While many look for bright spots in the economy and local markets, investors need to face up to the bleak reality in South Africa – and government’s incoherent plans around pensions, writes Magnus Heystek, director of Brenthurst Wealth Management.
The returns on the JSE over the past seven, five and three years have been abysmal—probably the worst period in investment markets since the 1985 crisis after the infamous Rubicon speech by PW Botha, former president of apartheid South Africa.
But then we had international sanctions, a financial rand and global sanctions—and a low intensity civil war in our townships. Today there is none of that. Why then, is the JSE doing so poorly?
But is it doing poorly? Worse than you think. Much worse.
The following numbers you have never seen before, especially not from any one of the large investment houses in South Africa. They churn out a lot of information, all the time, but never the relative returns of the JSE versus the global markets.
Well, see here for yourself.
The following two charts reflect the rand and USD returns of the JSE since 1st January 2018, when Ramaphoria was at its peak.
The mood in the country was jubilant. Former president Zuma was on his way out, the good guys in the ANC had won and South Africa was back on track towards better things. The rand was strong (around R11.30 to the USD), and foreign money was pouring not the country and much more was promised at the World Economic Forum in Davos later that month.
New leader of the ANC and president elect Cyril Ramaphosa had appointed his investment advisory team and the objectives was to lure R500 billion in new investments into the country.
The front page of the Sunday Times splashed an interview with Colon Coleman, former country head of Goldman Sachs, saying South Africa is the world’s hottest emerging market, predicting only good things and ever-rising prospects. It padded the interview with other heavyweights in the business and investment world, supporting Coleman.
There was not even a suggestion that this positivity was misplaced. Who wanted to spoil a good party?
Soon thereafter there were predictions that the JSE would be the “best investment market in the world over the next 5 years”. Every communiqué from fund managers from thereon was outrageously bullish about the JSE.
So how come, 31 months later, the JSE is one of the worst, if not the worst, performing investment markets in the world?
Against the major indices and large markets its been a disaster. The JSE over this period of time has made you no money in rands, and lost you 25% or so in US dollars. And in relative terms the loss compared to the Nasdaq has been almost 50% in US dollar terms.
A more worrying aspect is that against its peers in emerging markets the JSE now also an back-runner, trailing the pack by far after being the poster-child as an investment markets over many, many years.
So what went wrong?
The foreign investors did not stay long and soon thereafter started moving their capital back to home countries or the next hot investment destination. Over the past 5 years a total of almost R600 billion has left the JSE equity and bond markets.
Local investors too started heading for offshore markets where the Nasdaq–driven by the FAAANG stocks (Facebook, Alphabet, Apple, Netflix, Google etc.) were driving investment markets to new record levels, year after year.
The South African economy showed no signs of revival and year-on-year economic growth just got worse, debt levels were rising as was unemployment. Meanwhile state owned enterprises (SOE) losses kept growing with not one of the 700-odd SOE’s making a profit.
Policy confused the markets. Finance minister Tito Mboweni would tweet for SAA to be closed down one day, only for cabinet colleague Pravin Gordhan to say he will never allow it, two weeks later.
Eskom was up to its old tricks of sucking up more money without being able to guarantee a reliable source of energy, even at any price.
And out of the woodwork came the ANC’s viewpoints on stuff like expropriation without compensation, the nationalisation of the South African Reserve Bank, and also prescribed assets.
Out of the blue the Treasury announced on 25 July – without any consultation or forewarning – that it intends holding on to the pension funds of people emigrating for three years. That announcement has caused an unbelievable panic among people who were planning to emigrate the minute international flights are open again.
Imagine emigrating with the bulk of your capital tied up in a country where the currency has been dropping at around 9% per annum over the last 10 years?
And who says government will honour its obligation to give you back your money after three years? Who says it won’t become five or ten years? Anything is now possible.
On the same day that the Rapport newspaper had a front page article on this subject, the Sunday Times ran a story on government’s plans to start its own bank and also move onto the assets in pension funds to fund major reconstruction and renewal projects.
So expect a lot of misinformation to be heading the way of investors around South Africa’s R8 trillion pension pot.
- By Magnus Heystek, director of Brenthurst Wealth Management