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South African investors need to fall out of love with equities

Investors should embrace new asset classes, advises Kevin Lings.
Given the scale of the turnaround required in SA, the author says investors will need to work harder to find good investment opportunities. Picture: Shutterstock

South Africa’s equity market capitalisation equates to more than 200% of the country’s gross domestic product (GDP), the highest proportion in the world and a level that is simply not sustainable. 

South African investors are in love with equities – they kind of think it’s the only place to be, this fixation cannot last. South Africans investors need to embrace different asset classes.

South African equities have underperformed in recent years, especially when compared to US stocks, their performance is actually in line with that of other emerging markets. Much of this has to do with the fact that economic growth in developing countries has struggled to recover since the 2008 financial crisis.

Read: Only 19 local equity funds have beaten inflation over five years 

Emerging market malaise

For instance, economic growth in South Africa has declined from an average rate of 4.2% between 2000 and 2008 to a mere 1.9% from 2010 to 2018. Similarly, growth in Brazil has slipped from an average of 3.8% to 1.4% over the same timeframes while in Nigeria it has more than halved from an average of 8.3% between 2000 and 2008 to 4% from 2010 to 2018.

Emerging market equities have not been the place to be and South Africa is simply a part of that. We’re beating ourselves up too much. If the growth rates in emerging markets pick up so will equities.

Read: Making sense of the outlook for SA Inc stocks

New asset classes

Nevertheless, a recommendation for South African investors is to include new asset classes in their portfolio construction, particularly those that are appropriate for the country’s low growth environment. This is especially important given that South Africa’s economy is expected to expand by no more than 0.7% this year.

The circumstances we find ourselves in are screaming out for us to embrace other asset classes, such as government and corporate bonds. If you can get a 9% nominal return from a bond fund, relative to an inflation of say 5%, that’s a decent real return with significantly less risk.

A reality check

Investors need to be realistic and not expect an instant turnaround in South Africa’s fortunes. After all, the country’s youth employment rate of 55.2% (which jumps to 69.1% when you include discouraged workers) is worse than the levels experienced in industrialised nations during the Great Depression.

Whenever you have a crisis, as you uncover the extent of the crisis it always gets worse before it gets better. SA is still in the discovery phase – it is still trying to understand how much damage has been done in last nine years.

The total debt of South Africa’s government, companies and households has surged 106% since 2010, which is an increase of a massive R3.8 trillion. While government debt currently equates to 58% of GDP, the figure jumps to 75% when you include the debt owed by state-owned entities.

If a South African company was almost bankrupt and it elected a new CEO could you really expect him to turn it around in a year?

We are creating unrealistic expectation on how quickly this can turn around. It’s much easier to damage an economy than fix it and we’ve been damaging this economy for the last nine years.

Don’t be a lazy investor

Given the scale of the turnaround required, South African investors will need to work harder to find good opportunities within the broader malaise. For example, despite the fact that South Africa’s manufacturing industry has slumped from 21% of GDP in 1994 to 12% of GDP last year, there are still bright spots such as the automotive sector as well as food and beverages.

South Africa is actually quite good at producing food in this country, it has a fairly solid agricultural sector and advanced food processing industry.

Geographic diversification

The best piece of advice for domestic investors is to focus more strongly on geographic diversification of their portfolios, a point driven home by the fact that South Africa accounts for just 0.4% of global GDP. In comparison, the US accounts for 24.3% of world GDP followed by the euro-area (15.8%), China (15%) and Japan (6.1%). Even sub-Saharan Africa as a whole only accounts for 1.9% of the world economy.

We’re a small portion of the world so why would you put everything in SA?

We need to change our perspective and stop comparing ourselves with the likes of the United States or Switzerland. South Africa is a messy emerging market so we should be comparing ourselves with other messy emerging markets.

Kevin Lings is the chief economist at Stanlib.

The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.


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” …. screaming out for us to embrace other asset classes, such as government and corporate bonds.”

Thanks for confirming what we did three years ago.for our primary investments.

So Kevin, what happens to SA bond values (not interest) when we get downgraded to junk. What is your assessment of the magnitude of the capital loss on SA bonds? Will there even be a loss?

Its priced in already.

Forward-looking investors already price us as junk even before we get there.

The bigger risk is a continuation down – yields rise to unsustainable levels (where Gov battle to repay interest burden) – fortunately we have curbed the decline in growth (for now).

He was asked that question and he is of the belief that we won’t be downgraded in Dec…..

This was however the most “negative” I have ever heard him in terms of SA. He usually always has some positive spin, not today!!

Were do you diversify to?
The MSCI Europe index underperforms even the MSCI Emerging Markets Index! Every single International Equity Index outside of the USA underperforms the MSCI World Index. Somehow, the USA escaped the worldwide deflationary spiral of the past 5 years. How is that be possible? US companies depend on international trade. How can they prosper while their trading partners are battling a severe deflationary cycle?

