A new year, and a new decade needs to bring with it a new found sense of optimism for South Africans, following what for many has felt like a decade of disappointment and unfilled potential for this beautiful country.
“Every year we seem to be saying that things are becoming more challenging. Unemployment keeps growing, economic growth is shrinking, government finances continue to go the wrong way,” says Steven Nathan, founder and chief executive officer of 10X Investments.
“As a result, we are over-indebted, so there is a lot to be concerned about,” he said.
There are also concerns about how the economic environment is impacting on our investments. For most people, that means their balanced pension fund.
“Yes, some asset classes, such as SA property, have had a bad 12 months, even a bad few years. But in a well-diversified portfolio you have the international exposure delivering around 22%, you have SA cash delivering around 7%.
“So, overall, most people’s wealth in their retirement funds and their long-term investments has probably fared far better than the financial pages and/or the national mood would suggest over the last 12 months,” Nathan said.
Take this one data point as an example: Ending November 30 the Johannesburg Stock Exchange was up around 13% over one year.
As South African long-term investors, we have a very good hedge against bad economic growth in South Africa with more than half of your balanced fund exposed to international assets, Nathan said.
He said that more than 50% of your portfolio is either invested directly offshore in top performing companies like Apple, Google, Microsoft and Nestle, or through diversification on the JSE out of South Africa into US dollars and global growth with mining houses, and the likes of Richemont, Naspers and British American Tobacco.
Whilst listed on the JSE, these “rand hedge” shares have virtually no exposure to the South African economy, he pointed out.
Also, Nathan stressed that, even if the (bad) news feels fresh to us, the financial markets have usually already factored it in. “The news that Moody’s may or may not downgrade us and that Eskom’s debt is rising, for example, has been known by financial markets for at least two years.”
He said that while there is concern about a potential ratings downgrade by Moody’s, and its negative impact on the country, “no-one really knows what is going to happen, or when, or whether it would be a bad event or even a non-event”.
“But if you look at the price of government debt, it looks like it is already priced in. SA government bonds trade at a higher yield than countries that are already junk,” he said.
Nathan said that the financial markets know about all the problems in South Africa, and are pricing them in.
“The markets know about Eskom, about rising government debt, all of it. A number of people see us as deserving of a downgrade and there is evidence that the bond market is already pricing one in. So if we get the downgrade it is not going to come as a surprise to anyone.
“Just think how much time and energy has been wasted on the implications of a downgrade, and how many times we have had a false start when Moody’s has not said anything after weeks of speculation, when there has been no downgrade, but a lot of energy has been wasted,” Nathan said.
There is a chance that a downgrade would largely be a non-event. “There is always a bit of activity around these events, for one or two days as traders and other people try to profit. But once that washes out of the system there is a very good chance that it’s going to be a non-event because it is already reflected in the prices.”
Nathan said he is hopeful that should a downgrade occur, it will motivate the government into taking positive action. “At the end of the day, the private sector is trying very hard to grow and to retain jobs. It is difficult to do that with a government that doesn’t seem to be aligned, or implementing policies that are supportive of these efforts.
“And if pro-growth policies don’t come to pass, we are probably going to stay in a lower growth but not an ‘all fall down’ environment, as it won’t be a surprise.”
Nathan highlighted previous events which were considered shocks to the South African economy like Pravin Gordon’s sacking as finance minister at the end of March 2017, and the downgrade three days later of South African Government Dollar Debt by Standard & Poor’s. At this time, he said the 10X portfolios performed well.
“Between 30 March 2017 and 5 April 2017, the portfolio had a positive return of 2.3%. While the rand did badly (it fell by 7%), our international equity portfolio grew by almost 7% and our SA equity portfolio grew by 2% because of the rand hedge element.”
Looking more recently, between 30 October and 1 November 2019, the time of the disappointing Medium-Term Budget Policy Statement from National Treasury, a period of concern and bad economic news, the portfolio also grew, he said.
The High Equity portfolio grew by 1.2% over that period.
“These two examples demonstrate the natural hedge that well diversified balanced funds have against poor South African economic growth,” Nathan said.
“So, yes, there are a lot of reasons to be negative from an emotional point of view, and financial markets already reflect this negative news.
“The financial markets are not expecting good news. If we don’t get good news the financial markets will probably continue to deliver the sort of results we are seeing now, which are not great, but also not disastrous, it won’t be a surprise – most South African’s would agree.
“If we do get good news, there is the opportunity for much better returns, as the market is not expecting this.”
Nathan said that the key thing from an investment perspective was to focus on what you can control, such as how much you save, how long you save for and what you pay away in fees.
“Don’t worry about what you can’t control, including whether we are going to get a downgrade, if the rand is going to strengthen over the next week or month, or a trade war between China and the US and so on. We can’t predict those, and we can’t influence them.”
10X Investments is running an offer for the month of January. Set up a new retirement savings policy or transfer an existing one to 10X by January 31 and you will pay no 10X fees at all for the whole of 2020.