What’s that old saying again? “History doesn’t repeat itself, but it does rhyme…”
Therein lies a lesson for many South African investors who still seem to think that inertia is the best investment strategy, especially, considering the tumultuous and wealth-altering times we have been living in over the past few years.
For the past five years I have been on a crusade, some would call it, trying to warn investors and anyone who cares to listen, that the foundations of wealth creation for the average investor in South Africa are under enormous pressure and, like a sand castle, are being undermined by the incoming tide.
Five years ago I hosted a countrywide series of seminars with the redoubtable Clem Sunter, our foremost scenario planner and author. At the time Sunter was still vacillating between SA being part of the first league or perhaps a country playing in the regulation play-offs. He was even calling for a stronger rand going forward. Once a mining man always a mining man, so it seems.
I was firmly of the view that offshore assets were vital to the portfolios of all local investors. And so it came to be….
On my reading, SA is now firmly set on the low road and about to be relegated to the third league, notwithstanding the delusions of our president. Our economic fabric is fraying at the edges. We won’t see an economic growth rate of 3% per annum for a very long time, especially not with the current mishmash masquerading as economic policy.
The rand’s outlook
Let’s take the rand for example. In five years the rand has dropped from 6.50 to the US dollar, to this week’s R12.85. Everything you pay for in US dollars will now cost you 90% more.
Overseas travel will decline, the purchase of imported goods and services will soar in value and in a normal situation inbound travel would soar, were it not for the imbecilic visa regulations by another ANC-politician with a chip on both shoulders – a well-balanced politician in other words.
The rout in the rand is not over, not by a long shot and by the time this is all over, the rand could be trading at R15, R18 or maybe even R20 to the US dollar.
It’s interesting to note that now that Cees Bruggemans, former chief economist at FNB, is not constrained by the political chains of his former position, he is free to speak his redoubtable economic mind.
As I have said before, most full-time economists work either for one of the big banks or large asset managers where the truth is better left alone. Speaking the truth about the economic road that lies ahead could be career limiting. Political expediency triumphs over the truth. But every day normal, middle-of-the-road people base their investment decisions on these heavily massaged facts that are trotted out to the media and eventually to the public.
Bruggemans can now ask the probing question that all economists should be asking: ‘How many economists five years ago or even as recent as three years ago suggested a substantially offshore position in your investment portfolio?’ Here and there you might find one but most mainstream economists operate on the basis of ‘don’t rock the boat’.
How would you react, gentle reader, in reading that an investment of a similar risk (S&P 500 versus the JSE in rand terms) has returned more than double that of the local investment?
Where would you read that? Nowhere, as much of what you read in the financial press is heavily controlled by a number of large asset managers. The truth is, the JSE has returned 15% per annum over the past five years whereas an investment in the S&P 500 more than 33% per annum. The same pattern is repeated over three years, one year and even six months. All the other major indices of the world show a similar pattern.
So, on a global basis your local investment returns have been slaughtered by the returns international investors have been earning. Never take investment advice from a fund manager.
Let’s talk residential property prices
The other day I was driving home listening to a favourite radio station, MixFM, when up popped an interview with a local estate agent. Again we were saddled with that hairy old chestnut that “residential property is the biggest investment the average investor will make in his or her lifetime”. I almost flipped my car as I tried to Google the station’s number to try to point out this bald-faced lie.
“It’s your biggest debt, not your biggest investment”, I wanted to shout down the line, as thousands of would-be property moguls are finding out to their detriment as the residential property market enters its seventh year of a bear market.
Average property prices – with the exception of the Western Cape – are still 20% lower in real terms than they were at the peak at the beginning of 2008 and are set to decline by another 2% to 3% in real terms this year.
You haven’t seen or heard the term ‘negative equity’ yet, but you soon will. Property values are dropping in both real and nominal terms in many parts of the country. The pockets of areas where property prices are holding their own is shrinking rapidly. In many smaller towns the property market has stopped functioning.
World class African city? I think not
You cannot have an efficiently-functioning property market when Johannesburg, still proclaiming to be a World Class African City, takes over seven months to issue clearance certificates.
As I wrote in April this year I sold one of my ‘investment’ properties in Dainfern, and I cannot get this wonderful city to sort out this mess. Millions of rands have effectively been locked up, the house stands empty and I’m massively out of pocket. Likewise, the survivor from Stalingrad (read Investment Lessons from Stalingrad), who sadly passed away some weeks ago, also sold his house in December last year. To date the transfer has not been completed. So please don’t tell me residential property is a sound investment. It’s not.
South Africa and all its people, rich or poor, are rushing headlong into an economic disaster. I don’t share the sanguine views proffered by columnists Max du Preez and Peter Bruce. I think President Jacob Zuma is unlikely to leave at the end of his term in 2019 and even if he does, the economic damage he has done would be so vast and deep that it would take many years to heal the scars. Even replacing Zuma with someone else will make no difference. The system of political patronage now runs so deep and wide, affecting all sectors of political power and money, that it’s not going to be dislodged soon. An octopus does not let go easily.
All this at a time when commodity prices have collapsed and are unlikely to increase again for many years. Even if they recover tomorrow, will foreign investors rush into setting up mining companies in South Africa? Not after our government last week effectively made mining rights subject to the whims of a mining minister. Say goodbye to foreign investment in our mining sector.
There is very little to show from the most recent commodity boom (1980 to 2002). Nor from the boom fuelled by the inflow of money sans 2008. The cupboard is empty. Yet government wages are up 40% since the Great Financial Crash. In many other parts of the world government officials have accepted cuts of up to 25% in wages and salaries.
The ever-shrinking tax base is now in the cross-hairs of Sars. Prepare to be hunted down like Cecil the Zimbabwean lion.
Let me end with a quotation from Warren Buffett: “Read, read and read some more. Or suffer the consequences….”
*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at firstname.lastname@example.org for ideas and suggestions.