Heystek: SA’s slow decline hits “suddenly”; ANC leadership guarantees more calamity

Independent financial analyst Magnus Heystek reflects on South Africa’s deteriorating economic situation, drawing parallels with Ernest Hemingway’s famous quote on financial calamity, suggesting that after years of “Slowly” the country has hit the point of “Suddenly”. Heystek highlights various indicators of the country’s decline, including low GDP growth, credit rating downgrades, currency depreciation, property market collapse, rising interest rates, and poor pension fund performance. He criticizes optimistic economic forecasts and calls for individuals to protect their wealth by investing offshore and divesting from local assets.

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By Magnus Heystek*

Ernest Hemingway’s famous passage in his novella The Sun Also Rises—“How did you get poor? Slowly at first and then suddenly”- has become the most over-used quote describing the situation in South Africa the last couple of years.

Hell, I even used it in one of my articles many years ago (click here) warning about the financial calamity approaching almost everyone in SA.

I first read the Hemingway book at university many years ago but since then my copy most probably has ended in a landfill or second hand bookshop, courtesy of a divorce or two in the interim years.

I asked for a fresh copy of the book a few months ago as a birthday gift and spent a recent afternoon, recovering from a total hip transplant, slowly reading it again, along with a number of other Hemingways I also received at the same time. And yes, the passage is very apt, describing the declining fortunes of one the characters in the book in an almost throw-away line or two of writing.

After years of slowly getting poor as a country, we have now entered the ‘suddenly’ phase. It’s all happening almost at once and the outlook is unlikely to turn out well while we continue on the current trajectory under the leadership of the ANC. We haven’t hit bottom yet..

SLOWLY, SLOWLY AT FIRST….

For years now almost every South African—and I mean almost EVERYONE with exception of the 1%-ers—has slowly but surely been getting poorer, year after year, since about 2013, especially if you compare us with most of the rest of the world.

The signposts to the current collapse of middle and upper-class wealth has been:

  1. Gross Domestic Growth per capita below 2% per annum, one of the slowest in the emerging world, since about 2011. Against a population growing at more than 2% per annum over the same period this represented a decline in total wealth.
  2. SA’s global credit rating has been declining since 2011, when it was still investment grade, to its current level of junk status. As a consequence, a lot of capital has flowed out of the country , slowly at first but in recent years it has turned into a torrent. This effects the growth in our capital and equity markets. It doesn’t make headlines, but the effects are real, nevertheless. No fund manager issues a press release, saying : “Today we sold SA equities/bonds.” They just do it and it has a negative effect, like a slow poison.
  3. The currency has been on a slow descending trend, declining by about 6 % per annum against the major currencies. Over the past year, however, the ZAR has dropped from R14,40 in April last year to current levels around R19 to the USD. The impact on local purchasing power of such a decline in the currency is often understated and overlooked. We live in a dollar-denominated world and everything from grain (for the poor) to air tickets and global holidays and motor cars  for the middle-class rich are priced in US dollars. The currency shock alone has pushed a lot of people into middle-class poverty. The price of new motor cars has become un-affordable for most but the rich. Steady declining new motor car purchases is a clear reflection of this trend.
  4. Property prices—residential and commercial—have been a total disaster. Listed commercial property has shown no growth in 10 years and over 5 years its lost you between 30-60% of its value. Many, if not most, pension funds still stick to a 2-5% exposure to listed commercial properties, in many instances to protect their initial investment.
  5. SA’s repo rate and hence prime overdraft rates have risen sharply as a result of the upsurge in global and local inflation over the past two years. This is having a major impact on the cash flow of the middle and upper middle class. The era of cheap money is over, globally as well as locally. Many households are finding it hard to adjust to this new reality.
  6. The latest FNB Property barometer shows just had hard the middle to upper end of the residential property market has been hit. In short, it’s been a financial calamity, yet the media seems reluctant to ventilate this issue. The top end of the property market has bombed out and real values have declined by between 10 and 30% over the past 5 years and more. See for yourself in the chart underneath, courtesy of the latest FNB Barometer.

ANATOMY OF A PROPERTY PRICE COLLAPSE

Top-end properties have lost about 20-30 % of their value in real term over the past 5 years and it now takes almost 4 months to sell, if at all. For many middle-class property owners nearing retirement their sprawling mansion has become a capital trap at a time when the municipalities are squeezing them ever-harder for more taxes. Ask me, for I am one.

The media hardly gives the bloodbath—and it is a bloodbath, dear reader—any coverage at all, whether by design or whether by the shock at what is unfolding. The only ray of light has been the Western Cape where the flood of people from up north has pushed prices to way above national levels.

Strip out the effect of the Western Cape and the picture is even worse.

Many small to medium towns have no more effective residential property markets. The financial anarchy reigning in these towns has simply crashed and gutted any values there still might have been in their properties. Many years ago I advised a family from Bloemfontein to sell their substantial local property portfolio, which they did, and invested the proceeds offshore. That capital has doubled in value while the property portfolio has lost more than 50% of its value. On such decisions family fortunes are protected or lost.

