Magnus Heystek urges South Africans: Go global or risk a ‘Lost Decade’ in investments
Financial expert Magnus Heystek urges South African investors to consider externalising their assets due to a decade of economic challenges in the country. He emphasises the decline of the Johannesburg Stock Exchange (JSE) in USD terms compared to global indices, warning of a potential lost decade. Heystek criticises local fund managers and highlights the benefits for those already diversified globally. He concludes with a cautionary note on the government's decision to withdraw funds from the SA Reserve Bank, advising investors to consider USD or gold investments for a secure future.
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By Magnus Heystek
What made the Reserve Bank governor change his mind?
MOST readers of this column will be aware that I have been advocating that SA investors externalize a great deal of their discretionary assets, investing in dollars, pounds, and other hard currencies, especially after 1st April 2015, when the Treasury more than doubled the offshore allowances, up from R400 000 (single discretionary allowance) and R4m (foreign investment allowance) to R1m and R10m per year respectively.
This more-than-doubling of the dollars you can buy was a surprise announcement in the 2015 Budget, which effectively meant that most South Africans who wanted to globalize their assets could do so.
The truly rich—which I estimate to be around 5,000 people or so—would have to apply at SARB for a special dispensation to take out more. From what I can glean from players in the forex market, several investors have been permitted to take out amounts well above R100m and more. My public views have not gone well in certain circles, especially the local asset management industry and residential property market.
For over ten years now, I have suggested that investors look further afield than the local market to protect and grow their wealth.
Initially, this recommendation was purely a call for global diversification. After returning from an investment conference in the USA where I listened to well-known commentator John Mauldin–who raved about the potential growth in technology and biotechnology— I tried to find local access to these asset classes, of which there was none.
Stanlib used to run a small technology fund but closed it in about 2013 due to a "lack of investment interest". This is astonishing and is a poor reflection of the local advisory community, which seems to have a myopic view of the world.
Their clients mostly have missed out on one of the most exciting and profitable booms in stock markets the world has ever seen.
Stuck in SA, behind foreign exchange gates for most of this time, SA investors could only look on (If they did) and see how the world became rich, very rich.
But from around 2014/15, other factors influenced my recommendation: state capture, investment credit downgrades, the collapse of Eskom and Transnet, the stronger implementation of BEE rules, and the by-now document flight of capital from the JSE. It is a very toxic environment for making money for domestic companies listed on the JSE.
At the same time, global markets were roaring ahead, building substantial assets for investors in those companies.
South African investors, by contrast, have built very little wealth in Rand terms over the last 10 years or so. In dollar terms, the situation is even worse, and local investors have become dollar paupers compared to the wealth generated and earned by global investors, especially in the US.
The following chart, showing the dollar returns of the Johannesburg Stock Exchange (JSE) compared to the 3 major indices in the world, reflects this wealth destruction.
THIS IS WHAT THE 'LOST DECADE' LOOKS LIKE
DECADE OF LOST GROWTH
It's been a "decade of lost growth in USD" as Coronation admitted during its AGM in Cape Town last week. The same week, Allan Gray CEO Duncan Artus confirmed that the JSE has "shown no growth in US terms since 2006". And he added that the JSE will become "uninvestable" should the ANC form a coalition with the EFF after the general election in May this year. Strip out investment fees from these returns, and SA investors can show zero growth in USD terms. Over the same period, the Nasdaq, S&P 500, and MSCI World Index grew by 436%, 212%, and 138%, respectively.
Unfortunately, these admissions from two of the largest fund management companies come too late for countless local investors who are stuck (and still are) with local investments, hoping their fortunes will miraculously improve one day.
I have bad news for them. In his presentation to shareholders, Coronation CIO Karl Leinberger indicated that he doesn't see the situation improving soon, perhaps not for another 10 years or more. It also explains why Coronation has launched a massive advertising campaign promoting offshore investments into their global funds.
I can understand that local fund managers, facing declining inflows over the past few years, kept on beating the "local is lekker " drum despite the overwhelming evidence to the contrary. After all, that is their business and what one would expect.
