Investing locally is no longer lekker

Spare a thought for the foreign investor who, five years ago, decided to diversify away from the world’s biggest economy and stock market, the United States, and elected to put some money into the Johannesburg Stock Exchange (JSE).

What could go wrong, one could have asked. After all, South Africa was at that stage the largest economy in Africa, a major producer of resources and to cap it all, was newly elected as the fifth member of the illustrious political economic grouping known as Brics.

The country still had an attractive international credit rating and economic forecasts for future growth by both the private sector and the country’s Treasury augured well, with growth well in excess of 3% per annum forecast well into the future….

In fact, the first year of such a strategy worked out very well. Returns in the SA market in 2012 were well ahead of the returns earned in the so-called mature economies of the world, but thereafter the wheels started coming off.

Today, five years later, the foreign investor – assuming he/she is still invested in the SA market – will have the following investment comparison to consider:

Total return in SA market (USD): 8.6% (1.7% per annum)

Total return in US market (USD): 91.7% (14.7% per annum).

In sporting parlance it’s been a whitewash, a 6-0, 6-0, 6-0 victory at Wimbledon, the All Blacks playing the Springboks.

The returns over four years look even worse. The mythical foreign investor would today have recorded a loss in USD terms of more than 10% compared with a potential return of almost 70% had the capital instead been allocated to the S&P500, the broadest measure of returns on the US market.

Over three years the comparative figures are JSE -8.3% versus S&P 27%, over two years -8.8% and 27% respectively . Only over one year, as a result of a stronger rand, the JSE crept ahead with a return of 16.5% versus 10.2% for the S&P500.

So what happened?

It would be trite to say that President Jacob Zuma happened, but the destructive impact of the economic policies followed by the ANC happened to coincide with two global macro-economic trends, namely the collapse in the global commodity cycle and the resurrection of the US dollar as the supreme measure of exchange between countries. Despite all the anti-US rhetoric and talk of a US dollar collapse, the opposite has happened: the US dollar is currently at 14-year highs against every other measure of exchange, whether the British pound, the euro, the Japanese yen, oil, gold copper and even pork bellies.

Google how many so-called analysts forecast the collapse of the US dollar over the last number of years.

South Africa under Zuma not only chose the wrong friends (the Chinese and Russians), it also followed the wrong policies under the illusion that commodity prices only rise and never collapse.

Make no mistake. The previous regime regularly made the same mistakes in years gone by, leading to boom and bust cycles. History doesn’t repeat itself, but it rhymes, as they say.

The ANC government also seemed hell-bent on abandoning its long-established trading and investment partners from the West, suffering from the illusion that they will be replaced by foreign investment from China and Russia.

I recall a TV debate several years ago where this issue was discussed. Appearing on the programme was one Patrick Craven, former spokesman for Cosatu, who when asked who would replace the West as foreign investors replied with the glib response that was to become the standard government one on this issue: “The Chinese are ready and waiting to invest if the West pulls out,” was the smirking reply.

Well, the so-called West has been pulling out, quietly and without making a song and dance about it. I often wonder how much foreign investment has been scared off by our regular anti-Western (read former colonialist) propaganda. But the flood of money from the Chinese or the Russians has not been forthcoming.

The latest figures reflect that foreign direct investment (FDI) has dropped to 10-year lows. This doesn’t come as a surprise as the annual AP Kearney global survey has shown some two years ago that South Africa has completely dropped off the radar screen of the top 500 multinational companies in the world.

The Kearney survey doesn’t attract much attention in SA but it is an annual survey among the chief executives of the top 500 countries in the world to determine which countries they are considering for foreign investment. Until 2013 SA featured prominently on this list, but since then it has completely vanished. In short: we are not on the radar screen of foreign investors any more. This is a deeply disturbing trend as SA needs foreign capital and technological skills to grow its economy.

Scaring away foreign investors

Every year this country sends a very large (and costly) delegation to the World Economic Forum in Davos, Switzerland. And every year we hear the same platitudes that “South Africa is open for foreign investment”. But that foreign investment is simply not forthcoming.

Why is that?

Visa regulations. Affirmative action. BBBEE targets. Corruption. State capture. Lack of corporate governance. Collapsing municipal infrastructure. Anti-white rethoric. Uncertainty about mining rights.

Take your pick.

Today the coffers are empty; very little was put away in the good times. Instead, wages and salaries of the government sector were boosted way ahead of inflation to stifle any rising discontent in the ranks. Next month’s annual budget will most probably reveal the full extent of the empty coffers.

Local investors high and dry

Spare a thought too for the local investor who elected not to invest some money offshore five years ago. In global terms, investors who have no or very little offshore exposure have suffered a very sharp drop in their global purchasing power. Don’t believe me? Just check out your latest medical aid premiums to see what I mean. Much of that increase is due to the sharp decline in the currency against the US dollar over the past five years and more. No more overseas holidays for you. It’s going to be East London rather than London for a while, I’m afraid.

The local investment community has done a very good job convincing investors that the JSE Top 40 index gives ample offshore diversification and that no further investments should be considered. I have written about this before and warned that even if you are an ardent believer in index investing, the JSE Top 40 index is the wrong index for you. If you consider yourself a global citizen with global investment objectives, then you should be investing in the S&P 500 index. The cheapest one is probably the Vanguard S&P 500 index fund, which can be had for an annual fee of 0.19% per annum.

While the JSE Top 40 has returned a creditable 84% over five years, it pales into insignificance when compared with the rand returns of the S&P 500, which produced a total return of 225% over the same period in rand terms. On an annual basis the respective returns were 13% for the JSE versus 27% for the S&P500. Despite the drop over the past year, my biotechs have returned more than 30% per annum since I moved some money offshore. A truly life-altering decision for me, that is.

In short, rand returns in the US stock market have been more than double that of an investment in the local, comparative index.

Investors who acted on the good advice to diversify and invest in other regions of the world have been well rewarded.

At least the JSE Top 40 has given investors some protection against inflation, even though this protection has been minimal over the past one, two and three years.

Spare a thought therefore for investors who stuck with a “local is lekker” portfolio in recent years … that is, local residential property, cash and fixed deposits. Such investors have suffered a dramatic decline in their living standard and global purchasing power.

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

Part two on the performance of the JSE against the S&P500 will be published on Moneyweb tomorrow.

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