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Why local quality stocks have under-performed vs global quality

And why there may be growing opportunity – an op-ed by First Avenue CIO Hlelo Giyose.
Image: Moneyweb

Companies have a lot in common with communities, villages, towns, cities, and countries. For one, they grow. For another, the same natural laws that govern the growth of mammals determine the growth of cities, countries, and yes, companies.

These natural laws govern the characteristics of growth by placing constraints on misalignments between size (mass) on the one hand and power, temperature, and organ functionality on the other.

Town planners might not be aware, but the principles of town planning are based on these same biological qualities. Many businesspeople are not aware of the impact of this on their businesses either.

Even less cognisant of it are politicians and legislatures, and hence the high failure rate of policies and countries. South Africa, through statist tendencies, has violated the tenets of scaling in its communities, villages, towns, and cities, and now both investors and companies listed on the JSE are paying for it very, very dearly.

Local vs global

To us at First Avenue, the outcome is evident in the comparison between the fortunes of our global equity proposition and our South African equity propositions. Both invest in high quality companies whose internal organs better maximise metabolic capacity (production of energy and materials required to sustain and reproduce life) and minimise energy loss.  The result is a natural selection favours continued existence of high-quality companies relative to their competitors.

However, the difference in performance between South African high-quality companies and their global brethren could not be starker.

Quartile performance of First Avenue solutions vs peers
6 months 12 months 36 months
Select focused   strategy (local + global) First First First
General equity strategy (100% SA) Third Fourth Fourth
Focused equity strategy (100% SA) Third Fourth Fourth

Note: Rankings based on gross returns
Source: First Avenue, Morningstar

What quality companies are metabolising is economic growth. They do this by arbitraging factors of production for revenue, and ultimately, economic profits.

Growth cannot happen without a continuous supply of resources to their cells to metabolise.  Organisms eat, metabolise, and distribute metabolic energy to their organs. This is the template for how all growth occurs – the equivalent of renewing corporate value in companies and ratcheting up economic development in countries.

It is none other than the law of conservation of energy – whatever goes in must be accounted for in terms of how it is allocated between the various categories of what it acts upon and produces: maintenance or growth.

The government is elected to act as a heart that pumps oxygen-rich blood (by distributing taxes and government debt) to cells (the various arms of national and municipal government), for the citizenry to transform into economic value.

In South Africa, economic transmission mechanisms are, however, not following the biological functionality you find among living organisms in nature. There is capriciously inadequate raw material for companies in South Africa to arbitrage.

The only companies that are thriving are those that supply (export) raw materials (resources) to other countries better able to generate growth, or those who are listed in South Africa, but operate elsewhere.


Nature has its own way of making sure that living organisms grow in such proportion that they are not unwieldly. Trees do not grow taller than their trunks can support. Humans, no matter how much weightlifting and body building they do, will never grow so big that their body cannot support their structure.

These scaling principles are all around you. Human creations simply mimic nature, or they fail over time.

In a business, net income and total assets scale at a given ratio with the number of employees. There is no point growing one variable if it goes out of proportion with the others. You could not pay more employees if new business did not come in fast enough to match the rate of job creation. Likewise, there is no point growing your business faster than your employees can process it.

The same applies for government support of an economy.

If infrastructure building, goods, the delivery of essential services, and so on are scaling sub-optimally, then population sizes of various cities are not worth their weight in economic opportunity.  Businesses that attempt to provide goods to that community or city find that the absence of complimentary services or facilities limits opportunity.

Natural selection

This is the problem facing South Africa. Yet, we still have a large proportion of our portfolio invested in SA Inc. stocks. So, is our portfolio a lost cause?

We believe that natural selection now has a free rein in redesigning the economic landscape of the country, regardless of the government’s opposition. Do not bet against natural selection. It is the most powerful force in nature.

Natural selection has already reduced South Africa’s weighting in global emerging market indices to a level that betrays national pride. Natural selection has also ensured that South Africa’s GDP in proportion to global GDP continues to fall. If you wanted to see how badly scaled the country is, the economy ranks as the 35th largest in the world, yet 89th on a per capita basis.

The country is a lot smaller, more inefficient, unproductive, and economically unreliable than its population would suggest. Natural selection will simply align investment, not to population size, but to GDP per capita.  This implies an addressable population of 10m. The rest are simply economically un-addressable.

As government finances collapse, posing a risk to its elaborate social net, businesses providing food, clothing, education, healthcare, private security, and so on will cut their coats according to this cloth.

