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Trade wars, land expropriation, low growth: Where to from here?

Magda Wiercyka, Magnus Heystek and Jean-Pierre Verster discuss the current state of play, SA’s future outlook and what investors can do to safeguard wealth.

While returns from equity markets have been good, there are headwinds to growth across the globe. These were the words of Glyn Owen, investment director at Momentum Global Investment Management in the UK, spoken at the final instalment of the Brenthurst/Moneyweb Quo Vadis? seminar series in Cape Town on Thursday (Jun 21). 

Owen, presenting a global view, said 2017 was “the most benign period I could recall, with hardly a downward tick” for developed and emerging markets.

But current volatility and uncertainty raise questions about where to from here.

While there are a number of geopolitical risks, he said markets are currently affected by threats of trade wars, which he believes will ultimately be avoided.

On monetary policy, “for the first time in 10 years we are looking at interest rate increases and tightening of monetary policy,” he said.

In the US, the previous peak in interest rates was 5%, and while the Fed is increasing rates, they are still low and likely to be 2.5% by the end of 2018 and peak at 3.5% around 2020.

US bonds, giving a return for the first time in a decade, are “the ultimate safe haven asset,” he said. Momentum is buying them for the first time since the financial crisis.

Countries that have borrowed in dollars, have a high degree of external debt, and significant current account and fiscal deficits are starting to feel pain. The worst 10 currencies over the last three months are all emerging market currencies, with the rand being the fourth worst.

While it was no surprise that Argentina, Brazil, India, Turkey and South Africa, among others, had high external debt and financing needs as a percentage of GDP, Owen said it was not all bad news, as these levels were not as bad as a few years ago.

He said signs of a sustained increase in growth across the global economy were encouraging for markets, and good economic conditions lead to good growth in company earnings.

One of the headwinds to growth is demographics. China’s working population is expected to decrease and Japan’s population is falling by a million people a year, meaning that if Japan grows at 1%, that should be considered a good return, Owen said. 

While economies are growing, investors should expect slower growth than before.

China will struggle to produce the growth rates of the last few years. “There is also too much debt about, with debt as a percentage of GDP having gone up globally,” he said. This is significantly so in China.

Corporate earnings have been strong and P/E ratios have moved up since the crisis, but came down a bit over the last 18 months and are in reasonable value territory now, Owen said. He expects companies to continue to produce reasonable returns over the next five years or so, and believes equities in his portfolios are what will yield growth.

South Africa fails to keep up with global trends

Magnus Heystek, director of Brenthurst Wealth Management, said 10 years of wealth destruction under former president Jacob Zuma meant South Africa was one of very few countries that has not recovered, and that it missed a global economic upturn and the benefits that come with it in terms of trade and job creation.

Heystek said there has been no growth in wealth per capita, while in other emerging markets it has increased. South Africans’ purchasing power parity – our wealth in international terms – is dropping significantly, he said. 

Latest tourism figures indicated that fewer and fewer people can afford to travel, car sales are at a fraction of what was forecast 10 years ago, and the rand 10 years ago was R6.84.

Not all of South Africa’s economic woes could be ascribed to Zuma, Heystek said, as there were contributing factors like the downturn in the commodity cycle.

But he – and Pravin Gordhan, in his former position as finance minister – could be blamed for South Africa’s credit rating, the acceleration of “out of control” government wages, government debt as  a percentage of GDP and negative foreign direct investment (FDI).

Land expropriation an investment deterrent 

Heystek said land expropriation, if handled badly, could lead to a further acceleration in the decline of FDI.

On other measures, like debt servicing costs and the world competitive index, South Africa is being overtaken by countries like Mauritius, Rwanda and Morocco, he said.

The effect of all of these issues on wealth is a collapse or stagnation in the property market, with the average property price around 2005 levels.

Looking at relative investment returns – over three, five, seven and 10 years – South Africa was stone or second to last, he said. The average pension fund has not beaten inflation over three years. While South Africa still quotes the gold price – “the least important economic indicator” – biotech and tech investors offshore have created great wealth, and most average investors in South Africa have missed out on that growth, he said.

“We are chugging along while the rest of world is creating value for investors.”

The long-term effects of state capture

Sygnia CEO Magda Wierzycka, commenting on the political environment, said that 18 months ago, state capture and Gupta leaks weren’t part of the lexicon in South Africa, but now this information is out,  and state-owned enterprise (SOE) by SOE is compromised.

The involvement of international companies like McKinsey, SAP, Bank of Baroda, HSBC and KPMG has also been exposed. 

According to Wierzycka, an SAP director told her “this is their standard way of doing business in most emerging markets”, while one of the big four banks was involved in beneficial structured transactions involving Transnet and Eskom.

South Africa’s recovery “will take much longer than most of us will like to believe,” she said.

“We cannot be too impatient. I think Cyril [Ramaphosa] is moving incredibly quickly given the constraints he is under.” 

The biggest constraint is job creation, and Zuma’s greatest crime was to destroy basic education, “condemning another generation of youth to unemployment [while], at the same time, we are facing forces of fourth industrial revolution.”

