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The road to poverty ...

Jun 03 2019 13:39
Thought Leadership - By Brenthurst Wealth
Brenthurst

An in-depth analysis of SA’s economic and financial situation suggests that the rose-tinted forecasts need to be approached with a great deal of circumspection.

By Magnus Heystek, Investment Strategist & Director Brenthurst Wealth Management

OUR UNDER-PERFORMING MARKETS

South Africa’s massive investment industry must be secretly very happy with the fact that the decimation of journalism in South Africa, and financial journalism in particular, has led  to very poor and superficial reporting on local investment  trends.  Added  to  that,  is  the  fact  that  many  media  outlets  are furthermore   hesitant   to   expose   the   poor   performance   of   locally-listed investments for fear of upsetting some of the very few industries which still has some money to spend on advertising.

The few remaining financial journalists are also under so much pressure to produce  never-ending  copy  for  a  voracious  master—their  websites—that there is simply not enough time to do really in-depth analytical research on investment trends and returns, both real and relative.

They are  therefore  so  thankful  for  the  well-crafted  press  releases  that  the  big  investment  companies churns out, as it fills an insatiable hole as eternally-connected readers demand more and more articles, often without paying for them. An article that has been on a website for a couple of hours is deemed to be “old news”, with readers often quick to write and demand better and faster-flowing news..

As someone who  has  spent  a  lifetime  in  financial  journalism,  I  can  therefore  spot  a  reworded  press release almost immediately. Original and well-researched investigative journalism is therefore becoming very scarce.

Over the last couple of months I have noticed a sharp increase in the number of articles on a variety of websites  and  media  outlets,  emanating  from  the  large  asset  managers,  and most  of  them  are  guilty  of what  is  known  as “sunshine journalism”.   In short:  everything is  fine (with  your investments),  the  poor performance of the JSE over the past several years is temporary, and investors who panic now will miss the benefits of the upturn.

One large fund management company, Old Mutual, recently went out on a national roadshow confidently forecasting that the JSE would outperform the “average of world equity markets over the next five years”. This is quite rich coming from a company whose investors by and large have not seen a real return, i.e. in excess of inflation, over the past 1, 3 and 5 years.

It is clear to me that the large investment companies are seeing money flowing out of their fee-rich equity portfolios into cash or offshore, where it possibly will be invested with global companies who offers lower fees. The results from JSE-listed Coronation shows just how much pressure asset managers currently are under.

The harsh reality is that is the JSE has been one of the poorest performing major markets now for over 10 years. It used to be over 1, 3 and 5 years but according to the latest Morningstar stats which hit my inbox over the weekend, SA has been under-performing global markets now over every year from 1 to 10 years.

THE IMPACT ON YOUR RETIREMENT FUND

Furthermore—and   I   battle   to   find   any   articles about this with the exception of my own—pension funds,  which  are  controlled  by  Regulation  28  of the  Pensions  Act—have  not  beaten  inflation  now over 1,3 and 5 years. Let me say that again: each and    every    one    with    money    in    a    pension/ provident/retirement   annuity/preservation   fund has  not  beaten  inflation  over  5  years  now.  The primary  reason  is  that  retirement  funds  are  only currently  allowed  to  invest  30%  of  their  capital offshore. For many years this allowance was much lower.

There   is   virtually   no   reporting   on   the   relative performance of the JSE versus developed markets or even its peers, the emerging markets. Here too, the JSE   has   been   underperforming   since   December2015—and  we  all  know  what  happened  in  that month, don’t we? Strip out Naspers and the under- performance since 2012 is even more concerning.

And  yet,  we  still  have  newspaper  columnists  such as the one in Rapport about a month ago warning that   offshore   investing   is   “dangerous   and   your money  will  be  swallowed  up  by  this  giant  black hole”.   Elsewhere,   the   beholden   media   keep   on warning  that  offshore  investments  are  “risky”  and that  investors  are  better  off  keeping  their  money invested in the JSE

Such news would be front pages of media outlets in most Western countries. Here in SA: nada, nothing. Try and find an article of Reg 28 and what it is doing to  your  future  wealth.  Or  an  article  about  how poorly  the  JSE  is  doing  relative  to  the  rest  of  the world.

I  listened  the  other  day  to  a  podcast  from  a  local investment  commentator,  who     pops  up  every- where,  that  he doesn’t waste  much  time  with  off- shore  markets  as  the  JSE  offers  enough  offshore diversification.  It  all  made  sense  when  I  realised that his blog/podcast is sponsored by the JSE.

Anyone recommending offshore investments, such as  myself,  is  accused  of  being  “unpatriotic,  negative,  cynical  or  whatever”  and  that  we  should  all” bugger  of  to  Australia  or  Mauritius”,  as  if  that would solve the problem.

