Don’t say you haven’t been warned: The SA economy is at a dead-end

It’s a common lament that when an investment scheme collapses the victims always try to find someone to blame. How often have we heard the mournful cry of thousands of investors, now badly out of pocket and in some cases penniless, that “someone should have done or said something before the collapse”.

The most recent case was that of Steinhoff, an event that has cost investors an estimated R200 billion and counting. In the same category one could include the Resilient property funds and, going back in time, Sharemax and Pickvest, the two failed property syndicates that were all the rage some 10 to 15 years ago.

More than a decade ago I found myself almost in a fistfight with the spokesman for Pickvest in the studio of RSG, the primary Afrikaans radio station. My sin was that I was trying to warn the investing public to stay away from Pickvest as well as Sharemax, as they fell into the same category of investments that I would not recommend.

But what I was doing pales in significance when compared to what Deon Basson and Vic de Klerk did over many years, issuing similar warnings. Basson wrote many articles in Finweek about these schemes and was even busy with a book on Sharemax when he died. I was given most chapters of this book barely a week before he died. I can understand why the Sharemax people paid his estate R400 000 in order to ensure it was never published.

The outrage from the promoters against people such as myself, Basson and De Klerk, was predictable. Lawyers’ letters, insults – ‘You are too stupid to understand how this scheme works’ (as I was not an accredited advisor to these schemes) – to a pathetic attempt to try to bribe me with R500 000 in a brown paper bag on condition that I stopped talking and writing about Sharemax. I protected myself from potential lawsuits by simply sticking to a simple strategy, which basically said “I will never invest my own money into this scheme nor the money of any of my clients”.

Hard as they tried, the litigious promotors could not get around this freedom of speech to legally prevent me from saying what I said for as long as I did.

I sometimes feel I should’ve tried harder to get this message out to more unsuspecting members of the public. I console myself with the fact that many people did heed my warning (and those of Basson, De Klerk and also forensic accountant Andre Prakke) and that more people didn’t invest in either of these two failed companies.

It’s still a mystery to me that neither the Financial Services Board (FSB) nor the SA Reserve Bank (Sarb) stopped these schemes earlier. I still have on record an email I sent to Gerry Anderson, a former executive at the FSB, in which I tried to alert him to my concerns about Sharemax in particular. His response: “I take note of your concerns.” A similar email to Michael Blackbeard, then at the Sarb, had a similar response.

The future is not what it used to be

This brings me to a much larger issue than simply one or two failed investment schemes. Here I am talking about the slowly unfolding economic and financial disaster in South Africa.

Here, too, I have spoken my mind over the past five years or so. I have been trying in my own little way to at least bring another perspective to the slow but relentless destruction of the personal wealth of the average and perhaps not-so-average South African investor.

In fact, my first-ever column on Moneyweb had the headline “Is it time to panic yet?” quoting from the delightful little book A Handful of Summers by tennis player Gordon Summers.

This wasn’t the feel-good-alles-sal-regkom-type of column the financial press in South Africa normally tends to produce. And very soon my earlier warnings about the unfolding unravelling of our country’s finances – and everyone invested in them – elicited the predictable responses from the various vested interests threatened.

Over time, and depending on the contents of my articles, I’ve been called “cynical and ignorant” by economist Dr Rudolf Botha, “misguided” by the FW de Klerk Foundation,” ill-informed” by Mmusi Maimane from the Democratic Alliance and “sommer a Figjam“ by more than one commentator on Moneyweb. Phew, and I don’t even get a cup of coffee for my efforts…

But I reserve a special mention of my experiences on a TV show on kykNET some four years ago, following my article, the death of the rainbow nation. In the studio to discuss the warnings contained in my article was Moneyweb editor Ryk van Niekerk, and one Dr Piet ‘Kopdoek’ Croucamp, a political scientist from the University of Johannesburg at the time. Croucamp is well known for his predilection for wearing a kopdoek on TV, the kind cyclists wear under their helmets.

Never having met him before, I tried to greet him and shake his hand before the event, but was brusquely ignored. I knew then that it wasn’t going to be a fun interview. The discussion kicked off with me giving my views on the trends in the economy and my recommendation to consider offshore investments. I could see from the corner of my eye that Croucamp couldn’t wait to verbally body-slam me, which he promptly did when given the chance.

“Commentators like you must stop talking about South Africa going the way of Zimbabwe. That is absolute rubbish as the government is busy rolling out the National Development Plan and South Africa will soon be on another growth plane.”

Not once did he even look my way, continuing to ignore me as if I had an incurable disease.

Croucamp, as a final aside, left the studio without once looking at me or even deigning to greet me or the other guest in the studio.

Today, four years later and considering what has since happened (credit downgrades, the firing of Nhlanhla Nene, economic slowdown, state capture) it is clear to me that any political scientist (a total misnomer in any way) who works for a state-funded university does not have the freedom to criticise government policy, especially if they happen to be white.

The financial and economic events since then have tended, by and large, to support my views, and the slowly unfolding financial disaster affecting each and everyone in the country, with perhaps the exception of the very rich who have all or most of their wealth offshore or linked to offshore asset classes.

Just how bad are things?

Recently Carol Paton, roving editor of Business Day, wrote an article that clearly signalled this publication’s ending of its infatuation with Ramaphoria, when she asked the question: “When will President Cyril Ramaphosa and Finance Minister Nhanhla Nene let the public in on the news of just how bad a state the country is financially?”