South Africa has emerged out of state capture at a difficult time as central banks globally take out the free money they had been throwing into the system, she said. 

While the world had “an unprecedented period of growth,” South Africa did not participate.

SA must change its narrative

She said stumbling blocks for foreign investors include the mining charter and land appropriation, and as much as the resource sector is a sunset industry, it’s an employer of manual labour. Acceptance of the ‘once empowered, always empowered’ concept was “a very positive sign that government recognises the realities facing SA.”

Land reform, however, was problematic. Wierzycka said the ANC never gave any thought to what it meant and is only now starting to put frameworks in place.

South Africa needs foreign investment to create jobs and generate growth, she said, adding that South Africa was the only emerging market last year “to attract negative foreign investment”. Getting investment will be difficult, and South Africa needs to change the narrative, stop talking about state capture and the Guptas, and start talking about the positives.

While the last few years have not been good for local investors, there are options for investors and strategies they can adopt to increase their returns.

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In a democratic ruled land the majority chose who will steer. If they do a Titanic or a Bismark thing like sinking, it is destiny to blame. Not Zuma.

….”destiny”?

Many would say “Opportunities are made” and fate is for the casino’s

The ANC voters have a very tenuous hold on who steers. They vote for the ANC which in turn through its structures vote for a committee, which votes for another committee and eventually the top six committee decides who is Numba One.
Therefore a system open to the abuse we have seen.

It’s the ANC’s branch structure that’s the problem.Their 4000 corrupt elective conference delegates gave the country Mabuza, Magashule and Dwarte.

“…Zuma’s greatest crime was to destroy basic education, “condemning another generation of youth to unemployment…”

Precisely. An extraordinarily powerful man without any education himself threw a whole new generation under the bus without flinching. The consequence will be that the SA economy will not be competitive for at least the next 25 years. Not to mention the social instability that must inevitably follow.

SA can only stop talking about state capture and the Zuptas when ALL the high-ranking criminals are behind bars.

The annual migration of the wildebeest in the Serengeti is a spectacular event. Huge herds move in the same direction without leadership. The herd encounters many obstacles like rivers, crocodiles and lions on the way to their destiny, but the motivation to move is stronger than the fear of those obstacles.

The majority of the voting public in South Africa are not interested in economic growth. It is only the small minority of educated and intelligent entrepreneurs (capitalists) who focus on growth. ANC supporters are focused on redistribution under the cover of retribution. In the same way the physical environment acts as the motivation for the wildebeest to migrate, the economic environment motivates people to migrate towards socialism. They do not need a leader to guide them and the size of the obstacles are irrelevant. The motivation for redistribution overcomes any obstacle in its way. The wildebeest do not “learn from history”. Neither will socialist learn from history.

The migration is gaining momentum with the Mining Charter, National Health Insurance, Expropriation without compensation, nationalization of mineral rights and water rights, ESTA and security of tenure laws, increasing BEE demands and the highest tax-rate in the world.

At this stage I recognize that the herd is moving in my direction, and my only option is to get out of its way.

So true! And what this article says about Zuma and Pravin Gordhan is so accurate. under Pravin Gordhans watch we started to fail as an economy. The Rand collapsed, growth tanked and the Zuptas stole the country broke. Big business was fooled(again..like with Steinhoff) by smooth words from an exceptionally incapable and ineffective man ie Pravin. He should be tried for gross mismanagement ie Mr State Guarantee to raise debt for SOE frauds!! A true Commie and hopelessly incompetent

Pravin, like his ex-boss, struggles with simple arithmetic. When increasing the top tax rate in 2016 by 5% to 45% on income exceeding R1.5 million, he claimed he had to increase the DWT accordingly(so that company owners would not shift their salaries to dividends) by 5% from 15% to 20%. What Pravin (and his advisers?) failed to understand is that the 5% increase in DWT was a 33% increase from Rand one while the other increase was a ‘mere’ 12.5% and then only on amounts exceeding R1.5 million.

So the only real option is emigration… Agree with the comments about the destruction of the education system – Educated people will never vote for the ANC (and the ANC knows that) – Keep them poor, uneducated and ignorant and they will keep voting for the ANC and EFF.

Sadly, I agree Gemini & SAM. If there was a solution for SA’s socio & political problems, it would’ve have been found already.

Face reality. The most of SA’ (children) population still has to grow up & once adolescents, the economy would more closely resemble that of a smaller African state. The destitute will increase exponentially. ‘You & me’ will be the shrinking pool of “haves” in SA, and will end up carrying everyone. And people think crime is bad now? Give it time.

Water supply (and it’s already managed poorly) after 2035 won’t be a guaranteed resource. Never mind any political issues…just the latter is enough to point that emigration is the only viable long-term option.

(…and I don’t say it just to us ‘privileged’ whites/Indians, but to educated and well-heeled Africans as well. Get out if you can. The overseas job-market don’t judge you on a racial bias, as is the case in SA, where I understand ‘racism is still very alive’.