Well, the mechanism is fourfold. Firstly, by lowering interest rates to next to zero, they instigate the “search for yield” phenomenon that has the effect of exporting American deflation across the globe.
Secondly, the low-interest-rate environment, in combination with an accommodative legal framework, motivates companies to buy their own shares. 80% of S&P 500 companies reported share-buybacks, amounting to $180 billion in the first quarter. Thirdly, the lowering of taxes by Trump flowed through to the market capitalisation of listed companies.
Finally, the devaluation of the measure of value, the currency, obscured the actual value of indexes. Today’s dollar is not the same as yesterdays dollar, so, how can you compare the index value of today, with the index value of yesterday, and say it increased by a certain percentage?

Are any of these factors sustainable? Hell No!
Can this combination of circumstances keep on drive the US indexes higher? Hell yes!

SENSEI: I LOVE YOUR INSIGHTS! Please tell us that there is a BOOK on its way.

DriesBez, Thank you. I have a very short attention span, just enough to write a short comment, not enough to write a book.

That was the smokescreen, now for the truth – I only have enough knowledge to fill a short post. If I had to write a book, based on my insights and knowledge, it will be a comic consisting of no more than 2 pages.

I’m also waiting for the book. I don’t buy that you have a short attention span but rather you have better things to do. Either way, this Sensei fellow, is utter brilliance.

It is much easier to destroy something than to rebuild it. You can demolish your house in an afternoon using machinery, but it will take months or weeks to rebuild. Same with the economy. The ANC has been destroying it systematically since 1994. It will take far longer than 25 years to rebuild it, and it is about to get worse, much worse, when lunacy like the NHI gets implemented. Whether S. Africans can rebuild a modern, competitive economy at all, remains to be seen.

This probably means that even very optimistic people, even relatively young ones, cannot even consider investing in SA. Your investment may double in five years in rand terms, but that will mean nothing if the rand goes to R100 to a dollar. You simply have to get your investments and money out while you still can.

There is a fundamental reality nobody can escape from. The Economic performance of a country, SOE or company is merely a reflection of the mindset of the voters, managers or owners. This is why the results are so catastrophic when a politician, driven by self-interest, abuses his legislative powers to insert certain individuals, who would not reach those positions under free-market circumstances, as shareholders, managers and board members. ANC socialist policies basically inject the toxic collectivist mindset into the jugular vein of economic activity.

The uncomfortable reality is this – the natural state or the default status, of any business, is bankruptcy, and the default status of any country is hyperinflation of the currency. It requires owners of a certain calibre, and with a certain mindset, to appoint managers of a certain calibre and mindset, to do the daily task of saving a business from its defaults status. Similarly, it takes voters of a certain calibre and mindset, to appoint political leaders of a certain calibre and mindset, to save a country from a hyperinflationary collapse.

Therefore, it is quite simple to predict the future of the economy by simply identifying the calibre and mindset of the average voter. There! – this is how you can read the future!

for most simple minded people like me who are over exposed to the equities because of the general perception that equities have always out performed other assert classes, where do you suggest we invest our funds?

I really don’t see how market capitalisation has anything remotely to do with the size of GDP.

You are looking for a relationship where there is none.

Chief economist?

‘Equity market cap to GDP’ has been around for ages as a guide to market valuation.


PLEASE back that with say 50y of stats of the largest 5 GDP and their equity values?

At its most basic level : imagine all south african pension funds were invested in Singapore equities the past 36 montha. The one has absolutely nothing to do with the other. Whether I (as a south african or Singaporean) was a buyer or seller of Apple shares in March 2009 has as much relevance.

In that case let’s forget about solving all the structural issues in the economy and just lobby the tech giants to dual list on the JSE. we can instantly grow GDP 10x.

Or get rid of BHP and the other dual listeds so that marketcap/GDP ratio falls and equities look cheap again.

Completely flawed ratio to base any investment decision on. There is only a loose relationship, does not really tell you anything about value though.

Only thing it tells me is that SA has well developed capital markets considering how knackered our economy is.

I’m just saying I have seen this metric for many years, it is not something that Kevin Lings just dreamt up. It is not perfect – like most metrics – but it does have some meaning and is more applicable to developed equity markets where a large number of companies are listed. If you don’t like the comparison so be it but don’t complain like children when someone else chooses to use it to make a point.

Imagine you are driving in your car. You are moving at a certain speed and you look out the window and you see the clouds moving relative to the moon. Now you look at the speedometer to determine the speed at which the moon is moving relative to earth. The market cap/GDP ratio is exactly that.

It is normal for participants in the market to invent and build for themselves a sense of security and control. Then they invent metrics to serve this purpose. Man’s quest for certainty does not make the metrics accurate though.

