Can you remember watching television as a child, and your mother or father would suddenly cover your eyes when something risky came onto the screen, either violence or sex, so that you wouldn’t be frightened, or worse?
Even as an adult your instinctive reaction to scary movies – think Wes Craven’s Nightmare on Elm Street or Stephen King’s The Dead Zone – is to shut your eyes, hoping the nightmare will soon go away.
So here is my warning to queasy readers: if you scare easily, don’t read on.
Cover your eyes and go directly to the next article. But I must warn you that while such a tactic might seem to be helping, it unfortunately won’t make the boogie-man disappear. For he is right there, every day and every time you open your investment portfolio linked to the Johannesburg Stock Exchange.
For all we know King is busy furiously bashing the keyboard working on his scariest movie ever, Nightmare on Maude Street and the monster that’s coming for your personal wealth, pension fund and investment portfolio.
Of course I am being theatrical, but the performance of the JSE – SA’s premier investment vehicle – is becoming something of a horror story. The only difference this time is that it’s real and no amount of eye-clinching and hiding behind your mother’s hands will make the unpleasant reality go away.
I have written many articles about the poor and lagging performance of the JSE over the past couple of years, often incurring a barrage of criticism from different quarters of the investment community, even from fellow columnists. But I’ve noticed that the criticism is slowly receding. In fact, it has gone quiet indeed. An eerie silence, one could call it.
It’s becoming harder and harder, when analysing the numbers objectively and clinically, to come to any conclusion other than that the JSE is not the wealth generator it used to be. And the outlook, in my view, is not going to change very soon. In fact, it could easily get worse. The current bout of horrific returns, in both real and relative terms, is bound to continue for a long time.
Many analysts would like to pretend that the current downtrend is cyclical and that the time to buy is near. Or the other porky about ‘reversion to mean’, which is often thrown out there as an allure to invest. Remember the value-style investors?
This is akin to whistling when walking through the graveyard, hoping that it will keep the scary monsters at bay. I would rather suggest that the issue is structural, deeply damaging to the economy and ominous to future investment returns. Even the oft-touted argument that the JSE earns 65% or so of its revenue offshore and is a rand hedge bourse, seemingly does not hold water anymore.
The recent bout of weakness in the rand has not translated into better returns as it did during previous times of rand weakness. The reason? The downturn in commodities means that we are receiving much lower prices for the commodities we are exporting. Furthermore, cost push pressures on our exporters (think rising labour costs in the gold and platinum industries) means the profitability of our exporters is under pressure. And how can our industries compete with their global counterparts when Eskom’s sharply rising costs are pushing them into bankruptcy?
The worst of them all
In short: when compared to the global investment regions of the world, in rands or in dollars, over periods from one to five years and even longer, the JSE has been the worst performer of them all. Even more worrying is that when the performance of the JSE is measured against (a) our peers in emerging markets, (b) our peers in the Brics grouping and (c) against stock exchanges in the grouping known as frontier markets, the JSE is again stone last.
Yet I find little media coverage about this horrifying trend, Moneyweb aside. As a consequence, the average investor is almost oblivious to the unfolding wealth destruction happening right in front of our noses, whether we would prefer to deny it or not. I don’t believe in conspiracy theories but I sense that the popular media would rather not cover this issue, the same with the disaster that we know as the residential property market. Super-duper optimistic press releases about the property market appear on many popular websites with ease, but serious and forward-looking analysis based on facts is simply binned. It doesn’t suit the narrative, it seems, that everything is fine.
See here for yourself, a table with the investment returns of the JSE in US dollars: the numbers don’t lie. Over five years, investors on the JSE haven’t made any returns in US dollars. Compare this to the returns earned by investors in the USA, Japan or even Asian Pacific countries (see first table).
The second table shows the returns when converted to rands. Here too the same story, even though the rand actually strengthened for a large period of this time, from end 2015 to beginning 2018. This strengthening of the rand could not conceal the poor growth metrics of the SA economy and the companies that operate within it.
JSE vs the world in dollars
JSE vs the world in rands
But what about the performance of the JSE when compared to our peers in the emerging market universe? Here too a kind of a nightmare is unfolding. For most of the 20th century the JSE was probably one of the best or even the best investment destination for global investors, far outperforming our emerging market peers. A study by Credit Suisse some years ago highlighted this fact, but this performance was based on the gold and diamond booms of the previous century, plus the massive industrialisation that happened from about the 1960s onwards to 1990, when the gold boom started petering out.
