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Why foreigners are fleeing our market

Should you do the same?

There’s an old saying in shipping circles that when the rats start jumping overboard you shouldn’t question why: just follow them and do the same. They probably know something you don’t.

Foreign investors in the local equity and bond markets have seemingly been acting like proverbial rats aboard the good ship SS South Africa: they have been selling in their droves and in the billions of rands. Should we as local investors take note and be worried?

Or should we, as some are prone to do,  say good riddance and goodbye.

The truth is likely to be somewhere in the middle.

Many foreigners investors were not long-term investors in the first place (are they ever?).

When the going was good and the commodity cycle was on the up and up (2003-2011), money was pouring into the country, artificially strengthening the currency and our foreign exchange coffers. Portfolio flows all over the world have the same in common: they don’t really invest in bricks and mortar and don’t, directly at least, create new jobs and tax revenues for their hosts.

Source: Investec

The tide has now turned with a vengeance and money has been pouring out of the country in recent months. More than R263 billion over the past 15 months according to some reports, and the reasons are not very hard to find.

The sharp drop in the currency over the past number of years as well as the poor performance of our local market has all but wiped out any returns to foreign investors in general.

Over the past five years the US dollar-return for foreign investors has been zero. Nothing. Nada. Zilch.

Let me say that again. Had you invested $1 million into the SA equity market 5 years ago and you cashed out today, you will take back less than you had put in.

Compare this to the USD returns earned over the same period of time elsewhere in the world. They ranged from 50% globally and more than 80% in the S&P 500 Index.   

 All in the same boat

And don’t think that you as a South African investor have escaped this carnage. You’ve had exactly the same returns. If you believe, like I do, that you should try and price your assets and wealth in US dollars, then you would have reflected no real increase in your global wealth over five years. Add in the 50% drop in USD terms of your residential property, and it doesn’t take a genius to work out that we have all become very poor — globally speaking — over the past five years and more.

Don’t believe me? Then pop down to your local Apple or Samsung store and buy any one of those fantastic imported items they stock there and check the latest eye-watering prices.

I did that last week, to purchase not one but two Apple iMacs for kids at university and I was gob-smacked at being charged R35 000 a piece. And then I thought mountain biking equipment was expensive.

The problem is these items are all priced in US dollars but you earn in rands. And the only way you can protect yourself against this is to either earn in US dollars, which very few of us do, or invest in USD, which we all can but not necessarily do. There is also an institutional bias against this kind of advice.

Thanks goodness I had the good fortune to invest the bulk of my liquid assets into USD-based portfolios more than five years ago, so it softened the blow to the solar plexus when it came to paying for the Apple Macs. But only a little….

While the local investment market still shows a positive return one over five and three years (barely), you’ve lost money over one and two years, even  in rand terms.

This column is not about advising you to take money offshore or invest in offshore-based funds in South Africa. If you haven’t worked this out for yourself yet, you probably never will.

I’ve taken some flak from Moneyweb readers from time to time about my predilection for investing in the US biotechnology sector, especially when the market dropped by almost 35% from its peak in July last year. It took some courage to hold my position and to even add to it more recently. This  sector, which has returned 20% per annum in USD terms over 5 years ( 35 % in rand terms) has been the best performing sector in the world over that period of time.

Forex controls and radical economic transition

This column is to warn you that the offshore allowance up to R10 million per individual per year is probably earmarked for the scrap-heap in the near future.

We seem to forget that this offshore allowance (plus the rand swap allowance of the large investment institutions) is still controlled by foreign exchange rules and regulations. Forex-controls can (and most probably will) be reintroduced at any given time as they essentially are still in place. I am not a betting man but will wager a fiver that this will happen, sooner rather than later, especially if Zuma and his cronies get their hands on the Treasury.

From the beginning of the year the ANC under President Jacob Zuma has embarked on his journey of “radical economic transition” which at this early stage talks about land occupation with compensation and a dramatic restructuring of the economy allegedly controlled by “white monopoly capital”.

