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Is there now more value locally than offshore?

Prospective returns on the JSE over the next five years could be better than from international markets.

Over the past few years South African asset managers have preferred holding international equities to investing in the local stock market. Their view has been that the potential returns offshore have been much higher.

They have been proven correct too. Over the five years to the end of March 2019 the MSCI World Index was up 11.72% per annum in rand terms, while the FTSE/JSE Top 40 had grown only 6.44% per annum.

However, this view is starting to shift. While many fund managers still believe that there are better opportunities offshore, the perception of the local stock market is improving.

The Old Mutual MacroSolutions boutique, which recently published its annual Long-Term Perspectives, now expects that over the next five years, the potential returns from the JSE are higher than those investors can expect offshore.

Expected long-term real returns (after inflation)

Source: MacroSolutions

While a 5.5% real return from the JSE is still below the long-term average of 7%, this is clearly an improving outlook.

“This is the first time since 2014 that we feel the forward-looking returns from South African equity are higher than they are for global equity,” says Zain Wilson, portfolio manager at MacroSolutions.

Changing dynamics

There are broadly two reasons for this.

“On the one hand the US has had 10 really good years,” Wilson explains. “It has benefitted from easy monetary policy after the financial crisis took all of the credit out of the system, and you’ve had fiscal easing for the last three years.”

MacroSolutions agrees with IMF forecasts that the US will move from this period of strong growth to incrementally lower growth over the next five years.

“At the same time, South Africa has had five years of pain,” Wilson argues. “Part of that pain has been driven by a weak Chinese environment and weak global trade on which we are reliant, and there has been a lot of self-inflicted pain.”

However, this pattern is changing.

“The US is slowing down because they don’t have all the tailwinds that have helped to boost the economy and the market over the last 10 years,” Wilson notes. “And there is also incremental positive change in South Africa, starting with better fiscal management and improved governance.”

Investment flows

These changes in South Africa are not going to realise massive improvements in economic performance immediately, but they will at least start to reverse the downward trend. This will also be aided in Wilson’s view by an inevitable shift in investment flows.

Over the last 10 years external investment by domestic companies has been exceptionally high. High profile examples include Woolworths buying David Jones in Australia, Brait’s purchase of New Look in the UK, and a number of property companies making acquisitions in Eastern Europe. At the same time, foreign direct investment (FDI) into South Africa has been extremely low.

The appetite and capacity for local companies to invest offshore has however dissipated. Wilson believes that just removing those outflows will remove a big headwind.

At the same time, an improved local environment will become more attractive for foreign investors.

“If you get delivery on policy certainty, resolve the mining charter debate, the wage debate, and land expropriation, that sets the foundation for stronger FDI going forward,” Wilson argues. “That will make a big difference.”

Improvement off a low base

This will be accompanied by a shift in business and consumer confidence.

“Confidence is so low that if you just start building that again, the impact will be significant,” says Graham Tucker, portfolio manager at MacroSolutions. “We have clearly done damage to ourselves. We have scored own goals. But if we can create more certainty and put better policies in place, confidence will come back.”

These twin improvements will change the outlook for the local economy.

“As confidence improves and FDI outflows stop, the base is very low for a cyclical recovery,” says Wilson.

“The growth recovery will take time, but if we can see stabilisation in the cost of capital and a steady rand as governance improves, then we expect the improvement to start there.”

That, Tucker believes, will translate into growth for local equities, particularly since many companies exposed to the local economy are currently trading at low valuations. Even a small improvement in the overall environment could translate into much more positive sentiment.

“Our view is that South Africa will improve,” Tucker notes. “That means we are not buying the biggest weights in the index, but accessing mid and small cap companies that are currently small components of the index, but are offering the most value in our view.”

Investors should not, however, expect to see results immediately. This is a long-term story.

“We see the actions that the government is taking continuing slowly but surely, and that will build confidence,” says Tucker. “It’s coming off such a low starting point that any improvement will see a material rerating of South African assets. But a lot of the action that needs to be taken will take time. It’s not going to happen overnight. It requires patience.”

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Admittedly there is a natural hedge when investing in rands for retirement, but I would suggest that becomes increasing irrelevant beyond the yield you need for your living needs, post retirement. Beyond that, for real wealth creation, it seems senseless to arbitrarily choose a small, risky country at the foot of Africa in which to invest anything but a small component of your investment basket.

I think all this talk of local vs international future returns is largely irrelevant in the face of the inevitable coming US recession, crack in its markets (which are already at record heights), and the rest of the world’s stock exchanges following suit. My advice is to build liquidity and wait for the crack.Then see where value lies.

Where and when you invest is entirely based on what your perception is of the world around you. If you think SA is heading for Zim2, then you shouldn’t invest locally. If you think the US markets are going to crash, then don’t invest there. If you think the world is heading for a wobble, then you truly have a problem. It seems to me that you then either go for bullion, or invest in a currency you think will hold up best under wobbly circumstances. I suspect that SA has a much better chance of hitting 1000% inflation (mainly because our government can’t organise a drunk party in a bar), than the US. Under those circumstances I’d rather be in a currency that devalues at 5 or 10%, than the Zim $.

