A decade of wealth destruction, issue 297, november 2018 brenthurst gas pump icon


This has been a consequence of two major events, one global and one local, which happened almost at the same time. The first was the collapse of the global commodity boom—which was the major driver of the economic boom period from 2003 to 2010—which roughly coincided with the 9 years or misrule, corrup-tion and state capture under the ANC and its ex-president Jacob Zuma.

In short: most middle-class wealth is under threat and this is to be seen in almost all spheres of society where it can be measured. gsa 2016 calendar Housing sales, overseas trips, membership of medical aids and new motor car sales: these have all been in decline for many years now. The residential property market is in a severe slump and even the former recession-proof Cape Town market has grinded to a halt in recent months.

The industry receives very generous tax concessions from Treasury and to criticize government and its economic policies would jeopardize this cozy, but mutually beneficial arrangement: the industry gets to manage trillions of rands of pension money (as a result of generous tax-incentives) and the govern-ment in exchange gets a very efficient tax-collection agency for free! Any whiff of criticism would be a career-ending move, as we have seen many times in the past. THE VALUE OF INDEPENDENT ADVICE

It is therefore up to independent investment advisory groups such as Brenthurst Wealth to offer an objective and often-times critical assessment of the investment landscape and its prospects. This has not made us very popular with the local asset management industry. There are many things the industry would prefer to remain unsaid or swept under the carpet.

The fact remains that since 2011, or thereabouts, there have been several turning points, some global and some local, that have had a major impact on the personal wealth of each and every South African. Peo-ple with no assets or investments feel it in the form of rising unemployment and rising cost of living. Middle-class and upper-middle class South Africans feel it in the form of stagnant asset values and rising taxes.

This has been a major turning point for investors on the JSE, many who have been reluctant to take money offshore on the basis that offshore somehow is more risky than local investments. However, the majority of investors and fund managers have missed this crucial divergence which has now produced a decade of sub-optimal returns and over the past 3 to 5 years, below-inflation returns.

When combined with below inflation returns on the residential property market, does this mean that the average SA investor has lost substantial ground against inflation and also against the global purchasing power of the US dollar? In short, without direct offshore assets in investment portfolios, most South Africans have become depressingly worse off with a plunging rand and investment assets producing no real return over 5years (equities) and over 10 years as far as residential property is concerned.

At one stage in the mid-1980’s the Anglo American Corporation was so powerful that it made up almost 80% of the market capitalization of the Johannesburg Stock Exchange, owning major or controlling shares in just about every major local company. One reason was exchange control, as it could not invest money offshore so it kept on buying all the major companies on the JSE.

Today Anglo is a shadow of its former self, the gold mining industry has collapsed and from being the number one gold producer with 1 000 tonnes per year in 1980 it is now only the 8th largest producer, with an annual production of a mere 150 tonnes and declining rapidly. South African now earns more foreign exchange from the sale of coal, platinum and soon iron ore.

In recent decades the global commodity boom was driven by the almost insatiable demand for coal, iron ore and other base metals by China since it became a member of the World Trade Organisation (WTO) in 2001. b games zombie All commodity producing countries benefited including Australia, Chile, Canada and South Africa. BLOOMBERG COMMODITY INDEX COLLAPSES

The misrule of the country under Jacob Zuma since 2009, when he was elected as president until he was fired in February 2018, has left behind a shattered economy, a sharply weakened rand and a massive outflow of foreign capital. In fact, since 2014 an esti-mated R400 bn has left the country’s bond and stock market, resulting partly in the massive under-performance when compared to the rest of the world.

We do not foresee a turnaround in the fortunes on the JSE until such time as this massive outflows of foreign capital slows down or reverses. Foreign inves-tors have been unnerved by the government’s handling of its finances and the finance portfolio, with seven ministers of finance in 8 years. This does not augur well for policy certainty and long-term confi-dence in the economy.

It has been suggested for several years now that the massive share appreciation of Naspers, which at its peak earlier this year made up 22% of the market capitalization of the JSE, has been disguising the poor performance of large sectors of the JSE, especially companies greatly exposed to the SA economy. This has now come true and the mid-cap and small-cap shares have lost between 30 and 50% in many cases.

Yet at investment presentation after presentation local fund managers try to make a case for greater investment onto the JSE. e gaskell We have resisted this urging as our research does not support this view. SA companies are under enormous pressure to make profits as a result of the weak economy (the only OECD-country currently in a recession), volatile labour relations, rising electricity costs and regulatory uncer-tainty in several key sectors of the economy.

Developments on the global front also don’t help. This year has been characterised by a rising US dollar, buoyed by rising US interest rates, which has led to a massive sell-off in emerging markets, including South Africa. Interest rates in SA are set to start rising soon and stock markets normally don’t do well when inter-est rates start creeping higher. Another reason to remain underweight SA shares.

The local investment industry, until recently, was not a great proponent of offshore investments. They only became cheerleaders for offshore investments when they could not hide the massive under-performance of the JSE versus global investment markets anymore. electricity projects for 4th graders The reason is simple: it makes more money with local assets under management as the fee structure of international fund houses is substantially lower than local funds. electricity voltage in norway The local asset industry has one of the highest cost-structures in the world and therefore it stands to reason that local investments are preferred.

Another reason why the local industry does not strong-ly recommend offshore investments is the fear (a real one) that the money taken offshore will be invested with international competitors. This fear is real as many of the best-performing sectors in the world (health care, technology, 4th industrial revolu-tion funds) do not feature amongst the SA-owned companies, mainly due to scale.

Most investors know by now that the year 2018 has turned out to be a “annus horribilis” in many respects. The economy has slumped into a recession (two quar-ters of negative growth), unemployment has reached a new record high of almost 28% of the labour force, the rand has weakened from R11,50 to lows of R15,70 earlier this year, and returns on the JSE have been negative by 16% so far this year.

The Medium Term Budget Review delivered by the new finance minister Tito Mboweni further revealed the depth of SA’s fiscal problems. SA’s total debt, now standing at around R3 trillion, already costs taxpayers an estimated R158 billion per year in interest costs alone. Any further downgrade by Moody’s will lead to an increase in interest cost in order to service this debt and potentially a further outflow of foreign capital.

We would love to tell you that things are about to get better and that the weak performance on the JSE, in particular, will suddenly turn around and start galloping ahead. We simply do not see that in any piece of eco-nomic statistic at this point in time. However, we will be the first to inform you when we start seeing any green sprouts of an economic revival. FOR THE TIME BEING WE REMAIN UNDERWEIGHT SA EQUITIES AND OVERWEIGHT SA CASH, AND GLOBAL EQUITIES

To some clients, who have an international lifestyle we have recommended a 100% offshore exposure, which has been a great recommendation. Have enough cash in SA (which earns a high interest rate) to fund local liabilities and have the balance of investment portfolios invested fully offshore. We think that this trend will increase over time as investors become more accus-tomed to offshore investments, despite the short-term volatility at times due to the vagaries of the SA rand.