Ask  yourself  one  question.  Have  you  ever  seen  a fund  manager  advise  that  the  market  is  expensive and  that  investors  should  consider  moving  money to   cash   or   other   better-performing   markets   or funds. Fund manager are eternally bullish, that we all know, but investors must learn to become more circumspect when they read such bullish forecasts.

It’s  also  worth  noting  that  fund  managers  are  not legally  allowed  to  give  investment  advice.  This  is the  domain  of  registered  financial  advisors.  But these investment seminars are so carefully choreographed  to  steer  investors  (and  investment  advisors) into a certain outcome, that by all accounts it comes across as investment advice.

So  are  the  investment  giants  correct  when  they say   that   the   under-performance   over   the   past decade is temporary? And that the upturn is near? Or should one consider, as I do, that the SA economy  has structurally changed and therefore, unless there  is  a  dramatic  sea-change  in  the  economic policies  by  the  governing  party,  that  this  under- performance is likely to continue for much longer, perhaps  even   permanently,  and   that  a  serious re-evaluation  of  current  investments  strategies  is called for if one hopes to rescue one’s retirement capital from further declines. 

As it is, the retirement outlook for a generation of South Africans has been demolished, right in front of the eyes of our sleepy financial media.

Residential  property  prices,  as  most  of  us  already have experienced, is also in a 10- year bear market. Property prices on average have declined by 23% in real terms over the past ten years, according to the FNB   Housing   Barometer.   Properties   have   also shown very little growth in nominal terms over the past 3 years.

Media  coverage on this?  Don’t upset the advertis-ers, is the warning from the editors.

The  large fund companies  avoid  cash.  The  fees  on these  instruments  are  very  low  and  the  real  big bucks   and   the   star-careers   are   built   on   equity funds, not cash funds.

But there comes a time when the truth needs to be spoken about the reality of the SA’s economic near- term future.

It’s  true  that  the  JSE  was  one  of  the  top  investment  markets  for  more  than  a  century  to  about 2011, according to a study done by Credit Suisse. This performance is often used by fund managers and advisors to justify staying invested in the JSE.

The sad truth is that the JSE has now a shadow of its former self. The gold mining industry has come and  gone.  Anglo  American’s  announcement  last week that it is selling its last gold mine in SA, is the final nail in the coffin for the sunset industry. Neal Froneman  from  Sibanye  has  stated  publicly  that he won’t “invest another cent in South Africa”, an exasperation brought upon by the uncertain mining policies, militant labour unions and escalating costs of electricity. Foreigners have been fleeing from the JSE for over 4 years now—well over R500 billion has been with- drawn  from  the  equity  and  capital  markets  over this time.

New  listings  have  dried  up,  as  have  daily  volumes on  the  JSE.  Ten  years  ago  the  JSE  had  more  than700 listed companies, today the number is around 350.

Our construction industry is on its knees, retail is in a deep funk and the over-traded local listed proper- ty funds are starting to see the horrors of horrors: downward  adjustments  in  rentals.  This  is  like  an avalanche waiting to happen.

Eskom  itself,  sits  like  a  giant  anaconda,  squeezing all  life  and  profits  out  of  the  SA  economy.  This  is now  starting  to  be  reflected  in  the  profit  num- bers—or  lack  thereof—for  SA’s  corporate  world. More  and  more  public  companies  are  now  openly blaming   Eskom   for   their   poor   financial   results, mining    companies    and    smelters    amongst    the primary  ones.  And  that  was  before  the  increased Eskom tariffs were announced. Who knows what an annual  escalation  of  15,9%  per  year  over  the next five years will do to company profitability?

TAX REVENUES COLLAPSING

SA’s Treasury has often in the recent past been accused of providing over-optimistic economic growth and tax revenue numbers. All of the growth/revenue number since 2012 have resulted in downward adjustments, often barely months into the new fiscal year. This year seems to be no exception.

In March this year, according to Treasury numbers, tax revenues have already shown a sharp decline in overall tax collections. It shows a collapse in profits and hence dividend to shareholders.

Could our market and economy turn around and suddenly become the new financial Eldorado? I think not.  But if the signs are there, I will be the first to applaud any improvement.

But until then my view remains the same as it has been for almost 8 years now:INCREASE YOUR OFFSHORE EXPOSURE DRAMATICALLY IF YOU HOPE TO PROTECT YOUR CAPITAL.



Brenthurst’s team consists of fourteen highly-qualified investment advisors who can assist you in creating a truly global investment portfolio. Having a detailed financial plan provides you with a strategy to make practical financial decisions in all aspects of your life.



This post and content is written, sponsored and provided by Brenthurst Wealth Management. 



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