I think you should google the phrase “timing the market.” Peruse a few articles that come up.

Personally, I took a long term view on the construction sector and bought Esorfranki and Basil Read. The valuations were very very low and could have been bargain-buys. And then it was already about 10 years into the downwards cycle and I thought only a short while before they would recover. Lost about 90% on each.

Moral of story: if rotten tomatoes sell for a bargain price it is still not a bargain. There is indeed a difference between investing and gambling and DO NOT blur the line.


Don’t feel too bad. Some clever guy (C type at biggest asset manager) went geared long on Steinhoff after its first dip to mid teens. It lost another 90% as well and the C type wiped out most of what they took off pensioners and savers for the past twenty years. Karma yes, but also – never catch a falling knife.

In my opinion on JSE : property will need to reflect hundreds of billions of revaluations to approach reality; who knows or cares what resources will do – the hired help and insiders steal everything anyway; financial services are lower than pimps on the morals totem pole; retail is right now in a panic waiting for SENS announcement.

So maybe if one can find smaller well-run (probably flunder-runnor family-run) industrial companies on the JSE, but I can find 20 of those on 10PE and 2% dividend yield in the US in an hour. And have currency hedge.

“financial services are lower than pimps on the morals totem pole”

This had me in stitches!! 😀 :’D

BUT, the elephant in the room remains the ANC.
As long as you have Ebrahim Patel and Rob Davis driveing the Economy the downward spiral will continue due.
We need an In segment friendly environment with laws and policies.icies to match!

Dear MW readers/investors,
Please see this report by OM as a desperate attempt to stop the massive flow of money rushing from SA equities into cash or into global equities. I, too, spent some time working through this document but not one word on the potential impact of:
Expropriation without compensation.
Potential downgrade by Moody’s.
Introduction of prescribed assets.
Eskom’s financial and operational implosion.
Militant labour.
Shrinking tax base.
Poor economic growth rate.
Capital and people fleeing the country.

Against all this, OM says the SA equity market will outperform the rest of the world over 5 years. Pull the other one.
I, for one, know where my long-term capital will be. Not in SA and definitely NOT with Old Mutual.
Has anyone checked OM’s 5-year returns on their local equity and balanced funds? I cannot find one that has beaten the inflation rate after fees over 5 years.

Anyone smart enough would know that offshore offers better returns than local.

I couldn’t agree more with you. The risks in a low growth state, with marxists in power , threatened by the EFF and a highly uneducated population dependent on basic income grants makes South Africa a poor choice for Emerging market exposure. If you must have EM risk then go for a well diversified fund.

Home bias is very 1980s thinking. The world has changed and we have access to global information instantly. remember the population is growing so with growth at 1% we are getting poorer per head.

I will go with SA will outperform for 2 years…
1. ANC will win with more or less 58%…international investors will be happy.
2. US market expensive..
2. President will do some changes…everyone will be happy thinks SA economy will show strong growth…
and then the same all over again
….therefor wait for 12 months..ZAR will be stronger and take money out

Only your last sentence is the wish. I wish Ramaphosa would suddenly privatise Eskom, enforce property rights, abolish BEE, etc etc. Then I can sell my farm and send the proceeds out of SA at a decent rate. If wishes were horses…………

Value is an ambiguous term. Value metrics like Price/Earnings and Dividend Yield ratios use the currency as a yardstick. When we aim to determine value, we have to “calibrate” the yardstick before we rush into using it. The length of this yardstick, the comparability of data, and integrity of the unit of measure, shifts constantly. The relative length of the yardstick is determined by the Central Bank, and it changes regularly as a result of the debasement of the currency.

That brings me to the point. In any monetary system, be it Fiat currency or Gold Standard, those individuals nearest to the source of the newly-created money become wealthy relative to those furthest from it. The measuring stick shrinks in length as the money travels further from its source.

Those who are first to receive the new money enjoys its full purchasing power, while those further down the line is forced to accepts devalued currency with lower purchasing power as inflation takes its toll. The companies on the Nasdaq and the NYSE are closest to the printing press (Federal Reserve) while those companies listed on the JSE are furthest away from it. The fact that USA markets are outperforming all other markets proves this point. The Dollar enjoys the status as the worlds reserve currency. This gives them a source of cheap money, and the power to export inflation, and the resulting lower profitability, to the rest of the world.

In short – don’t fight the Fed.

Caracas Stock Exchange Stock Market Index:
YTD RETURN: 440.97%
1 YEAR RETURN: 149,379.90%

– Venezuela’s annual inflation rate fell to 2.30 million percent in February.

– The Caracas Stock Market Index was 2018’s worst stock market performer in dollar terms, suffering a collapse of 94%.

All I’m saying is good luck to OM if they want to invest in the falling knife also known as the JSE, so aptly named by @Johan_Buys.

It’s not like they have any risk if they invest their customers money in the JSE, they still get their fees even if the investment underperforms. Their only risk is clients leaving them and taking their investment overseas.

If I was a betting man I’d put my Dollar on SA having a greater chance of following Venezuela as appose to breaking out and turning into the US of Africa.