More extreme measures are in the pipeline as Zuma gets increasingly desperate about his flailing grip on power. Today there is very little difference between the EFF and the ANC and a potential merge of the two parties cannot be ruled out.

The ANC knows full well that if it really embarks on this journey, more money will flow out of the country. Under those circumstances it would be foolish to leave the forex gates open.

And then there is still the potential downgrade by one or more of the foreign credit ratings agencies. While the news flow around this issue has dissipated somewhat in recent weeks, the danger of a credit downgrade has not gone away. Far from it. A downgrade will just hasten the scrapping of the offshore investment allowance, I feel.

In ANC circles the issues of foreign exchange (and the reduction or scrapping in the offshore investment allowance) frequently comes up for discussion. Prof Patrick Bond from the University of the Witwatersrand economics department and a leading light in the world of ANC economic thinking has long advanced this idea, and so have others.

The feeling is that the outflow of capital in terms of this allowance (R70 billion last year I believe) is white monopoly capital fleeing the country and should be stopped.

Should that happen, will there really be no floor as to how far the rand can fall.

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

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I suspect that the reversal of capital flows has a lot to do with the current strong rand. The whole investment idea is to buy low and sell high. If you can control the currency movement that would be first prize- a risk free profit. The Rand has appreciated a lot recently and the good folks with the hot money are raking profits on the carry trade plus the yield differentials. Certainly this would be a pointer (if there ever was) for a local to move money offshore. Historically a sharp appreciation in the Rand is never sustainable. You can be sure that when Bloomberg starts making noises about the Rand being over valued, the speculators have already taken up their short positions: selling Rand bonds, borrowing in Rand and dumping to push the currency lower so they can close their short positions en masse.

The fact that the ANC still maintains currency controls and is shortly highly likely to scrap offshore allowances merely underscores the fact that the semblance of freedom in SA is an illusion. What is no grandiose apparition, however, is that the link between currency controls and the wholesale inability of the ANC to affect anything useful in every sphere of their miserable existence.

Freedom anywhere in the world is an illusion.

The problem comes when an uneducated and hopelessly gullible population believe what a self-serving, looting, and corrupt government tell them and then continue to keep them in power.

What we are seeing in South Africa is nothing new to Africa. Many African countries have been destroyed by their Zuma-like leaders.

The bigger problem that those of us who are educated will see, is that Zuma and his idiots have barely started with the looting. Pravin is the hero for now but that will soon be ended. As Magnus said, there will be no floor for the Rand.

The writing has been on the wall for some years now and the window of opportunity to flee with your finances relatively intact is closing.

The ANC (be it under Zuma or any subseqeuent cleptocrat who will replace him) is hell-bent on looting as much as it can. The notion of the ANC being concerned about the people of the country is political mumbo jumbo that tugs at the heart strings of the stupid and desperate. The past 20 years has shown the people what the ANC is really about and it definitely has nothing to do with “upliftment” of anybody.

If by now you have the means to get out and you aren’t already in the process of getting out, then best of luck to you.

This isn’t going to be a happy ending.

Don’t be so negative, the corruption in SA and in Africa is nothing unique. Go back to 136 BC and see that the Roman emperor Tiberius Gracchus was murdered by his fellow senators for wanting to introduce land reform. The reason: At the time men did 7 years military service and any farmer who is away from his farm for 7 years would likely loose it. The rich landlords and senators profiteered from this and bought up all farmland for bargain prices and the emperor wanted to end this. So they killed him. Go back to 1517 where Elizabeth I in England banned the use of a weaving machine because mechanisation would lead to job losses and unruly people. Therefore ultimately it would threaten her own position. Go back to the ruling Habsburg family of Austria in the 1800’s who objected to railroads being introduced in Austria because new technology was a threat to their own position. See the same thing happen in the feudal system in Europe and it eventually being slowly eroded by the Glorious Revolution in 1866. The norm of the times was that if you were born poor then you would die poor. The aristocracy didn’t just become rich from taxes but by enforcing monopolies. They had the sole rights to sell certain products and nobody dared criticise them for it. The same thing happened in Japan. Finally in 1867 the last feudal Japanese military government called the “Tokugawa” shogunate (who taxed the peasants to death) was ended. It modernised Japan and ended the shogunate’s monopoly on international trade and laid the basis for the Meiji government. So the corruption in Africa and SA is nothing new- it is just human nature and the story of Man.