We have already seen how natural selection begun rebalancing the retail sector. The demise of Edcon Group, a 90-year old clothing retailer, will drastically reduce supply in the industry. Alongside this, the retreat of international players will align supply and clothing inflation with the opportunity value.  Despite structurally receding GDP growth, the sector is now creating growth for itself.

What is interesting to is that many parts of SA Inc. are now considered value stocks because they are pricing in zero if not negative growth despite their quality.  Value stocks of weak, no moat, companies will be dealt with harshly by natural selection. The great opportunity, however, is in the strong, moaty businesses priced for no growth.

And this opportunity, we would say, is worth playing for.

This article was first published on Citywire South Africa here, and republished with permission.


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This “Natural Selection” Economics seems all blood and gore- as if a primitive nature is what determines the outcome of human social development.

Like the common denominator between the current political powers that be and the last one- ie the “National” in the NP and the ANC.

I can prove in detail that this is not the case- it is in fact the higher nature of the human species that dictates the path of development.

Essentially assessing our economy as being representative of 10 million “productive” (in the Western sense of the word) people, when in reality we have over 60 million, is harsh if not downright ludicrous or verge elitist/ racist even…

I would say this research excludes the diverse and integrated outputs generated by the informal sector and a large portion of the service economy.

It also does not take into account the extreme structural adjustment this society has had to engage in in order to find a way out of 300 years of misallocated resources and unsustainable non-generative activities spread amongst a very low proportion of its actual population.

Principally this analysis uses only one very narrow yardstick as a measure of value- ie money. And most particularly not South African money but foreign money- the US Dollar most probably. This in itself is grossly overvalued under the structural nonsense of 100 years of Petrodollar “hitman” economics whilst the ZAR is grossly undervalued at the bottom of the pit of gross prejudice against emerging/ developing economies in the current world order. This is set to change- and could happen very quickly if current outlooks for the USD are to be believed.

Greater and higher sources of wealth include intangibles such as a positive attitude. As is currently being illustrated very succinctly- physical health is another.

Freedom from fear, harmony in our relations, a willingness to share our blessings with others- these are all very important higher sources of wealth. Without them the most highly regarded and esteemed holy grail value of “financial security” (for this author at least) is unattainable.

Notions such as “National Pride” conjure up dark images of a fascist past or neo-fascist uprising/ future. The same Nationalist forces that drove our species into two catastrophic world wars in the last 100 years. The bundestag might have had phenomenal economic revival and growth in the period 1930 to 1940, but what did it all come to, and at what enormous incalculable cost in lives?

We have an alternative heritage to draw from encompassing notions such as ubuntu, sharing, diversity and Gcondiswa- finding the right way.

The right path is illuminating as we strive forward together. Companies that feel they require “moats” are going to drown on their own fear.

The growth of the future is in the disruption of the present by the 4th Industrial Revolution. Sitting ducks in the moats prepare for the tsunami!

Your narrative is a popular one. Most non-financial minds will agree with you. The problem is nobody can survive on feelings alone. They need food and shelter and these needs can only be fulfilled by the exchange of labour for food. Money is merely a token in this process. Money does not drive, or direct, the process. Money is a means of exchange between the sale of labour and the purchase of food. Nothing more and nothing less.

If the majority does not have an opportunity to exchange their labour for food, they will starve, irrelevant of the amount of money the Central Planner prints to redistribute to them. They will struggle at the lower positions of Maslow’s Hierarchy of Needs, where their psychological needs like safety, belonging, national pride, ubuntu and a positive attitude and wellbeing are non-existent.

Your line of reasoning is more typical of person higher up in the hierarchy of needs where your needs for shelter and food are already well provided for. Only economic growth, that is only free-market capitalism with property rights in other words, can lift people from the bottom of Maslow’s Hierarchy to the position that you occupy. You should be wary though. for socialism will equalise your position with theirs by pulling you down to their level. Soon, you will also not care about nice to haves like security, ubuntu, human rights and national pride. You will only want a job so you can exchange your labour for food.

Beware what you wish for.

Make that ‘326 years of misallocated resources and unsustainable non-generative activities’

Sensei, your comments are usually of better value that the actual column. Well done and thank you.

…good speech Comrade Ellison. The “Politburo” has noted your spirit & devotion to the supreme council …Comrade Gwede will contact you soon

Hehehe! spot on!

Essentially, I cannot eat politics and it doesn’t burn very well. What I look for in my activities is the generation of outputs that principally are good for my nutrition, my health or my environment in general. This requires an abundant and cooperative (or optimistic) outlook as opposed to a scarce and competitive (or fearful) one. You wish to label the former “socialist” and the latter “capitalist”…fine! Let’s take this explanation further…

Gold is so topical at the moment and provides a good illustration of the problem. Over the last 120 years, South African labour has extracted over 80% of all the gold ever mined in the entire history of mankind.