No wonder then that consumer confidence, as measured by the Bureau for Economic Research (BER) shows a decline to levels last seen 44 years ago! This doesn’t augur well for high-end consumption for the rest of the year.

  1. SA’s pension funds have not, by and large, beaten the inflation rate over the past 10 years. I have written many articles about this, showing how poorly traditional retirement products have performed. From 2011 local pension funds were forced into the straight jacket of Reg28 which caused most of they underperformance, in my view.  
  2. And then finally, SA’s placement on the so-called “Grey list’’ has just rubbed in salt into the wounds. Capital is slowly flowing out of the country while no fresh money is coming in.

FINANCIAL TSUNAMI HAS HIT OUR SHORES

I have been tracking these “wealth” indicators from about 2012/2013 and soon thereafter in 2014 started writing about them. These articles obviously did not sit well with a very large and well-paid group of sunshine economists who did their very best to discredit them. Whenever I wrote an article, it was followed by several others to rebut my arguments. In short: I was talking shyte and all was good with the Good Ship SA. The late Mike Schussler became my go to guy to check out my statistics with which he agreed 100%. He often provided me with additional facts to support my contention of the slow rolling avalanche heading down the mountain…

Even as recently as last year in July we were confidently told by several economists—Johan Els from Old Mutual and JP Landman, amongst others—that all was well and that a new growth era had started. Old Mutual was confident growth in 2023 could be 2,5% and even more.

The bad news is that the IMF, World Bank, SA Reserve Bank and other banks don’t see any growth this year, perhaps a marginal uplift of about 0,1% growth.

How can major financial institutions such as OM get their forecasts so wrong? To me it is obvious they are clutching at any vaguely positive economic statistic to paint a picture of an imminent upturn. Just last week a host of fund managers, including Old Mutual and Denker, were once again trying to make an ever-weakening case for investing in the JSE.

Coronation, on the other hand, one of SA’s largest fund manager announced that they had moved their offshore allocation to 45%–the maximum allowed—and have also soft-closed all their offshore rand feeder funds, due to lack of further capacity. That is very telling.

Last week several updates on this financial collapse appeared almost simultaneously.

The BER released statistics which showed consumer confidence at its lowest  level since 1994. Bank impairments at almost all the major banks have increased substantially while the SARB shows that foreign direct investment in the 1st quarter has dropped to about zero. Again, one has to search high and low for any reports on this in the mainstream media.

Certain media outlets were using the word “surprise” in their commentary.  Where have they been over the past 5 to 10 years? This creeping financial collapse has been well-documented and signalled by many analysts such as Claude Baissac and myself, but in general the media considered articles along thereon to be “too negative”.

I should know, I’ve received many “too negative” rejection slips from finance editors over the past seven years or so. Instead, gloriously over-optimistic articles on SA’s situation are published week after week on the same media outlets.

There is no escaping from the reality or pretending all is well and that the downturn is temporary. Exceptions have been the Financial Mail’s Claire Bisseker who has written several excellent front-page reports on this developing trend, the most noteworthy one being “SA’s Doomsday Clock” which appeared in April this year.

SA, and its people, is broke.  It’s not one factor alone—it’s a confluence of several ever-worsening financial trends which have hit, almost all at the same time.

Interest rates have been increased 10 TIMES  since the  upward phase of the interest rate cycle started almost two years ago.

There are only 207 000 taxpayers who earn more than R1m according to SARS.

Dollar millionaires—down from 44 000 in 2018 to below 30 000 today– are fleeing the country, and several analysts have commented on the very small group of taxpayers funding the good ship South Africa.

Yet the ANC and its hangers on keep on spending and planning large like we are a rich country. If its not writing off Eskom loans (R400bn) or plans to introduce the National Health Service –which will cost an estimated R250bn or so per year—it’s the fanciful idea that SA can afford a basic income grant to all.

WHAT TO DO, WHAT TO DO…?

For many middle and upper middle-class investors its almost too late to save the day. However, any spare cash should be used to create an offshore share portfolio, starting with the R1m annual investment allowance, which is the quickest and easiest way to externalise some capital from SA.

Secondly, any surplus property investments—the remnants from the Buy to Rent-era —should be sold soonest. It’s not going to get better while the opportunity costs of alternative investments get bigger and bigger every year.

Consider cashing out your RA’s and/or preservation funds, taking out your tax-free portion and either converting your capital to a 100% offshore living annuity, or paying the taxes and putting the cash into offshore asset swaps or move it offshore using all or part of your R10m investment allowance.

Obviously, this advice won’t sit well with the county’s asset managers, property developers, car manufacturers etc, but I simply don’t care. I think this is the best advice for ordinary investors and savers who have been suffered biased and misguided “advice” for many years, but the end result is now clear for all to see. Local isn’t lekker anymore.

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*Magnus Heystek is the investment strategist at Brenthurst Wealth. Brenthurst was once again voted one of the top three Boutique Managers in SA in the annual Intellidex Survey, published last week. Follow him on Twitter @magnusheystek.

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