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Time to open your eyes

Jun 04 2019 11:05
Thought Leadership - By Brenthurst Wealth
Brenthurst

Magnus Heystek shares his opinion on why South Africa is not creating wealth.

It is amazing how people these days still talk about foreign investment as if it is something to avoid at all costs. It is “dangerous”, a “black hole that will suck in your investments” and you should steer clear of advisors recommending it because they have “sinister motives”.

In my opinion these kind of comments – and believe you me, there are many varieties thereof – are based on ignorance. But maybe it is also still influenced by almost four decades of isolation from foreign investment caused by sanctions and exchange control during the apartheid-era. Those days even companies had a tough time to get permission from government to make foreign investments.

I remember an interview of many years ago with the late Dr Anton Rupert, founder of the international companies Rembrandt and the Richemont Group. He said how he struggled during the sixties to get the relatively small amount of £50 000 overseas to make the first investment in British American Tobacco. The same happened years later with investments in companies renowned for luxury goods, like Cartier, Dunhill and others. Today these companies are a hundred times bigger and more profitable than the local Rembrandt Group.

Any South African caught acquiring foreign currency or assets were prosecuted criminally and many people ended up in jail. One of the consequences of this era was that South African investment houses got away with murder with the kind of products they could market to local investors, because of the lack of foreign competitors. The elderly amongst us know just to well how the Big Three – Sanlam, Old Mutual and Liberty – sold products like long term retirement annuities and endowment insurance to innocent investors. The costs and commission structures of these products were linked to the term of the investment – the longer the term, the better.

Media coverage by myself and Bruce Cameron showed how bad the return on these products were. It led to the situation where most of these companies had to pay millions of rand in fines to compensate investors.

How quickly do we forget! Today there is no chance at all for this kind of product to be placed in the market.

Treasury only gave permission in 1997 for local investors to take a little bit of money overseas. Initially it was R200 000 per person, then R400 000 and it systematically increased to the point where it is today possible to acquire foreign assets. Up to R1 million can be taken in any form in a single discretionary allowance of R1 million per tax payer. The application to do so is automatic and very quick. It forms the base for most applications thus far to take money overseas.

Investors can also take up to R10 million per calendar year out of the country in the form of a Foreign Investment Allowance, but applications need to be approved by the South African Revenue Serves and the South African Reserve Bank. Sometimes this might lead to an audit of the applicant’s finances.

To take money overseas with the purpose of investing, is not necessarily successful. In the term 1997 up until 2002 it made sense to take your money overseas, but from 2002 until 2008 it was better to keep your money at home because of the good performance of the local stock exchange market. This, of course, happened in combination with the poor performance of the stock exchange market in the USA from 2002 to 2007, mainly because of the dotcom crash.

In the past ten years foreign assets – especially stocks – beat the performance of local assets, but over a term of seven, five, three and one year the difference became bigger and bigger. Local investors without money directly invested overseas had to look on while other markets, especially the USA, performed exceptionally well, mainly because of the boom in technology companies like Facebook, Amazon, Apple, Netflix and Google – the so called FAANG shares. 

And if people want to say these shares are heading for another bubble, beware. The legendary investor Warren Buffet announced only last week the Berkshire Hathaway group bought about 2% of Amazon shares and that they were wrong not to buy Google years ago.

In contrast, the JSE suffered a lot over the past five to seven years because of the impact of state capture, corruption, policy uncertainty and the precariousness of policy, added to global factors like the collapse of the commodity cycle. Foreign investors, for example, over the last five years withdrew more than R500 billion from the JSE in shares.

The end result thus far was one of the weakest periods in many decades with returns on the JSE barely beating inflation. With regards to pension funds – in the form of pension funds, provident funds, retirement annuities and preservation funds – the impact was even bigger with very few funds able to beat inflation over the past five years.

The main reason was the impact of Regulation 28 – a regulation of Treasury determining that only 30% of funds in these sorts of investments can be moved overseas. This regulation creates an enormous problem for the investment industry – a huge industry with total assets of about R8, 7 trillion. Most, if not all of these funds, already used their quota. It therefore does not make sense to recommend any more foreign investment, because there is no more “stock” available.

I’m also very sure local investment houses are extremely concerned about the huge amounts of capital flowing out of the country. Accurate numbers are not available, but apparently hundreds of millions of rand has been taken overseas as uncertainty about the political and business situation in the country increases.

These investment houses are dominant in the local market, but in world markets they are almost insignificant in relation to the big international houses like Black Rock, Vanguard, Fidelity, Franklin Templeton and Schroders, to name but a few. Every single one of these companies are bigger than the total investment market in South Africa.

Only once you enter the foreign investment arena, do you realise how small the South African market really is, and how little diversification investors get by only focusing on one stock exchange.

One argument going around is that JSE companies give enough foreign exposure because 50% to 60% of earnings come from overseas. This is only true in part. Most of these companies struggle with local factors like Eskom, local working conditions, political uncertainty (BEE) etc. From this perspective, South Africa is the “black hole” that is going to “suck in” your money. The return for a foreign investor during the past five years in dollar terms, was absolutely zero!

It was a huge mistake to not, during the past seven years, include significant more foreign assets in local portfolios.

How much foreign exposure is optimal?

For some investors it is 100% and for others none. If an investor and his family have plans to emigrate or to retire in another country, it is most possibly 100%. For someone without that kind of plan that needs local currency to generate an income, it will be zero.

There is a fluctuation in currency markets that can’t be ignored. It is however a small price to pay for the wealth creation offered over a long period by overseas investment markets.

South Africa is not creating wealth. The local property market is collapsing because of uncertainty about the government’s land policy. The price of agricultural land apparently dropped by more than 30% to 40% over the past year. And don’t even get me started on the price of buffalos and other rare wildlife . . .

Investors can’t really expect a country’s stock exchange to create wealth if companies are moving away and the rest of them struggle to make a profit. The best alternative – and it is really not as scary as some will tell you – is foreign diversification. Just like millions of South Africans each day buy Dutch cheese, French wine, German equipment, fruit from Spain and Korean cell phones – without them being condemned for it – the names of foreign investment companies like Black Rock, Fidelity, Schroders and Franklin Templeton should be freely used by local investors.

Brenthurst Wealth, in collaboration with Rapport and Momentum, is hosting three investment seminars in June where the state of affairs after the election and expectations of worldwide slower economic growth will be discussed.

Members of the panel include Magnus Heystek, director and investment strategist at Brenthurst Wealth, economist Mike Schussler from Economist.co.za and Glyn Owen, Investment Director from Momentum. Seminars will take place in Stellenbosch (June 10), Century City in Cape Town (June 11) and Pretoria (June 13). To book your ticket, click here: Brenthurst Seminars. Please note presentations will be mostly in Afrikaans.

To contact Magnus Heystek send mail to: magnus@heystek.co.za

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