Never in my life, have I Googled so much info on foreign countries’ “residency & citizenship programs” / expat networks / ‘cost of living comparisons’ / individual tax rates globally, etc etc. Sad, isn’t it? But am determined not to retire in SA one day. Do you really want to retire in a country where the healthcare will be a goner?

Dont diddle daddle too much, make a decision on LEAVE.20 years ago I decided to stay since my youngest was still in high school.
I am now, aged 62, stuck in this shithole. Fortunately my two daughters have settled in the UK and are doing great as UK citizens.
Age is a facor and the longer you wait the more difficult it wil become.

@Bihap, happy to hear your kids are doing well in the UK 🙂 Done the right thing.
Thanks for reminding me of the age factor. Also a point in life may arrive where one is unwilling to accept the trauma of pulling roots and relocating. Maybe my retirement will consist of a permanent “rental holiday” in East Europe or Paraquay/Uruguay. Accepted it as new excitement in one’s future life…and have one only.

(…or you and I can get together, and become permanent campers and enjoy Africa for what it’s worth, until we’re both eaten alive by lion 😉

Moneyweb and Brenthurst can do us readers a favour by comparing the tax regimens of the popular emigration destinations. Some of us may not want to emigrate physically, but we want to expatriate our assets and source of income to protect it from the socialist looters locally.

The personal and company tax rate in Mauritius is half of the rates in South Africa while there is no Capital Gains Tax in Mauritius. What are the benefits and drawbacks of an investment trust or company that is domiciled in Mauritius? Are there better alternatives available?

Now you start talking Sensei! Such an article long overdue.

Just the previous week I compared the various tax rates of European countries (for residents), even in East Europe…some countries get away with 10-15% individual tax brackets (Bulgaria or Romania I recall). Am thinking I should draft a summary & publish it.

The only problem is, countries like the Netherlands have apparently very high upper tax brackets (40-50%?), but the real question is “What services..and the quality of it…the Dutch citizen gets back in return his his high tax?”
Even with high tax in the Netherlands, it’s start to look quite attractive….since back here in good ‘ol SA, your Medical Aid contribution is actually a tax…as the PAYE we pay, SHOULD give one acceptable (if not quality) state healthcare. Same as cost of security…e.g. the cost of car & asset insurance due to theft, home armed response. Include that the money S’Africans spent on adding palisade-fencing, burglar bars in their lifetime….that’s as good as “tax”. And you get little of your tax back in benefits…as it subsidizes the poor.

Add up the daily costs to car guards, beggars, etc. Govt should look after these destitute. So it’s essentially an extra “tax”.

If I pay say 50% personal tax in Holland, and in return I receive an acceptable, quality healthcare system, plus a national pension…dammit, their tax is lower than SA “tax” on society.

Thank You Michael. You should really consider publishing the research you did in your professional capacity. It will get the debate going.

Have a look at the dutch tax system regarding taxes on your investments.

Copied this paragraph from the belastingdienst.nl

Box 3: sparen en beleggen

Hebt u vermogen, zoals spaargeld, aandelen of een tweede woning? Dan hoeft u de werkelijke inkomsten, bijvoorbeeld de rente op uw spaargeld, het dividend op uw aandelen of de huuropbrengst, niet aan te geven. Uw kosten, zoals betaalde rente, mag u niet aftrekken.

Wij rekenen een vast percentage van uw grondslag sparen en beleggen als uw voordeel in box 3. Uw grondslag sparen en beleggen is de waarde van uw vermogen (bezittingen min schulden) op 1 januari, na aftrek van het heffingsvrij vermogen. Uw schulden worden verlaagd met een drempel.

Uw voordeel vermindert u met uw persoonsgebonden aftrek als u daarvoor in box 1 te weinig inkomsten hebt. Wat overblijft is uw belastbaar inkomen in box 3.”

So you essentially only pay vermogensbelasting which is very little. All your assets – liabilities. Somewhere in the region of 4-6%.

This is very, very ideal.

Portugal-can be tax free for the first ten years

Israel-taxed on a remittance basis for the first 10 years

Italy-100 000 euro per year plus 25000 euro per extra person per year

Uk-UK Resident non domiciled-remittance basis only for a number of years but subject to a staggered minimum

Switzerland-fiscal deal of about 5 times the rental value of your property( for the big guys so about CHF150 000 per annum) irrespective of global earnings!

however-take advice! this is a tricky area-good luck! SAM

See you all in Mauritius soon….while the gates are still open!!

First he blamed Whites, Indians and Coloureds. At this rate Malema will have to find a new collective name for this target group – Mauritians.

….indeed, while the “gates” in Mauritius are still open. But back in SA, the “gates” on our side would be stolen *lol*

(Thinking of doing a MAU stock investment, knowing that it’s a small market compared to SA, and yet if a small portion of S’Africans capital goes there, it will lift their economy out of proportion. Probably already happening.)

Destiny is when you allow yourself to be manipulated and controlled without any proactive response from yourself. It’s when someone enters your household and violates you, your family and takes all your possessions, and you stand back and allow this to happen.

How about reacting positively to protect what and who you are responsible for? Is this to scary and difficult and so intimidating that you allow all your loved ones and all you have to be taken?

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