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JOHANNESBURG — Amid stifling economic growth in South Africa and crippling government policies, the country has become a land of no growth. If this continues, it will have profound consequences for local investors. Already, the JSE is underperforming when compared to its global rivals. Meanwhile falling economic growth and an ever-growing population are making all South Africans poorer by the day. The only way out is by investing offshore, something that every local investor should prioritise according to Magnus Heystek. – Gareth van Zyl
By Magnus Heystek*
Long-standing clients of Brenthurst Wealth will be well aware that we have been recommending offshore investments for some time to our clients.
This recommendation was based on a number of factors, which we felt would negatively impact on the future returns earned by investors on the JSE. The first and perhaps most important factor was the dramatic downturn in the global commodity cycle in mid-2011 after several years of expansion.
The collapse in the demand – and hence prices – from China in particular exposed South Africa’s dependency on the export of raw materials in order to pay for its large and growing deficit on the current account of the balance of payments. Not only did it lead to a sharp weakening of the currency against all major counterparts, but it also depressed the economic growth rate substantially as mines were forced to cut back and even close.
South Africa’s economic growth rate since the end of the Great Financial Crisis (GFC) has been less than 2% per annum and according to a recent World Bank report, will not be more than 0.6% for the 2017 calendar year. When measured against the population growth rate of 1.9% this is a further decline in the per capita wealth for the average South African.
This is much lower than the average growth rate of 3.5% percent forecast for the Sub-Sahara region or the 4% growth rate forecast for Egypt, which has just overtaken SA as the most favoured destination for foreign inward investment in Africa, according to Rand Merchant Bank (RMB).
Both consumer and business confidence is at record lows. Business confidence is down to levels last seen in 1985 after the disastrous Rubicon speech by former president P.W. Botha while consumer confidence is at 15 year lows, even worse than during the Great Financial Crisis of 2007.
What is the cause for all of this? It is not a reflection of global business conditions which have been surprisingly upbeat and global growth is forecast at between 3 and 3.5% for 2017.
SA’s growth rate forecast to be 1.7% as late as the 2017 Budget in February this year, is now set to be not much more than 0.5-0.6% for the year, according to the World Bank.
The World Bank has also warned that SA runs the threat of missing the global economic upturn as its economy is still too dependent on resource extraction and that it has not diversified its economic base to any significant measure.
It is our view that this is a combination of the destructive economic policies of the ANC, led by President Jacob Zuma and his Cabinet, which seems to be hell-bent on achieving Radical Economic Transformation, despite the costs to the economy and personal hardship of millions of unemployed and underemployed South Africans.
The continuous flow of media reports surrounding state capture and massive looting of state resources by people aligned to the infamous Gupta family have added to the current bout of intense negativity.
Unemployment has soared to record levels of around 27% of the working population, according to the latest figures from Statistics South Africa, while some place the number as high as 35%.
An analysis of the investment returns of the JSE over the past 5 years versus the main investment groupings in the world (which includes the Emerging Market sector) shows a shocking under-performance, which is not publicly well-known or even discussed (see table and charts).
In fact over all periods measured, the returns on the Johannesburg Stock Exchange (JSE) has been stone last.
It’s a shocking indictment of the poor returns investors are getting by being fully invested on the local stock market. Quite frankly: in investment terms we are being left behind by the rest of the world.
This poor performance is already being felt by millions of local investors who have not increased their offshore exposure within investment portfolios, particularly investors with clients invested in pension and other retirement funds, which are subject to Regulation 28 which limits the amount fund managers can move into offshore, namely 25% of total assets.
Were it not for the returns earned on the offshore assets would the growth of pension and retirement funds (preservation funds, provident funds and retirement annuity funds) been substantially lower.
As it is, have the returns of the JSE over the past 3 years barely kept pace with inflation, and in some cases performed below inflation.
It is our view that this situation is likely to continue, perhaps even for several years, considering the gross mismanagement at almost all levels of society, including local, municipal and national level.
SA is also rapidly heading towards a fiscal cliff
Government has, once again, over-estimated the expected growth rate in the 2017 fiscal year (1.7%), which is causing the collection of tax revenues to run substantially behind budget.
A shortfall of about R40-45bn rand is now widely expected and substantial tax increases are expected when Finance Minister Malusi Gigaba delivers the Medium Term Budget Forecast towards the end of October.
Prepare for a wide range of tax increases, which could include higher Capital Gains Taxes, dividend taxes and possibly an increase in Value Added Tax (VAT).
These tax increases will further depress consumer expenditure, especially amongst the higher earning taxpayers who were hit with sharply higher taxes, CGT and dividend taxes earlier this year in the 2017 Budget.
There are many ways to increase offshore exposure within the investment portfolios we manage on behalf of our clients.
This has been an ongoing process within Brenthurst Wealth for several years now, but we feel that many investors are still reluctant to increase offshore exposure on the misplaced fear that offshore investments are “risky”.
South African investments – as per the table – should rather be considered risky and that offshore investments should form the cornerstone of any long-term investment portfolio, despite the short term volatility caused by the rand.
- Magnus Heystek is Investment Strategist and Director at Brenthurst Wealth.
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