on the negative side – one can buy an apple imac 21.5inch in aus for R18,500 that’s with 10% GST(VAT) so HM needs to do a bit of shopping on the internet. also remember MH is re-locating to City of Cape Town – which very soon will have NO water – it already has the highest murder/rape rates in the world- so not all MH speaks is “golden”. as regards getting yr money out NOW – I have been screaming this out for a long time – and like MH have been thrown buckets of excrement by mw readers. at moment have all my investments on nyse/nasdaq – esp this beauty which fell 10% last nite (its up 60% in 6 months) and time to buy more!http://fortune.com/2017/02/28/kite-pharma-stock-cancer-drug/

Bob, you’re either touched or out of touch.

….or out of mind?

Shorted Kite at 85, up 10% in 2 days. Bought an iMac for R19500 in SA with the profits and saved on shipping costs. Also bought a JoJo tank and 10 kiloliters of water and 12 bottles of wine.

so say “thank you robertinsydney”. wish someone would give me tips on this site – all I get are brickbats and excrement thrown at me! my wife is dying of cancer which is why I became interested in this share and what they are attempting to do. IF it works will be the most important thing in cancer treatment since the ’50s and chemotherapy. but that is an IF in capitals! buying more tonite after the 10% drop on tuesday

So Magnus, are you advising us to invest offshore because it’s given 50% in $ compared to 0% from SA? That’s why your clients pay you the big bucks….or whatever they have left over from the biotech investment

The advice is, of course, on the basis that you would require the services of MH – and he does not work for free
I wonder how much his Prophet of Doom articles have earned him in fees

As a CA(SA) (and CFA Charterholder) living in Abu Dhabi, I am asked all the time whether people returning to South Africa should remit their savings and final settlements from here to South Africa. My advice is always — unless you absolutely need the funds in South Africa to survive, I highly recommend having your assets offshore, denominated in US dollars. One never knows where the rand is going and it’s always a good idea to hedge your currency risk by having assets offshore. As the funds are needed in South Africa you can ‘drip-feed’ the cash home but having the funds offshore allows a greater degree of financial flexibility. Bye from Abu Dhabi.

I have articles showing the monumental flight out of South Africa for the past 2 1/2 years SO get your #’s right. Blame all the issues you want BUT the leadership is eventually the problem!!!

So to summarize every single article Magnus has ever written/will ever write:
1. If is SA move to Cape Town
2. Be as negative as humanly possible about your own country (forgetting that it provided you with an education and a source of income)
3. Sell all your SA assets and invest offshore (using Magnus’s company so they can earn fees from instilling fear in you)
4. Pick an overvalued section of the US market trading in a bubble (earning fees even if you lose money for your clients in the investment).

Magnus your company is registered under the FAIS act – Surely this constitutes advice under the FAIS act – Are you then liable if the clients are not risk profiled and follows your advice on Moneyweb?
– You company is an FPI accredited practice – Surely you are not adhering to their guidelines? – Maybe they should revoke that status.

Whenever I read an article by Magnus I feel like running around in a circle, arms flailing and screaming like a mad man out of sheer panic :). Magnus you are the proverbial Prophet of Doom mate! I have a feeling you spent all day trying to find some reason to create panic in yourself and others. If EVER you were proven to be right, what will you say? I can imagine it will be something like: “Sien! Ek het mos vir jou gese dit gaan gebeur!!” 🙂
Here is the reality this afternoon the sun will set and tomorrow the sun will rise again. For everyone sitting and waiting for their world to end…it’s not going to. There will be hard times and good times in life. We are going through hard times but eventually even Zuma’s reign of chaos will end and things will turn.

Just remember – I also forget this sometimes – MH makes money on making these recommendations – which have remained the same for many years.
He should tell us – on average – what increase/decrease his fee income enjoys/suffers after each article.
perhaps he should check up on that Insurance policy – FAIS may catch up with him soon, and I believe the SA Regulator is not scared to act.

