SA investors are in deep denial, should invest 80% offshore

This is despite the massive underperformance of JSE indices, falling real house prices and a future that looks equally bleak for those trying to grow or even just preserve their wealth.

It really is time for South Africans to invest with their heads, not their hearts.

We are advising our clients to invest as much of their money as they can elsewhere in the world. We do not see a single reason why people should keep any discretionary investable funds in the country.

People should keep their house and their pension as their only assets here if they live in South Africa. But the rest should be invested in hard currency assets that will protect their buying power, which has already been deeply eroded.

South Africa is now in its longest downward business cycle since the end of World War 2 and the performance of its assets continue to reflect this unfortunate reality. The rand has lost a third of its value against the US dollar in the past five years and remains under pressure. Investors in South African equities have lagged developed markets while house prices have increased at less than half the rate of inflation for several years.

The S&P 500, for example, has delivered a total return of nearly 100% in the past five years, the Nasdaq 147% and even the 10-year Treasury bond a return of 12%. The total return in rands for the SA general equity market over the same period is just nudging 30% versus a 131% total return of the MSCI World Index, also in rands. But the SA general equity market return rebased to US dollars is down 13%. Many popular equity funds are also showing negative dollar returns over five years.

We have experienced a sharp uptick in the numbers of clients who are now very worried about the future of South Africa and want to protect their wealth for their families. Our clients are typically higher-net-worth individuals who have made money from their own businesses or have risen to C-suite level in the corporate world.

It is worrying that despite the fact that we are already in a recession, South Africa is marching on with plans to expropriate land without compensation and carrying on with an economic and industrial policy that will only make things worse for the country. We are potentially facing further rating downgrades, a bailout and sustained high unemployment.

But many South Africans are in a ‘daydreaming denial’ instead of taking hard action.

Much of the advice we see out there does not reflect the reality of South Africa today. For instance, it is a long-held belief that local investors should hold about 30% of their assets offshore. Some braver souls have advocated for that to be upped to 50%. But being completely independent, we believe it should be 80%, perhaps more, if practical. We don’t think people should just close their eyes and keep investing in the local market as they have always done.

We are banging the table on this one and saying get your money out.

We are advising people to put money in the US despite many predictions that the market there has run so hard a steep correction is imminent.

The US is the most dynamic, innovative economy in the world and represents about 41% of the world’s overall stock market capitalisation. And despite current volatility, for the longer-term investor we think being exposed to many of the world’s best companies is a far better play than investing in the JSE. The JSE does of course have many companies with offshore earnings but it is still an investment in South Africa; the money is still in the country.

We also favour property investment in select cities in Europe such as Barcelona and Berlin, which have the potential for capital appreciation and attractive yields of between 6% and 8% from rental income.

South Africans should of course hold sufficient cash in South Africa to meet expenses and liabilities and manage short-term liquidity requirements.

Ian Edwards, Africa regional manager of Austen Morris Associates

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