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Your future in the charts

SA’s in the middle of a financial firestorm.

I just love charts. I’ve spent most of my waking days and nights looking at them – literally, hundreds. Every one tells me a different story. Some go back 100 years – such as the Dow Jones Industrial index – while others show what’s happened during the most recent five minutes in forex markets.

A while ago I even saw a chart of Dutch bond yields going back almost 400 years. How cool is that?

Charts are great servants of researchers and journalists, especially in today’s digital world, where a great deal of charting information is free. For those who can afford advanced charts, on offer by Bloomberg, it’s charting heaven.

Charts cuts through the waffle, spin and downright lies – of which there is much peddled day in and day out in modern-day South Africa – by both government spin doctors and the private sector. 

I wish to discuss three charts.

While seemingly unrelated, all have one thing in common: they vividly and painfully illustrate the financial calamity embracing every one of you reading this column.

I’ve been trying to warn readers of this website for some time that SA’s finances – at government and on a personal level – are heading for a spectacular meltdown, which could last for many years and possibly become the new normal. In other words, it’s not cyclical this time but structural, permanent. The ramifications would be far worse than most pessimists would ever have considered.

There’s no joy in reaching this conclusion, no schadenfreude (pleasure at another’s misfortune). My rewards have been few and far between. A long-time and very dear friend calls me the ‘Leonard Cohen of financial writing’. Others have been, as expected, forthright and blunt, engaging me in a not-so-cerebral discussion, using words that don’t exceed four letters.

But my views are based on the charts I see and analyse. If the Nelson Mandela Foundation can describe the current political situation in SA as one where the “wheels are coming off”, then I can surely paraphrase that statement and claim that the “financial wheels are coming off”.

We are, in my view, already well past the embryonic stages of this meltdown and are now smack bang in the middle of a financial firestorm which could worsen if/when our foreign debt is downgraded by two of the three global credit ratings agencies in the near future.

1.SA debt levels at highest levels ever

Take a look at this chart of SA’s government debt.

public-debt-over-gdp-640x519-1

Source: MyBroadband, here

 

Words are almost not needed. It tells a story of a government hell-bent on spending its way into oblivion. As pointed out by finance minister Pravin Gordhan in his recent Medium-Term Budget Policy Statement (MTBPS), the cost of servicing this debt is now the second largest item in SA’s budget. A downgrade would further exacerbate this trend, as higher interest rates – which government also pays – will push our debt repayments to unprecedented levels. 

Guess under which finance minister most of our runaway spending occurred? The venerable Gordhan, who now seems to have garnered the status of a financial and political saint. If Gordhan couldn’t contain government spending during his previous stint as finance minister, on what grounds can he be called upon to stop it now?

As such, the MTBPS was completely devoid of any urgency in unlocking the suffocating levels of despondency amongst the business community and consumers.

All we were told with certainty was (a) the poor won’t be affected by any tax increases and (b) Gordhan needs to raise an estimated R47 billion over the next two years.

Pulling such a large amount of money out of the pockets of consumers and taxpayers – at a time when confidence and spending levels are already rock bottom – does not augur well for retailers, the residential property market and the sale of new motor vehicles, just for starters. Today’s depressed levels might be remembered fondly in a year or three from now. And then Treasury is expecting an upturn in economic growth over the next two years. Pull the other one.

2.Residential property market

As several of my columns have pointed out over the past two to three years, this market – aside from the Western Cape (WC) – is very firmly in the grip of a severe, almost eight-year bear market. In real terms, you haven’t made any money beating the inflation rate over this period. Over the past two years you’ve been losing money against inflation and, in some cases, we’re starting to see a decline in rand-terms.

This is a toxic sludge if you’ve been using gearing to try to make money in the buy-to-let market – which is still being promoted, but less so in recent months.

You cannot hope to make money using gearing if your cost of capital is eg 11%, while the value of the underlying asset you’ve geared is only rising by 3% or 4% per annum. And, the rentals to service the gearing are also only growing at about 5% per annum, with as much as 25% of SA tenants not paying on time or at all, according to Tenant Profile Network’s latest figures.

Mainstream financial media spends a lot of time and effort trying to pretend this isn’t happening. Property advertisers spend a great deal of money via these mediums and negative reporting on the property market is strongly discouraged.

The rapid growth in property prices in the WC – evident since about the time the Democratic Alliance took control of the province in 2009 – is disguising how bad other provinces are doing, if one takes a look at this chart in the latest FNB Property barometer.

magnus-2

 

Average WC property prices are now almost 25% higher than elsewhere. The momentum line for the growth of prices in smaller provinces is heading towards zero.

Obviously this chart can only apply to property prices where transactions are still being recorded. None of the major property surveys in SA (Absa, FNB and Pam Golding) give a breakdown of the turnover and actual sales in these areas, but I’m convinced that in many smaller towns in SA – besides the WC – property transactions have completely dried up. So, if there are no sales there is nothing to measure.

Have I turned bullish on property?

