by Magnus Heystek of Brenthurst Wealth
There is a somewhat-misplaced view that SA’s imminent credit downgrading will be a once-off event, followed by some market volatility, temporary downward pressure on the currency and equity market and then it’s all back to normal.
There’s also the forlorn message that some local financial institutions are putting out into the market place: that the markets could actually recover once the downgrade becomes fact. This is all done in an effort to convince their clients not to redeem funds and move money offshore – which has been happening ever-increasingly during the past two to three years.
Who knows what will actually happen when and if one, or perhaps even two, of the three large credit ratings agencies drop our rating to sub-investment grade? Both S&P and Fitch are busy preparing announcements to be made in this regard over the next month or two. And, judging by the release of a raft of worse-than-normal economic indicators in recent days – particularly unemployment which has rocketed by almost 2 percentage points to 27.6%, the outlook for a stay of execution has worsened considerably indeed.
Betting on a downgrade
I’m not a betting man but I would wager a handful of my biotech shares that we’ll soon be downgraded, if not in June, then in December this year.
The truth is countries get upgraded and downgraded almost on a daily basis by the markets: an on-going process rather than an event. In most cases the official downgrade is just a final confirmation of what most intelligent role players have known for a long time. And for the past five years and more, the consensus by the large global pools of capital that swirl around the globe started the downgrade process – long before Moody’s, S&P and Fitch officially started doing so.
The downgrades by these ratings agencies, ongoing since 2012, were in fact confirmation of what the ‘smart’ money has been doing for more than five years. This has been evident in the rand’s decline against other currencies: from levels of 6.60 against the US dollar in September 2011 to around 15.40 as of Friday May 13.
This trend is also clear to see in the astonishing under-performance of the JSE against all other major equity markets and regions in the world, even recently against its emerging market peers. When I tell investors that an investment in the S&P 500 five years ago returned more than three times that of an equivalent investment in the local market, for instance the Satrix 40, they seem utterly unable to grasp the consequences of such a statement.
The following table underscores the heavy underperformance of the JSE versus the major global equity regions in the world:
First movers smiling
The first-movers who diversified into global markets five years, three years and even one year ago, have increased their personal wealth substantially when compared with keeping their equity exposure 100% allocated to the local market.
From personal experience, the decision to move offshore five years ago has been life-changing. It’s common knowledge that I moved all my equity investments offshore in October 2011, at a rand exchange rate of R6.80. Even my worst-performing offshore equity funds have doubled the return I would have had had I succumbed to home-bias and stayed put.
I don’t think it’s going to change very soon. And while I’m not as bearish as economic commentator Chris Hart who sees a rand at R60/$ within 30 months and a possible IMF bail-out, I do think we’re heading towards R20 before the end of the year, especially if we get the downgrade I expect we will.
In the meantime, ordinary investors planning some kind of wealth for them and their families are being impoverished by the squeaky-clean and heavily politically-correct information masquerading as investment advice.
In a previous column I wrote about the fact that your residential property has not grown in real terms in over seven years (and could actually start declining in nominal terms soon). Rental growth has gone negative over the past four years, while even the stock market has not beaten the inflation rate over almost three years now. So your local investments have not made you any real money.
At the same time, BankservAfrica’s gauge of disposable income shows it barely keeping pace with inflation. So, like almost everyone in SA but the super-rich, on a GDP per capita basis we have become poorer over the past five years.
Moody’s: read the small print
The recent news of Moody’s leaving SA’s credit rating unchanged, was immediately pounced upon by the government, the ANC and some of our shallow media, pronouncing that all is well and that SA is turning the corner. I would suggest that they carefully read Moody’s document again.
Yes there was good news in that we were not downgraded, but the outlook was changed from stable to negative. Further on it warns very clearly that if growth does not pick up soon, we will be downgraded.
It also warned that the state of our State-owned enterprises (SOEs) is a cause for concern and is adding to the overall debt burden of government. What does President Jacob Zuma say barely three days later? “We will never ever privatise SAA (South African Airways), our national carrier” – a clear message to the market on how the issues of the under-performing and even non-performing SOEs will be dealt with: using more taxpayers money.
If this was not bad enough, news broke very soon thereafter that the government is considering buying a new airliner for Zuma at a reported R4 billion. A ‘Nkandla in the sky’ as someone described it, while we as an almost-broke country steam towards a credit downgrade to sub-investment grade.
We have 127 international airlines flying in and out of OR Tambo almost on a daily basis. Anyone can reach almost any destination in the world either directly or with perhaps one connecting flight.
Many countries, far more important on the international scale, do not have private jets for their political leaders: they fly their national carriers like everyone else.
Smart money left long ago
Some South African companies long ago started diversifiing their businesses and income streams away from the motherland and increasingly invested in other parts of the world. Now, barely a day goes by without the media reporting on listed and unlisted companies buying up offshore shareholdings. The outflow of local capital in recent years has been huge. While the SA Reserve Bank is very coy on the numbers, I’ve seen stats that indicate corporate outflows of R84 billion in 2014 and R68 billion in 2015.
These numbers exclude the outflow allowed for private individuals in terms of their offshore investment allowances of R10 million per person per year. It is it not uncommon for wealthy families to have moved most of their discretionary wealth offshore. It is possible to move as much as R60 million in less than 14 months, all legal and so far very financially rewarding.
This is money that could have been invested in local financial markets and even startups in order to create absolutely vital jobs. But why would you risk your family’s wealth in a business that could soon be subject to even more draconian requirements or worse, confiscation in terms of the Expropriation Bill, currently before Parliament.
In farming too there is legislation winding itself through Parliament that could give the State the power to confiscate part of your land if over a certain size. So why would you as a successful farmer with surplus capital want to buy more land in order to expand your farming operation to benefit from economies of scale?
Foreign shore beckon
Approximately 8 000 SA millionaires left the country between 2000 and 2014, according to research firm New World Wealth (NWW). Since then I would hazard another 2 000 or more have upped and left, bringing the official tally to about 10 000 or so. At best this is a rough estimation but it does indicate a disturbing trend: wealthy families and individuals with skills and money, especially younger ones, are leaving to pay their taxes and create jobs in another country.
Many leave for better opportunities and the chance to broaden their life experiences by working in other countries and cultures. The advent of the internet has also made this much easier. Many types of business can be run entirely via the internet. Many also leave because they are concerned about their future in SA.
Can this situation be turned around? For the sake of our children and grandchildren I desperately hope it can.
What needs to be done to correct the destructive path we are on?
In a piece on the Helen Suzman Foundation’s website, Iraj Abedian, founder of Pan-African Capital offers the following suggestions:
- Improve business confidence, currently at record low levels, with policy consistency and ethical governance.
- Curb trade union militancy.
- Foreign investment, absolutely critical, needs to be encouraged, not discouraged as government seems to be doing.
- SOEs need special attention and must stop being the playing field for political patronage and rent-seeking.
Considerably more needs to be done, but at least this is somewhere to start. It all boils down to leadership.