Thanks to the ANC economic growth in South Africa has declined from an average rate of 4.2% between 2000 and 2008 to a mere 1.9% from 2010 to 2018 to negative 3.2% in early 2019.

“If you can get a 9% nominal return from a bond fund, inflation of say 5%, that’s a decent real return..”

Lets see. Rand devalues 6% p.a in USD terms a year as per last 50 years, that puts your decent real return at 1.09 x 0.94 -1 = a not so decent 2%

Put your USD in US bonds yielding 2% and you get the same. So you’re taking massive risk in an emerging market prone to currency swings to get the same return as the US.. Nope, that’s risky 2% vs a non risky 2%

So who’s the smart Alec now Chief Economist Stanlib?

15 years ago the USD/ZAR was R13.90. It is currently R13.85. There will be periods of under and over performance for the Rand (and the USD).

Start looking at the UK numbers and you would buy SA debt every day of the week.

Long term trend definitely depreciation, and I think you got the numbers right in terms of 6% p.a. (which is inflation differential plus 1%). But there will be periods of disconnect, and with US lowering interest rates, that is now the case.

True, the time to buy SA bonds is when yields are high and rand is weak.

However, yields are much lower now and the rand has strengthened. Smart bond traders would be taking profits now as risks of capital loss are much higher.. esp if a credit downgrade comes.

cash till the crash..the US crash…and then we buy..including local

South African investors are falling out of love with Africa.

“South Africa’s equity market capitalisation equates to more than 200% of the country’s gross domestic product (GDP), the highest proportion in the world and a level that is simply not sustainable.”

Well, Mr lings, convince the government to do away with Reg28 and we will be much more heavily invested in equity in other countries.

Do away with Reg 28 and tomorrow the local market’s valuation will be 20% of GDP as all SA investors with more than 1 brain cell flee to offshore investments.

Busy selling all my shares/ETFs…Just stacking some Silver Bullion.

The stock market is a casino, and I have just called it a night, for good.

The FED is keeping the Zombie US economy alive, when the house of cards fall, its tickets…Deutsche Bank was the first domino.

@Rogue Trader….yup….agreed !

But add Krugers to your stacking too

And crypto [ little more risky in terms of volatility ] but way more easy to transport/transact etc !

Invest in Bitcoin as a new asset class.
* Risky? Yes.
* Decent returns? Yes (+200% YTD).
* Future? Possibly.
* Invest everything in bitcoin? No
* Listen to traditional financial institutions? Probably not.
* Is it used to fund illegal activities. Yes, but so does fiat money.
* Should you investigate this asset class? Yes.

Anything that returns +200% YTD should raise alarm bells. Remember that such high returns always carry a high risk (loss of initial investment).

Yes, they call them Ponzi schemes

@AP…agreed !

Firstly, any person that says BTC [ or crypto ]is a ‘ponzi scheme’, has absolutely no grasp of how it works [ just sent 5 figure value of $ overseas via BTC …took only 30 minutes to reflect there, 0.03% fee…no forms….no SARB…no blood samples needed etc etc ]

What a pleasure compared to the old way

I completely control my hard earned money now, I can send it anywhere, to whoever, at the push of the button….no chance of a dodgy bank confiscating this when the whole fiat house of cards eventually collapses…. and bonus: its rand hedged as well [ I hold a basket of good altcoins too ]

Just like when the internet came out, and the tech giants were taking off at an astronomical rate….anyone who didnt understand the internet back then also viewed it suspiciously

Then there was a temp reset…the dot com bust [ that reset has happened with crypto already…from here it generally will get more and more adopted ]

Oh, and once the internet penny dropped, everyone finally climbed in….and the rest is history as they say

Same will happen with crypto – all the late adopters that couldn’t initially wrap their heads around email/internet/YouTube etc etc, are the same coma induced peeps decrying Bitcoin now

PS…am stacking gold too – the best pair in the world thank you : crypto and gold

Terrible analysis and even worse advice. The fact that the market cap of the JSE is double that of our GDP says diddly squat about the asset allocation of SA investors. Our stock market is dominated by dual listed giants like Naspers, Richemont, BAT and SABMiller whose actually business has little to do with SA, more importantly about half of the JSE is made up of foreign investors.

There are plenty of stats from ASISA and the like that gives the exact asset allocation, if anything SA investors have to little exposure to growth assets like equities.

The cognitive dissonance is incredible.

He says SA equities are cheap but advocates not holding it.

He then lists all the problems of the SA government, high debt to GDP, SoE’s etc yet then he advocates that investors invests in government bonds.

MW’site was flooded with articles earlier this week after the ESKOM bailout that SA is essentially insolvent, yet this clown wants to push people to invest in SA govies?

I wonder how much of his advice stems from the fact that their equity funds performance has been horrible for ages but with a better bond franchise? talking you book Kev?

End of comments.



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