Fund managers are fortunate they are not held to the same standards as financial advisers.
I am not that interested in the returns for the next 5 years, it is the following 20 which scare me. It is becoming increasing apparent that it is nigh on impossible to generate real wealth when you are nailed with administrative price increases of >10% every year.

Corruption does not have a negligible effect. Corruption takes its toll, and it is highly significant.
Then the currency loses value and so down we go, like flight ET302

Guys this is all too easy to interpret. Where is the ANC’s good story for the last 20yrs (economy)? What trend has been set over the last 10 years? Its all downhill with debit that can never be rid of and non detention of corrupt ANC members. This is Zim 2 but WORSE!

SA definitely offers more value, the JSE is where it was 5 or 10 years ago.

Mr. Zuma has left office, but when will the JSE correct upwards?

We have a very good Banking sector, Mining sector and Retailer sector.
Even Agriculture could be a bonus.

All depends on government behaviour.

The last line says it all “all depends on government behaviour”.
Out of the lot of parliamentarians; there is only few bright lights; Pravin Gordan, Naledi Pandor and the health Minister.

The bottom line is this – There is no such thing as capital appreciation in a socialist country. The constant, orchestrated attack on property rights in South Africa forces investors to look offshore, to support capital appreciation in foreign jurisdictions. South Africa is in a financial depression that is much worse than the Great Depression. This situation is the result of myopic government policy.

We are capitalists in a socialist country. This experience is downright scary and very intimidating….

The health minister? What are you smoking? He has only made draconian smoking and drinking laws, has done nothing to curb predatory lawyers and is instrumental in crafting disastrous laws which may cost you your life. Probably will. Fear nothing more than that pie in the sky called NHI.

The comment lacks the comic sans font. Gordhan is weak and clueless as regards Eskom, he is only good as an ANC bagman. Pandor, say no more; 30% pass rate and still failing. Health, if NHI is not pie in the sky it will bankrupt SA more effectively than Eskom, if it gets the chance. If you are going to be an optimist at least have some grip on reality.

“the JSE is where it was 5 or 10 years ago.”

To this I can only quote @JapieM cause I could not have said it any better:

“Moral of story: if rotten tomatoes sell for a bargain price it is still not a bargain. There is indeed a difference between investing and gambling and DO NOT blur the line.”

If I was living on Mars and I was looking down at the world and taking all the markets into account, I would probably invest the vast majority in 1st world markets such as the US. If I really had a gambling itch to scratch I’d maybe invest 2% in South Africa and maybe 5-8% in the rest of the emerging market. Alternatively I might just go buy a lotto ticket, since it’s less hassle and there are no admin/performance fees.

Good mining sector ? What are you smoking friend ?
30 Year ago you had 700 000 people employed in the mining sector. Today you have 150 000. THAT IS JOB DESTRUCTION, courtesy of the ANC.
The mining sector, once the bedrock of the SA Economy is now a joke.

If anyone can posit an argument that there is any better investment in SA than taking my ZAR and turning them into Euro or Pound, I’d be very keen to hear it. My investment strategy is ‘capital protection’. Right now ‘growth’ means nothing to me

You maybe surprised but holding cash in a foreign currency (USD, EUR, GBP) has not been a fantastic investment strategy in the past (except for short periods such as NeneGate). There is a reason why foreign investors buy ZA bonds. If you really want to hold cash in a foreign currency the best returns have been in USD, then Euro and then GBP.

You misunderstand Lemon, I simply want to keep my money out of SA until I move myself. In fact I don’t care if I ‘lose’ via temporary fluctuations in the ZAR v X currency rate. I just want to be liquid and ex-Kleptozania

But when Maggie says all these comments, most commentators accuse him of being shockingly negative….
I am not a Maggie loyal, but I don’t understand.

Nonsense, what planet do you guys live on “If you get delivery on policy certainty, resolve the mining charter debate, the wage debate, and land expropriation, that sets the foundation for stronger FDI going forward,” Wilson argues. “That will make a big difference.”

So basically your whole argument for investing in the JSE is based on IF the ANC institutes policy certainty, resolves the mining charter and wage debate, and clarifies land expropriation.

Wahahahahahahaha. All I can say I’m glad you lot are not investing my cash.

“In investing, what is comfortable is rarely profitable”

There appears to be a lot of panic in the comment section. When this is the case, it’s often best to look at the data in front of us.

Local politics are not a key driver of markets. Markets have yielded 5/6% over the past 5 years and are therefore in a far more attractive position to outperform going forward.

Follow market trends and history. Don’t speculate that this particular time will be any different.

Very interesting to see some real clever moves by readers here.
Just be carefull of just looking in the rear view mirror and driving forward. Yes a lot of destruction took place in the perhaps last 5 years but may be we are at the same level SA Resources were in Jan 2016. Since then the RES index is up 180% and is out performing nearly if not all asset classes world wide. Emerging markets in Rand terms are also looking better than ther developed market and could be at a lower risk.
Looking at the change in trend from Dec 2018 the market might be powering ahead. To all with overweight positions globally beware if the Rand continues with strength from the 14.75 low. We have just broken 13.95 and may be get to 12.70-13.00 before the end of the year.

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