Untold fortunes have been derived from these by the value-add manufacturers and high technology refiners in the richest echelons of Europe and America. Places like Antwerp, Brussels, Zurich and London have profited a million fold more that we who have exercised the physical work of removing the mineral from deeper and deeper reef deposits under higher and higher stress and heat conditions, poor air quality and extreme danger of losing lives.

There are no stronger, fitter, disciplined and honed miners in the entire World than South Africans (including Lesotho- who have the largest proportion of their population engaged in deep level SA mines historically and currently).

And now to suggest we don’t work hard enough or are in some way attitudinally inferior to the rest of the World? Bizarre if not disrespectful and prejudicial!

Clearly SA should have developed these “add value” channels. This is not a blue-collar activity- it is one required of white-collar business operators and executives. The armchair brigade to which I suspect many in this forum might at least aspire to belong. Fine.

If these “elite” are so stand up and well trained and expert as to carry 50 million of our people- how come they failed in implementing the most optimised plan for our infrastructure and communities in this region?

Could it be that they are disproportionately representative of a colonial overseer mindset and do not see this readjustment as suiting their traditional means of control over those same communities i.e. divide the nations and rule the empire?

What amazes me is these fear-mongers who continue to prescribe more of the same blood, sweat and tears without addressing the shortfall in strategy, technology and management insight, skills and training and the effect on their creative abilities.

Clearly colonial powers organised around a far broader spectrum than mere national borders. The railway- for instance- stretched from Kenya, Northern Rhodesia (now Zambia) to Cape Town and was a super-efficient means of getting ore out to the superpowers at breakneck speeds enabling their own scale capacity manufacturing from reliable receivables.

This network, run nationally has shown itself to be unsustainable and inoperable (as well illustrated by the sideshow that is Transnet). It needs to be run at a far higher economy of scale than simply a single country.

Planning needs to be made at a much “higher” level to bring the scale benefits back into play for Sub Saharan Africa.

Nationalist calls are an illustration of planning too small. These restrict and impede our ability as the Sub Saharan region toa attain the economies the imperialists enjoyed.

Unity amongst the greater regions- a fraternity or brotherhood amongst those related and effected parties in whose interests a new and improved order will roll out is needed. An all-inclusive strategy of nations if you will. A greater Cooperative.

Calling for more of the same unitary national frenzy- doing the same thing that has been done before over and over again- is the definition of insanity and clearly no longer has the desired effect.

So, I will send my wholesome greetings and gratitude to the greatly deceived neo-national spokesman for the over-politicised nincompoops.

Go ahead and bet on natural selection as illustrated. I’ll take the disruption route and let’s see which leads to nirvana before the afterlife… Will that be with SATA and PUTCO or by PORSCHE und UBER?

Ellison Blaze, thank you for a detailed comment. I appreciate your opinion and I enjoy reading it. We may differ on some points but that is part of the debate. Ultimately we share the same intentions, to improve the condition of every sentient being. We agree on that. Where we differ though, is the on the principles that can deliver this positive outcome.

I fully agree that South African mineworkers, farmworkers, domestic servants, gardeners are hardworking people who deserve 5 times more than what they earn. My point is that without the system of property rights, they will not even earn what they currently do. They will be unemployed and hunger. The communist calculates the value of minerals, relative to the cost of the labour that produced it. In communism, the cost of labour determines the value of minerals. In this system, there is no upper limit, no constraint on the level of the wage because the price of the mineral will have to reflect whatever the value of labour is set to be. Unnecessary to mention, this leads to huge inefficiencies in the production process and the consumer is the ultimate loser. Products become unavailable and choices become limited. Nobody can afford the communist production process and the economy implodes, leading to starvation on a pandemic scale.

In the free-market system, the consumer has the power to allocate resources. The consumer determines the value of all products and services. The consumer, that is everybody, including the mineworker, enjoys freedom of choice. In this process, the consumer weighs up the supply of products, relative to the demand for those products. If like in South Africa, there is an oversupply of labour, while the shrinking economy suppresses the demand, the value of labour, the wage, will decline. In this system, a minimum wage will exacerbate the problem of unemployment.

The reason why our resources are exported to first world countries to be refined in a value-adding process is that those businesses enjoy property rights. The infringement on property rights in South Africa pushes businesses offshore. Even if you were successful in training a local to add value to local minerals, as soon as he has the process under control, he will also move offshore to a jurisdiction where is property will be protected. Thousands of black South Africans are emigrating for this very reason.