Not long thereafter Peter Bruce, emeritus editor of the same publication, wrote a similar article entitled The End of the Beginning. The article received several hundred comments on the website, a record for this column, I would venture.

Elsewhere, Dr Frans Cronje from the Institute of Race Relations warned about a certain grouping within the ANC NEC that was prepared to endure a dramatic collapse of wealth in order to achieve its ideological objectives.

But from the vast investment industry I could not find even one article that tried to spell out the financial implications for the average investor whose money is entrusted to these esteemed gentlemen. The one comment I did see was Old Mutual’s Johann Els saying that expropriation of land without compensation (EWC) would be positive for the country if a change to the constitution provided much-needed clarity on the ANC’s policy. But he would say that, wouldn’t he, is an expression that comes to mind.

I would therefore like to pose the same question to our country’s asset management companies who act as custodians of the nation’s savings pool. I think I read more than most and have, over the years, attended more asset manager presentations than I could care to remember. Very rarely have I found a local fund manager or asset manager with the ‘testicular fortitude’ to get up in front of an audience and tell it like it is, namely that South Africa is in a very precarious place and that the oft-predicted rosy investment outcomes, often regurgitated by more gullible journalists, are unlikely to be achieved.

Can we really be talking about investment returns “reverting to mean” when such an assumption assumes a certain kind of predictability of economic and political variables? Or when a fund manager writes about “based on long-term valuations, stocks are currently the cheapest they have ever been”, all in an attempt to drum up business despite the losses investors may eventually suffer.

It is almost impossible to make any long-term forecasts for most of South Africa’s business sectors today. This goes for mining, construction, medical services and others; all of these sectors and more have been badly affected by previous government intervention (mining, construction), and soon the medical field.

And it’s quite clear from recent government initiatives that it intends increasing its hold and control over ever-larger fields of the economy, with – in my view – fairly predictable results for those sectors involved. The extent of wealth destruction in the gold and platinum mining and construction industry over the past 10 to 15 years, as an example, has been nothing short of spectacular.

I think it is decidedly dishonest of the asset management business to exhort ordinary South Africans to save more for retirement when they themselves know the outcome is likely to disappoint, perhaps even greatly.

It is also up to the very large but often pliable investment advisory community to start having an honest conversation with their clients and to consider alternatives that might not make them popular with their banking or insurance employers.

Don’t say you haven’t been warned

The returns on Regulation 28-controlled retirement funds have not beaten, on average, the inflation rate over one to four years. When costs are included, the returns are negative over five years now. Send me an email if you have read any article in South Africa on this critical issue, on any website, apart from my own on Moneyweb.

The returns of the JSE have been last or second to last when compared to most major regions of the world over periods now ranging from one to 10 years. The JSE is minus 1% for the year while the S&P500, the broadest measure of the US economy, is plus 15%. It’s almost the same with Europe, Japan, Far East and the world.

Against its peers in the Emerging Market Index, the JSE is also trailing poorly (see graph).

The poor performance of the Top 40 index also does not tell the whole story. For a closer look at what is happening in the broader economy, consider mining, construction and manufacturing. When have you ever read or heard any of the large asset managers recommending increased offshore exposure?

In fact, as I wrote in December last year, Allan Gray reduced its offshore allocation to 25% within its living annuities, as it had no more capacity, a function of exchange controls and Regulation 28. I understand this has now been increased to 60%, but that is still not enough.

This is how the interests of our asset managers come before those of their investors. Earlier this year was probably the best time in a long while for investors to get more offshore exposure, but this was not to be. I think the local investment industry is too scared to recommend direct offshore investing lest the money end up with other asset managers who charge much less than the local managers.

Fidelity last week announced the first-ever zero-management fees for two newly launched funds, the start of what could be a major trend.

The residential property market is in a deep bear market and prices are down 22% in real terms since 2008. Property prices across the board, Cape Town included, are now failing to grow at more than 1%-3% per annum, depending on location and province. But if you read the nauseatingly optimistic press releases from the property marketing companies, you would swear that EWC is going to be good for the property market and a great time to buy. It’s not, dear reader, and the latest steps by the ANC to proceed with EWC will depress the residential property market even more. Farmland prices have crashed, together with those of exotic game and especially buffaloes, until recently also locked in a manic price bubble. That too, dear reader, has crashed spectacularly.

I simply don’t believe the regular dial-a-quote political commentators used by the popular media that EWC is only rhetoric and that it won’t happen. I think the chances of it happening are very real and that the ANC simply does not care how much wealth will be destroyed by such a disastrous course of action. As Julius Malema, leader of the EFF, said last week: “There is no turning back for the ANC and the country as far as land reform is concerned.”

There is simply no way that EWC will not lead to economic uncertainty, slower growth and possibly food shortages a year or two down the line.

Now you can differ with me, dear reader, call me names no doubt, but I simply don’t care. What I care about is my own future, but more importantly, about that of my children, grandchildren and anyone who takes the time to read such a long article. If we continue down this path chosen by the ANC, ignoring warnings from the IMF, World Bank, Wall Street Journal and many other influential financial publications, it will end poorly. And it will be ordinary investors who pay the price. Not the rich or the government elite, but the rest of us.

In short: I will not invest in it, nor do I recommend that you do. Don’t say that you have not been warned.

* Magnus Heystek is an independent investment advisor (magnus@heystek.co.za).

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