One sharp-eyed reader emailed Moneyweb editor Ryk van Niekerk last week, asking whether I’ve suddenly turned bullish on the residential property market, based on the fact that I’ve recently purchased two properties in the Western Cape.

One property is a lock-up and go at the magnificent Val de Vie development outside Paarl (the smallest property on the estate) and the other an even smaller two-bedroom unit in The Yacht Club on the Cape Town Waterfront. Both were purchased from the proceeds of sales of properties up north. 

The flood of well-heeled buyers from Gauteng and other northern regions continues unabated, with over 50% of buyers at Val de Vie from Gauteng. While Steyn City (outside Fourways in Gauteng) is battling with sales, Val de Vie cannot keep up and has sold over R1.6 billion worth of property over two years. Most of the phases (Polo Village, Gentleman’s Estate, River Club and even the Polo Village offices) have hung up the sold-out sign, according to sales director Renier Swart.

I don’t know how long this trend will continue, but after recently spending a week in the Cape, I’m more than convinced it has some miles to go.

3.JSE under water over one, two and soon three years

For a while since the 2007/2008 Great Financial Crisis, investors on the JSE made very good returns and, over seven, five and even four years, investors are still well ahead of the inflation rate.

However, over one and two years, this situation’s been reversed; even over three years investors in the JSE All share index have barely scraped by ahead of inflation.

One reason is that overseas buyers – who enthusiastically bought up our shares during the good times – have been aggressive sellers of these stocks over the past year, ever since the Nenegate-scandal broke.

In another chart (available for those interested), the under-performance of the JSE versus the MSCI emerging market index (-1,2% versus +9%) over the past 12 months is notable. In short, global investors have been dumping SA shares in record numbers ahead of an expected downgrade later this year or next year.

magnus-1

The same applies to the money market returns (before tax) over the same period of time.

This is what the third chart is telling us. 

For investors hoping for a quick return to the boom-times when markets bounded ahead year after year, at between 15% and 18%, my advice is to temper your expectations. The JSE is not cheap by any standards and if one strips out the effect of the market cap weighting of Naspers, now equal to almost 20%, it shows the market is in serious trouble.

And then there’s the looming downgrade.

What this all means to me is that most people, with the exception of the super-rich with globally-diversified investments portfolios, are facing a prolonged and drawn-out squeeze of their personal wealth. Additionally, business profits and salary increases aren’t keeping up with inflation, according to the latest BankservAfrica survey.

Government would like to put as much blame as possible for this long drawn-out financial calamity on global factors. Initially this was true but, as the scale and momentum of the mismanagement, corruption, theft, policy indecision and confusion picked up speed under the Jacob Zuma administration, it became clear that these were self-inflicted wounds.

Would the removal of Zuma improve matters?

I don’t think we will be seeing the back of Zuma very soon. In fact, we might even be witness to his scorched earth economic and political policies in the near future.

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at magnus@heystek.co.za for ideas and suggestions.

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COMMENTS   27

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You paint a very dismal picture, however I have not heard anything that is not known and in the market already. The political risks in SA have ensured that our debt is nowhere near as bad as the rest of the world and a downgrade will further limit our ability to dig ourselves further into debt. I agree we are in for a very grim time, but stuck at the bottom of Africa may not be the worst place in which to see things out.

The debt has been increasing much faster than the economic growth and the income of the government which is a major problem. Other countries have higher debt level, but because their cost of servicing it (interest rate) is much lower they pay a smaller percentage of the budget for it. It is a major difference if you pay only 2% interest on the debt instead of 8-10%. Add to this the practically zero growth, which translates to negative per capita growth, the increased unemployment, the increase in the amount spent on the different government grants and I do not see a solution.

@Lynne,
The “positive” of a downgrade on debt is something that I found that some people find it hard to understand/accept.

Magnus should pull those same charts for USA, Britain, Europe, Japan, China. Bad news, it looks the same everywhere. Even wealthy investors with money overseas will struggle to keep ahead of inflation. How is that biotech investment looking? Muted real returns (if any) everywhere.

And if Malema gets in and takes the land as he is boasting today to do?

Never forget how dumb our people are.

Shouldn’t you be more positive after winning a R4 million Ferrari for buying at Val De Vie??? where else on earth can one win such a prize??? most probably worth more than you paid for your apartment!!!
South Africa will be ok!!!! and so will all of us!!!

…..and you probably believe in tooth fairies.

Jerimiah my boytjie, i have seen the tooth fairy with my own eyes!!!!!
a movie is about to be released!!!!

oh, and by the way – property prices in cape town might be outperforming the rest of SA, but CT has now become the most expensive place to live in SA!!! many people who have migrated down here are very sorry!!! the beach and mountain won’t put food on your table!!!! and pay the exorbitant school fees charged for very average schools in CT!!!! we now pay the most for electricity,water,rates etc!!!!

if properties at Val De Vie were selling like hot cakes, why the need to offer such an incentive(R4mill Ferrari) to buyers?????