Both of us want the best for our fellow man, but the differences between the systems we propose will lead to either wealth or famine. Every political-economic system has a definite and proven outcome. Therefore, if we propose a system that is a proven failure, that has led to famine many times in the past, our good intentions are irrelevant. We will be complicit in mass-murder. Therefore, socialists are serial killers.

But this ascribing as totally unhealthy of all and any forms of national pride and related respect for ones national identity and sovereignty is the formative mantra of the purveyors of “The New World Order” as described by many of the Bilderberg cohorts. Their obvious purpose is to depose their opponents and their democracies which prevent the sought after totalitarian control of a few megalomaniacs over the entirety of humanity. Common sense needs some support it seems.

Thank you for the well written article..certainly gifted with eloquence. May this article please post actual % returns for the said funds..being firts or last in a ranking is not meaningful..has this fund generated meaningful real returns- how consistently and at what risk level. According to this link this fund is a serial underperformed over 10 years…please can you post the link to the returns from this fund manager

Please publish your performance over the same period. Let the readers compare apples with apples and see your comment in perspective. Maybe you can prove that you added something meaningful to the conversation. I will be the first one to entrust my capital with you if you can put your money where your mouth is, my brother.

The biggest downfall for SA stocks is Government policy. I don’t want to mention it by name as it normally gets “moderated” into oblivion but you know what I am talking about.

There is a cost to having a noncompetitive supply chain. To sustain the theft that occurs using these channels Government pays multiple times fair value for products and “services” they most of the time don’t need.

In private companies the same. Why would you invest in a company that pays far to much for products and services?

It’s not going to last much longer. The end is nigh. It’s just commonsense.

Your argument makes sense. Thank you for being factual and not negative. There is a difference.

However you can also have a clean government but then get battered by wildfires and then lockdowns and Covid. Melbourne is being punished economically whether they have clean government or not.

PS Dadape : Melbourne is not a Nation !!

‘Local’ and ‘quality’ in the same sentence!

You are cheap. Repeat out loud! SA has the largest resource base in the world. When its managed excellently it will flourish. Your negativity will not.

I don’t view it as ‘negative’. I am telling it like it is. Furthermore, your fact-checking needs improvement; South Africa does not have the largest resource base in the world. Making up stuff does not improve your argument. It WAS excellently managed and then something changed. The decline I have seen in this country, in everything I can think of, over the past 20 years is astronomical. You can disagree all you like but I’m just telling as I see it with no fibs.

…those beans you had for lunch are really performing

Its a thing called global macro.

In short – when a society turns its back on capitalism and moves towards any form of socialism, it sets in motion the process of “decivilization”.

Civilization rests on the concepts of freedom of choice, property rights, law and order, accountability and individualism. Any process that takes society away from these hallmarks of capitalism inevitably leads directly to an increasingly backward, primitive and unsophisticated population. The socialist system selects for unaccountable and irresponsible behaviour patters. It incentivizes and rewards the victim attitude and the slave mentality. Society becomes more immature, childish and stupid. Luthuli House provides us with ample examples.

Any move towards socialism reverses the following beneficial processes of capitalism:
1. The specialization of entrepreneurs provides alternatives to consumers.
2. The formation of capital and property rights create jobs.
3. The free and voluntary exchange of the fruits of one’s labour.
4. The constant and sustainable growth of the population.

This is why socialism sets the Malthusian Trap and why the size of the South African population will automatically shrink by about 20 million people over the next 2 decades to reflect the impact of ANC policies. Politics can be deadly indeed.

Tribalism worked in the past.

War and famine. Kept the population stable and will again in the near future.

“The government you elect is the government you deserve.”

― Thomas Jefferson

My view:

In sunny SA – Champagney Socialism is at play – the ANC and its cadres just take what’s available on the table. They are ruthless and don’t care a bit about the millions of ”feet” that voted them into power – they know the ”feet” will do it again. They do it for the ANC ”Flag”!
The ZAR will go to around 14.50 soon and all these Fund/Asset Managers will all start singing like SA Canaries when the IMF US $ 4.5 billion will start flowing through the market again – the pensioners will cry – the band will play and the investment Zoo will pass us gain – just be patient and get a ”ringside” seat!

Thank goodness for the sanity of thinking that has probably been around the block quite a few times.

The facts sir, just the facts … 😉

Local stocks underperformed because of….sh1t ANC govt anti business policys. The words “Investment” and “South Africa” cannot be used in the same sentence anymore.

To sum up this government in one sentence:

58% of tax money goes to 2.5% of the population, that is government employees.

End of comments.





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