Like every investor with an interest in the South African market, I followed finance minister Nhlanhla Nene’s budget speech on Wednesday with great interest. I did this as one does in this day and age: by flicking through my timeline on Twitter, reading comments from a number of “friends” on this social media platform, following links and studying websites.
By the time I woke up on Thursday morning, the tweets were emanating from a variety of breakfast debates in Johannesburg and Cape Town, prompting me to send my own tweet, as follows:
Judging from my SA timeline, it seems that Budget Breakfast is the next cullinary fad after The @ProfTimNoakes Diet – everybody’s at one…
— Deon Gouws (@DeonGouws_Credo) February 26, 2015
Having digested what I thought the main points were overnight, I was therefore somewhat surprised when I only picked up the announcement of the increase in the annual foreign exchange allowance for individuals, from R4 million to R10 million, earlier this morning on Moneyweb.
It seems like most analysts initially missed it, and one can hardly blame them: the announcement was not part of the minister’s speech, and you had to go all the way to the bottom of page 154 of the Budget Review 2015 document on the National Treasury website to find it.
In the Moneyweb article, a well-known market commentator was quoted as saying that the increased allowance ensures that in practice exchange controls do not affect 99% of the population. I would go further and suggest that in this brave new world, there’s probably not more than a few thousand South African individuals and families that are still constrained in terms of repatriating investable funds … perhaps as little as 0.01% of the population?
Having said that, the announcement is a very significant one for some of these ultra-high net worth investors and one can expect an acceleration of transfers into major international markets – and one can hardly blame them.
I would suggest that there are at least two reasons why any South African investor with surplus funds should prioritise spreading his or her wings into the global markets at present.
Firstly, it is well documented that after a tremendous run over the last few years, most companies on the JSE are now trading at multiples which are by no means cheap. To illustrate, the Cyclically Adjusted PE (CAPE) ratio may have its opponents – given that it’s not a great tool for timing markets – but most commentators still agree that it’s a decent measure in terms of forecasting future returns (i.e. the more expensive your entry price as measured by CAPE, the lower your future returns are likely to be over multi-year periods). And in terms of CAPE, the JSE in aggregate is now one of the most expensive stock markets in the world, as illustrated in the following diagram:
Source: Credit Lyonnais Securities Asia, FactSet Franklin Templeton Investments, Dec. 2014
Of course you can argue that the US market is even more expensive than South Africa, but the justification for this can probably be found in terms of arguments such as the underlying strength of the American economy, productivity and business friendly labour laws as well as a strong compliance culture at all levels of society. I will leave it to the reader to decide how South Africa compares on these fronts.
The bottom line is that there are many markets (including the UK) that offer opportunities to South African investors at multiples a lot more attractive than the JSE today.
The second reason why a South African investor should prioritise international exposure, simply relates to the opportunity set. The JSE may be one of the best regulated stock exchanges in the world (as confirmed annually by the World Economic Forum http://www.weforum.org/reports/global-competitiveness-report-2014-2015 ), but South Africa’s weighting in the MSCI All Country World Index (ACWI) is still less than 1% of the total (0.78% to be exact). This can be compared to individual companies such as Apple (more than twice SA’s market capitalisation in the ACWI), as well as Exxon Mobil and Microsoft (which are both bigger on an individual basis than the whole SA market).
When one drills down by industry, the diversification benefits of investing offshore become even more compelling. South Africa has some very good pharmaceutical companies, for example, but none that currently offer any meaningful exposure to some of the more exciting areas such as biotech (this, compared to Roche – nearly eight times the size of the whole SA pharmaceutical industry, as measured by market capitalisation, more than half of which is represented by its biotech interests today).
One possible counter-argument to the suggestion that exchange control relaxation will lead to money flooding offshore, relates to the currency. Will investors wait for their rands to strengthen before turning them into dollars and pounds? Only a few weeks ago, the Economist updated their famous Big Mac Index, suggesting that the rand is undervalued by some 54% at present (http://www.economist.com/content/big-mac-index). Personally I would point out that this index is a pretty blunt instrument which never really seems to work: in the last 15 years, the “best” level reached by the currency equated to an undervaluation of approximately 25%.
It is therefore up to each and every investor to decide how long it may take for the rand to appreciate significantly from current levels (if ever?). In the meantime, they should be weighing up the possible benefits of successfully timing their currency conversion (assuming they’re one of the lucky ones who may get it right!) against the opportunity cost of not pursuing attractive opportunities elsewhere.
There’s a big world out there.
Deon Gouws is Chief Investment Officer at Credo Capital in London