But I didn't expect the vicious personal attacks from fellow investment advisors and the media on calls to consider offshore investing.
These attacks ranged from snide comments on social media to outright denunciation by commentators such as Dr Piet "Kopdoek" Croucamp on TV programmes and in newspaper articles. Bernard Beukman, the editor of Beeld, called me a "polis smous", while Financial Mail wrote a whole article on Dr Doom based on my views about the JSE.
As recently as October last year, Nico van Gijsen wrote a column in Rapport calling me (and others who advocate offshore investments) a "parasite", amongst other things. I complained to the editor of Rapport, and it will be interesting to see if they publish my reply.
NO COMPLAINTS HERE
The only people not complaining are those who took the advice and externalized part or all of their assets. They have built a nest egg outside and beyond the reach of the economic carnage being inflicted on each South African, except for the well-connected inner circle of the ANC, who keep on scooping up all the very lucrative tenders on offer in SA.
The rest of the nation, those without significant offshore assets, have become very poor. They might not always understand the finer intricacies of currency valuations and real returns on assets, but they feel it every time they purchase at Shoprite or fill the car tank at Sasol.
I cannot find any other upper-income class country in the world where wealth has been destroyed to such an extent as South Africa over the past 10 years. The result of this collapse of wealth over the past 10 years is visible almost everywhere.
And don't think the ever-increasing numbers of beggars at intersections are the only sign of increasing poverty. No sir. Even the so-called "rich" executives with most of their wealth locked up in long-term share incentives have seen their wealth disappear due to a decline in share prices on the JSE..
In its presentation to shareholders, Coronation provided a graph that shows that the share price of the median domestic company on the JSE has declined by 40% from its peak. Top-end restaurants, luxury car dealers, and foreign travel agents, amongst others, will all say the same thing: there is no money going around in these circles anymore.
South Africa is much more dollarized than most people think, but with the ever-weakening of exchange rates, can one expect this dollarisation—prevalent in many African countries—to increase over time?
Only this week I saw for the first time an advert promoting local property prices in USD, not rands.
So isn't it ironic that the Treasury was last month able to pull the proverbial rabbit out of the hat by announcing that about R150bn will be withdrawn from the SA Reserve Banks Gold and Foreign Exchange Reserve Contingency Account (GFECRA), now standing at R507 bn? The finance minister said this money will be used to reduce SA's massive debt. Most commentators initially saw this as a welcome step, based on the reassurance by the Treasury that "other countries" do it.
The balance in the GFECRA account is the paper profits from the gold and USD the SARB has been buying over the past two decades.
But several commentators were not fooled by these reassurances. Jabalani Sikhikane, former spokesperson for the SA Reserve Bank, wrote that this was a "mistake" and would lead to poor outcomes. Peter Bruce in his column in Business Day, likewise warned that "The ANC never saw a pile of money—even paper money—it didn't want to eat or to use to buy off the public with welfare. Hell, just how many BMWs and Range Rovers did we taxpayers have to cough up for?"
"RAIDING GEFCRA IS A RECKLESS MOVE" — SARB GOVERNOR
But the final word on this matter must surely come from Leshetja Kganyago, SARB governor himself.
As recently as November last year at the Monetary Policy Committee meeting, he said:" The notion that there is this magical pot of gold that can be accessed is not only simplistic but reckless".
So what has changed? I think a lot of political pressure was put on the SARB to accede to this deal. I also think Kganyago has to answer some serious questions about this turnaround. The SARB's credibility is at stake, as S&P Global Ratings warned in a report this week.
"This plan is a convenient but limited and temporary solution to the country's long-standing fiscal challenges," it said.
I think it's a very bad idea, and we will all pay the price in the form of a weaker currency and higher bond yields in the future.
So, what should ordinary investors do?
Buy US dollars (or USD assets) or gold. The SARB has been doing that for the past 20 years and more.
Your future lifestyle might depend on it.
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*Magnus Heystek is investment strateist at Brenthurst Wealth. Follow him on X at @magnusheystek