Things will not “turn” with Zuma dead Timmo.

1000’s of anc office bearers have been corrupted; how to fix this?

The culture is corrupt.

Spot on Timmo – the Moneyweb doom and gloomers seem to enjoy getting their knickers in a knot and want us all to do the same.

@pacaratac – the ANC will be voted out, the signs are clear. Relax – better times ahead.

@ everyone else – diversify your wealth if you can afford to do so. Invest in South Africa or the world? The answer is obvious – it’s not either/or – it’s do both.

And MH giggles, 197 shares so far, this is what article writing is about, and not just this article from MH, all of them – he writes – we share, reply and comment(50). MH is doing something right.

I think only @robertinsydney comes close to MH when it comes to responses on comments post.

FAIS act – – very good point!

Looking forward to MH’s response.

Magnus : Assuming that one has more than $ 60 000 in USD equity and property portfolios, and that one has a NRA status(non-resident alien), how does one plan for the punitive estate duty that would be levied when one eventually falls off the perch ?

https://www.moneyweb.co.za/mymoney/moneyweb-tax/investing-in-uk-and-us-shares/

This issue is almost never addressed by authors advising us to get our funds offshore.

Excellent question! – You will receive no response because they have no clue – None of the fund managers actually have a clue – I tried to get an answer from Ashburton/RMB on withholding taxes and double tax agreements – Clueless

Not only do they not have a clue – they also would not want to know the answer – – would cost them business

This question was quite common in Aus 10 years ago when I started investing in USA. Haven’t heard it spoken about for ages. Death taxes in USA applies to natural persons only – ie a company or a trust is not liable nor can ever be liable for death tax. The normal situation is that one invests thru a trust with a corporate trustee. The assets are NOT held by a natural person

Again Robert – Rather stick to the sheep in Aus – ONLY if your shares/investments are held in a trust will it not form part of your personal estate. Any shares/collective investment schemes etc will form part of your SA/USA estate if it is held in your personal capacity.

No Robert upon death your shareholding in any company/scheme is taken into account. That forms part of ones estate and estate duties apply thereon. However since there is no shareholding in trusts they do not form part of one’s estate thus no estate duties on trusts. It is up to the trust to decide what happens to a beneficiary upon death

@PS why are people so anti Robert on moneyweb?

@Timmo…..because Bob is a typical ex-Saffa in Oz. He needs to justify why he left SA by highlighting all the negatives AND he is so bored counting sheep that he trolls SA web-sites.
It’s best just to ignore him and his comments. Based on his last comment, he doesn’t research before he sprouts forth and makes a fool of himself.

The advice I got was to avoid trusts due to new section 7 deemed interest on loans. Plus offshore trusts have high running costs and more anti trust legislation on its way. Best solution to avoid US/UK withholding taxes is to use the life wrappers offered by Sanlam/Old Mutual.