Since then we have witnessed a slow but relentless collapse, first in gold mining, then platinum mining and now the construction and manufacturing industries. The massive consumption expenditure boom fuelled by easy credit from around 2000 to around 2008 has also come to and end, which is evident today in the profit growth (or lack thereof) of SA’s retailers and granters of credit.
So it’s not correct to say that the current bout of weakness in the rand and markets is purely an emerging markets story. It’s also a story of our own making and is a reflection of 10 years of economic mismanagement by the Zuma regime. This has cost us all dearly, in individual terms and as a nation. Per capita we are all significantly poorer than 10 years ago.
This is evident in many areas and is easy to measure: car sales, new home construction, overseas trips, rounds of golf games, attendance at rugby games. Last Saturday’s rugby rest between the Springboks and the Pumas attracted a mere 24 000 spectators, the lowest test numbers on record. The All Blacks still seem to draw full crowds, but that is about all.
And just when we thought we had seen the worse of it, along comes the ANC, spearheaded by Cyril Ramaphosa, with its ill-conceived plan to expropriate property without compensation. So far it has been nothing short of a disaster. The message from the ANC has been garbled, convoluted and outright stupid.
The world’s financial press, including the Wall Street Journal, Bloomberg and Reuters, has warned that such a strategy – if pushed to its ultimate conclusion by the die-hard Marxists in the governing party — could only plunge this economy deeper into a death-like spiral from which it will be difficult to recover, if ever. The comparisons to failed countries such as Zimbabwe, Venezuela and others do not sit well with those foreign investors from whom CR would like to extract $100 billion over the next five years.
The markets – in the form of the JSE — are signalling that they do not like this policy one bit. So far this year the JSE is down 2,8% in rand terms while the S&P 500 is up almost 30%, the MSCI World Index is up 22%, even the out-of-favour MSCI Emerging Markets index is up 10.2%.
In dollar terms the JSE is down 21% this year.
Your survival strategy
So, how much of your investments should be onshore and offshore?
I am consistently asked this question and my answer hasn’t changed in almost seven years. If you own residential property (non-performing) and belong to a private sector retirement fund, also non-performing due to the fact that it is controlled by Regulation 28, the answer is 100% offshore.
Yes, that’s right, 100%. Older investors close to retirement and even in retirement need to have a serious look at their respective investment portfolios and asset allocations.
Are you older than 55 with money in retirement annuities (RAs) or a preservation fund? Then consider moving it across into a living annuity where you are allowed total freedom in terms of where you want to invest your money, even 100% offshore if you wish to do so. Most RAs haven’t beaten the inflation rate over one to four years, soon five years.
Younger investors should also consider postponing their first-time property purchase and rather consider renting. But that would have the property-worshipping fraternity frothing at the mouth, accusing me of being guilty of things worse than blasphemy.
I often ask myself why would 62% of people in Vienna, Austria – one of the wealthiest cities in the world – rather rent their properties than actually own them. Perhaps they know something the rest of us don’t.
Younger investors should, instead of just being slaves to technology, rather invest in this sector. I have my children’s investment allowances all invested in offshore equities, in funds such as the Mi Plan Global Macro Fund, Sygnia’s 4th Industrial Revolution Global Equity Fund, and even the Counterpoint Global Equity Feeder Fund which is now run by Sam Houlie, all producing returns in the teens and twenties.
I find great joy in discussing their respective investment portfolios with my teenage daughters and young adult stepdaughter, opening up their eyes to the links between their personal consumption (Google, Facebook, Netflix, Apple, Samsung et al) and their investment returns.
Hopefully this is a lesson they will put to great use in life.
I have also convinced them that personal ownership of a motor car is a relic of bygone era. They all make extensive use of Uber and only rarely ask Dad for his bakkie when they take longer trips. It’s a good thing I sold the Ferrari when I did.
PS: My Ferrari portfolio, almost six months old, is up more than 20% since inception. More about that in the next column.
* Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at firstname.lastname@example.org for ideas and suggestions.