“Should I take my money offshore?” A question which is often asked by investors who are fearful of the South African deterioration. Without digressing into a lengthy analysis of the pros and cons of offshore investing, let’s rather consider the facts which relate to the underlying issues within the question.
The graph below shows the government wage bill (government employees only) as a percentage of the country’s total wage bill (private + public). 30% of the country’s wage bill goes towards paying government employees.
South Africa is quite literally borrowing money to pay its public sector employees. Although the finance minister noted in his February budget speech that government will tackle its bloated public sector wage bill, nothing has been done as a result of the pandemic.
The chart below shows South Africa’s local GDP (growth) since 2013, as well as the forecasted GDP at the end of 2019. The sad reality is that the pandemic has set us back several years by way of lost GDP. As every South African well knows, this is on the back of an already stagnant period of growth in the years leading up to 2020.
As an emerging market, the odd wobble every now and then is to be expected when it comes to both business confidence and consumer confidence. As the chart below shows, these things come in cycles. The problem with where we currently sit is that we have never before seen such pessimism in our 26 years of democracy. Without meaningful intervention from the government, this time may be different?
Despite the bloated wage bill, the chart below is the most worrying for South African Investors. It doesn’t take a mathematician to see that the country has had declining real GDP (growth) since 2011.
Source: Centaur Asset Management
In a Business Times interview with Duncan Artus (the new chief investment officer of Allan Gray), Artus expresses his concern around the ability of good companies to operate and thrive in a failing economy.
“Over the longer term, you can’t have successful companies in a country that fails. The cost of our 10-year government debt is higher than our economy is growing. Just do the maths; it can’t carry on like that. Unless we make some brave economic decisions, it won’t be long. We’re running out of time.”
These comments highlight the concern around the already widely debated questions around holding too much of one’s retirement savings in the local market given the dangers of what may happen if the current status quo is not addressed.
There seems to be a consensus amongst many fund managers who are positioning themselves towards an offshore biased Regulation 28 compliant portfolio. At face value, it appears that on a see-through basis the largest and most well-known South African multi-asset high equity funds (local balanced funds) have more than 65% exposure to offshore assets.
As South Africans we remain hopeful that South Africa will change its default trajectory through brave economic decisions, however, we acknowledge the mistrust in government to implement the required policies.
The government’s actions over the next 6 – 18 months could determine the economic future of the local economy in the following 10 -15 years. Needless to say, the midterm budget speech is going to be vital to our economic outlook going forward.
It is important for investors to be guided in their asset allocation through a comprehensive financial plan that considers the circumstances of the individual investors and as well as their goals and objectives for their investments. Investors need to find an appropriate balance between local and offshore exposure without being overly pessimistic or optimistic as there are divergent outcomes that can still take place both locally and globally.
“After climbing a great hill, one only finds that there are many more hills to climb.” Nelson Mandela