Yes, Magnus’s piece is all doom and gloom but we stick our heads in the sand at our peril. The tragedy is that our country is loaded with wonderful, positive people who are working energetically and creatively towards a better life and future (including my children) – against a government that is doing exactly the opposite!. There is nothing the ANC is involved in that does not involve total incompetence, deceit and corruption. Prasa, SAA, Police, Escom, The Road Accident Fund, SABC…. etc etc. Untold billions lost while they use the courts to try to dodge the charges – which we are also paying millions for!!
It has taken 23 years for their train to get up to speed but now it is truly a runaway train racing down the Zimbabwe Route. How the country has stayed afloat given the enormity of the destruction is amazing, just goes to show how much better off we would be with no government at all! Unfortunately there is no way out, the worst people have risen to the top and the masses of ignorant voters will keep voting for the politicians who make the most outrageous promises laced with threats that their ancestors will be angry if they don’t vote for them. Voodoo and democracy! Democracy is a foreign concept in Africa, as are ethics, morals and the rule of law. Witness the increasing disregard for court orders, including the Con Court! The government has now shown complete contempt for the constitution and the courts. We have the DA to thank for slowing down the destruction for the past two decades. The well managed DA under Helen Zille prevented the ANC from getting the 66% they needed to change the constitution. In 1994 I said that the day the ANC get the power to change the constitution is the day we need to book our tickets out of the country. That is still true in my opinion, but now we have destruction by stealth. Unfortunately the end result will be the same, it’s just a matter of speed. Getting our money out is the least we should be doing. What a tragedy for our fabulous and beautiful country. The reality is beyond comprehension to a rational mind.
If we look back in history we will be able to clearly see where this is likely to end. With no exception, as far as I know, throughout history, when a country’s economy turns ugly the masses attack the “culprits”. Who are the culprits? The minority. Governments are nebulous, how do you attack a government? But the minority are easy to identify and attack, egged on by the government that wants to deflect the blame from itself. The Jews know this only too well! Already, whenever the ANC makes excuses they blame “the legacy of apartheid”. (Please note: I am not an apartheid apologist and in no way agree with that concept or what happened as a result). I am simply pointing out some facts. What is responsible for the ANC’s failures? Apartheid. Who is responsible for apartheid? Anyone with a white skin. The groundswell is already being laid – the cause of all SA’s problems are “White minority capital” !

when we left in ’86 the favourite saying was “when the jews leave you worry – when the afrikaaners start leaving – its too late!!” there has never been any doubt in my mind that what has happened since JvR arrived in 1652 would come back to bite those who are not indigenous Africans – and that I’m afraid is everyone who is not Xhosa, Zulu, Sotho etc etc. PLEASE read up on Algeria and what happened there in 1962 – when within months 1.5 million Europeans left for mainland France – some of whom claimed that their ancestor had been in Algeria since 1830. Didn’t help them and it won’t help you guys. only difference is that you guys have nowhere to go or indeed will take you – and that i’m afraid includes my colleague Magnus

you are so right we are living on borrowed time here in SA-
oh …but what a life it is.
whenever i visit Oz which i really enjoy, exsaffas are always trying to convince me(actually themselves) that they made the right decision to move. their lives do’nt look that good to me!

Let’s not over-focus on MH. The key question for me is: would anyone now invest in stretched/problematic offshore markets…. considering the fact that our offshore allowances may get cut soon?

You don’t have to invest from the minute you go offshore . Just put it in your foreign currency/s of choice and feed it into the market as you see fit.

Nothing have been said nothing about cutting/reducing the offshore allowances… That would have been highlighted in the recent budget speech – Its just another pathetic attempt by MH to drum up investments

“considering the fact that our offshore allowances may get cut soon”
CJ this comes from Magnus! Part of his doom and gloom prophesies. I think he could not find any negative news relating to cuts in offshore allowances so he simply made it up to add some more oomph to his prophesies 🙂

You need to take Magnus’ claims with a little pinch of salt. He cannot foresee the future (as much as he wants to make us believe he can)!
Magnus does make some valid points in his articles but most of what he says is quite delusional and VERY hyped.

@gemini7 They do not have to reduce offshore allowances if the Rand drops a lot. I wonder how much the offshore allowance will be (in US$) in 5-10 years time compared to today.

Hey louisk-you are a bit short on the wine boet.

I don’t know what to believe anymore … In 2015 I read articles like this in the financial press, about how tapering was going to destroy the Rand. Then I read about how SA was going to be downgraded and that would destroy the Rand. Each time I moved money out of the country and advised my poor mother to do the same. Now we’ve both lost money and my step-father is singing songs about how stupid I am!

If things are so bad in SA, and foreigners are pulling their money out, then why am I poorer now than I was two years ago when I started buying into these theories? Someone who actually knows what’s going on, please can you help me understand??

the biggest mistake anyone can make is to believe what a financial planner/advisor has to say!!!

supply & demand drive the price of everything!!! simple as that!!!

Alannah be cautious about what you read in the financial press. If you delve deeper you will see that the person who wrote/published the article has some vested interest in the movement of the price.
Basically if the articles on moneyweb tells you to SELL then you BUY!
When they tell you BUY then you SELL!!!
I learned the hard way taking advice from articles on moneyweb!