Anyone here had a financial planner tell him or her, about 8 or 10 years ago what a great idea it would be to put your entire pension package straight into a Living Annuity product?
Backed up by “Mr. Bloggs it’s time in the market not timing the market”
Of course if Mr. or Mrs Bloggs had purchased a so-called policy/product from one of our esteemed insurance houses the word RISK would not have even entered the conversation in any way shape or form at the time of signing the closing docs.

Several paragraphs are repeated in the 2nd section about the residential market. Before and after the FNB chart the same text appears.

Indeed a scary situation for us local investors. Now please give us some clear straight financial advice how to make best of this low road scenario (except buying property in the WC).

You should buy investments in the same way you buy food at the store. Look for stuff that is marked down, but not because it has expired. Current bargains: Property in Gauteng and the JSE. Load up your trolley before it is too late.

If one reads charts every day I wonder why would one keep all ur investments in foreign currency. The trend for the rand over many years might be down but the short term (10 months)clearly indicates a stronger rand with weakness when bad news are in the offering.Since the panic in Jan when it hit 18 to a $ it was stronger by 21% a week ago.
@ham
Follow the advice of @MoneyChief by not exposing all capital to risk all the time. If one bought every 3% plus dip in the market and sold some on the up days you would have a return of over 20%p.a. over the last 2 years. The next 3 years might be more of the same. Compare that to no return by “buy and hold”
Spread ur risk by committing some capital long term in a well diversified portfolio and add to the investments when they go south. Adapt to changing conditions and do not just rely on “it’s the time in the market that counts” Try to have different strategies with different slices of the cake.
Invest like a pro and not like the typical retail investor relying on a planner to make money for u.
The rand gave a good buying opportunity recently and another great opportunity to sell some this week. Over 6% gain of $ funds in a week. Why “invest” for 2 years and show no return in the overall market?
Those who buy at a cheap price have the odds in their favour to make a better return.
As Magnus said passive equity investment in the market has barely beaten inflation over the last 3 years.

Dear Magnus – Shame yes,what a terrible place SA is – Congrats on winning the Ferrari – Your clients must be so happy for you that their commissions are funding your lifestyle – But I suppose you need something to take your mind of the dismal performance of your bio-tech funds – Just what do you contribute to this country? Spreading fear and negativity is your calling card – You are not middle class by any stretch of the imagination so stop pretending you care about the middle class – Your only fear is that they will stop funding your lavish lifestyle by paying inflated “adviser” fees – Maybe a few of your clients should take you to court – Telling them to buy Dollars and Pounds at the worst time and investing in overvalued bloated 1st world stock markets

Well put. I remember Magnus saying ‘go offshore’ when the rand was around R16. Those poor clients.

Magnus, you are pinching my description of Gordhan calling him the so called saint LOL.
very scary chart showing debt/gdp growt since 2009.
debt in essence is not a bad thing if it is used to grow assets , but in the case of SA our assets are being devalued – the only growth is in grants (17 million ) and unemployment.
this supports my comments the other day that Gordhan is a commie like the rest of his cabal , just does not look as bad as the Zuptas.

On the lighter side – “Die Groot Trek” of the Afrikaner forefathers is now reversed. When they left the Cape Colony, they crossed the mountains bare-feet and in ox wagons with the bible under the arm. Now they move back with Cat boots and Prado’s with You and Huisgenoot under the arm.

The Voortrekkers moved away from civilization, being governed and taxed, to face the battles with indigenous people. Now the new Voortrekkers move away from battles with indigenous people (crime) towards civilization, good governance and efficient application of taxes. The Voortrekkers came full-circle. Welcome home guys, it took you bloody long enough!

LOL , i like your take on the new Trek, only problem is the crime rate in Cape Town is higher than in Jozie- the skelms have also trekked LOL

Yep – property along the Atlantic Seaboard continues to sell unabated and even here in Simon’s Town a new development with prices starting at R2.5m for a 95 sq m sea facing apartment is almost sold out after a month of launch.

Our main money has been in bonds and cash for the past year ….

An arts degree is barely good enough to flip burgers in todays times yet Magnus is allowed to comment on economic affairs. You shouldn’t take anyone that references “MyBroadBand” seriously. I would be very concerned if my money was managed by this guy.

Long term Capital Management was at the time, the biggest financial disaster in history. Their managers, Myron Scholes and Robert C. Merton shared the 1997 Nobel Memorial Prize in Economic Sciences. These managers with the highest qualification possible, caused the biggest financial catastrophe at that time.

I believe the point I am trying to make in reply to your comment is clear.

Yes, quite clear.

A sample of one (set of two people), where a qualified person got it wrong is irrefutable proof that all unqualified persons will get it right?

Comparing a financial advisor, like Magnus, to fund managers who created complex derivatives is like comparing a township taxi driver to an airline pilot.

well done MH -if anyone deserved to have won – it was YOU. I trust you enjoy yr retirement in the w cape knowing that the saying ” casting pearls before swine” applies to all your would be critics. I myself would prefer retirement in say spain, Portugal or at a punch French wine fields.

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