Fair enough, Timmo. Someone once told me, “If you’re reading information in the press, don’t trade on it because it’s already been priced-in.” It would seem that I didn’t listen 🙂

oh dear – not a happy camper. playing the rand forex market is by definition a risky venture. you play with fire you get burnt. a much safer bet would have been on the £ falling after brexit – which it has by almost 20% – thus the improved exchange rate. I personally feel the aus$ is over valued – but the market feels differently – so just live with it.

Thanks Rob. I’ve been burnt and I’ve learnt. I’m going back to playing with my dolls now coz they have big smiles, unlike my bank account. LOL!

Hi Alannah,
I agree with those who say that economists and financial “specialists” / planners havn’t got a clue, so its not wise to act on their advice alone. However, we are all concerned that we need to do something to protect our future so we are forced to make decisions. Hopefully you do not need the money that you have invested overseas because as long as you do not have to sell, at a loss, what you have invested in, then wait, the wheel is always turning. Rely on logic. No country can continue to destroy its economy the way our government is doing and see its currency appreciate in value. We are in a short term phenomenon, long term the Rand has nowhere to go but down the tubes like Zimbabwe.

Hi Foshan, thanks and a part of me hopes you’re right because I don’t like losing money. Another part of me feels guilty for betting against my own country.

Because I love SA so much. My family have lived here since 1823 and I consider myself to be a white African. I pray every day that we could make our miracle work and do it in a way that fair to us all. I hope that, in the long term, I turn out to be wrong and that our country will surprise people who lost hope.

Can’t stop loving SA … It’s like an abusive relationship. I should walk away and stop allowing myself to be battered because there is more to life than a braai, an aloe ferox and dry, red soil. But when my birthland turns on that charm, I want to give one more chance. Just ONE more chance, so common SA!

No one can Alannah…

Currency decisions are based on wisdom, luck and timing.

In early 2008 I bought GBP (pounds) at R15.50 because the experts said to take money out! And guess what – today, almost 10 years later, a pound is still worth R15.50…

Of course, had I bought dollars in 2010 at R7 per dollar, or sold my pounds in 2016 at R24 per pound I would have been in the money!

The point is – no one knows. Also, the whole world is pretty much in shambles. Who knows what is the best asset class / currency / timing? No one does.

Generally speaking though, it is often best to do exactly the opposite of what the currency experts say because they have even less of a clue 🙂

Don’t worry about it – your decisions were probably wise at the time. Hindsights is always 20/20

Thanks Ken. I’ve never had any luck with gambling (so much for me being Irish), so I’m going to bury myself back into my risk-averse comfort-zone and avoid the markets all together – so the bank can take a haircut on my deposit one day! 🙂

Those who have beaten MH’s returns may throw the 1st stones….

If we are experiencing such a massive outflow of capital why is the current account deficit narrowing so rapidly? It narrowed to 1.7% of GDP in the fourth quarter of 2016 (from an already significant narrowing of 3.1% of GDP in the 2nd quarter of 2016), way below median forecasts of 3.2%. Looking back from January 2017 we’ve had trade deficits in 4 out of the past 6 months. What are the significant amounts that have been flowing in?

MH is damned if he does tell you and damned if he does’nt
take the positives out of what he says because he is not god but is a lot smarter than you little people/losers who always shoot him down because you are stuck in your boring little 9 to 5 job and mortgage and are too shit scared to face facts and do something about it.

We thank you oh Lord Geranium, our Leader and supreme being for showing us the way. We thank you for pointing out to us our miserable existence without any hope. We worship you for not having to endure the suffering which we and our families have to endure on a daily basis with our “boring 8-5 meaningless jobs (and mortgage payments” -which very few of us actually have). We realise that you have been released from the yoke of such mediocrity and are therefore not subject to this routine which is the manifestation of everything evil.

you’re welcome little person , now get back to your miserable existence
jou baas roep jou !

My what a brave man (flower) you are…

notice u have no votes bipolar

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