Why foreigners are fleeing our market

Magnus Heystek

There’s an old saying in shipping circles that when the rats start jumping overboard you shouldn’t question why: just follow them and do the same. They probably know something you don’t.

Foreign investors in the local equity and bond markets have seemingly been acting like proverbial rats aboard the good ship SS South Africa: they have been selling in their droves and in the billions of rand. Should we as local investors take note and be worried?

Or should we, as some are prone to do, say good riddance and goodbye.
The truth is likely to be somewhere in the middle.

Many foreign investors were not long-term investors in the first place (are they ever?).
When the going was good and the commodity cycle was on the up and up (2003-2011), money was pouring into the country, artificially strengthening the currency and our foreign exchange coffers. Portfolio flows all over the world have the same in common: they don’t really invest in bricks and mortar and don’t, directly at least, create new jobs and tax revenues for their hosts.

The tide has now turned with a vengeance and money has been pouring out of the country in recent months. More than R263 billion over the past 15 months according to some reports, and the reasons are not very hard to find.
The sharp drop in the currency over the past number of years as well as the poor performance of our local market has all but wiped out any returns to foreign investors in general.

Over the past five years the US dollar-return for foreign investors has been zero. Nothing. Nada. Zilch.
Let me say that again. Had you invested $1 million into the SA equity market 5 years ago and you cashed out today, you will take back less than you had put in.
Compare this to the USD returns earned over the same period of time elsewhere in the world. They ranged from 50% globally and more than 80% in the S&P 500 Index.

And don’t think that you as a South African investor have escaped this carnage. You’ve had exactly the same returns. If you believe, like I do, that you should try and price your assets and wealth in US dollars, then you would have reflected no real increase in your global wealth over five years. Add in the 50% drop in USD terms of your residential property, and it doesn’t take a genius to work out that we have all become very poor — globally speaking — over the past five years and more.

Don’t believe me? Then pop down to your local Apple or Samsung store and buy any one of those fantastic imported items they stock there and check the latest eye-watering prices.
I did that last week, to purchase not one but two Apple iMacs for kids at university and I was gob-smacked at being charged R35 000 a piece. And then I thought mountain biking equipment was expensive.

The problem is these items are all priced in US dollars but you earn in rand. And the only way you can protect yourself against this is to either earn in US dollars, which very few of us do, or invest in USD, which we all can but not necessarily do. There is also an institutional bias against this kind of advice.
Thanks goodness I had the good fortune to invest the bulk of my liquid assets into USD-based portfolios more than five years ago, so it softened the blow to the solar plexus when it came to paying for the Apple Macs. But only a little….

While the local investment market still shows a positive return one over five and three years (barely), you’ve lost money over one and two years, even in rand terms.
This column is not about advising you to take money offshore or invest in offshore-based funds in South Africa. If you haven’t worked this out for yourself yet, you probably never will.

I’ve taken some flak from Moneyweb readers from time to time about my predilection for investing in the US biotechnology sector, especially when the market dropped by almost 35% from its peak in July last year. It took some courage to hold my position and to even add to it more recently. This sector, which has returned 20% per annum in USD terms over 5 years (35 % in rand terms) has been the best performing sector in the world over that period of time.
This column is to warn you that the offshore allowance up to R10 million per individual per year is probably earmarked for the scrap-heap in the near future.

We seem to forget that this offshore allowance (plus the rand swap allowance of the large investment institutions) is still controlled by foreign exchange rules and regulations. Forex-controls can (and most probably will) be reintroduced at any given time as they essentially are still in place. I am not a betting man but will wager a fiver that this will happen, sooner rather than later, especially if Zuma and his cronies get their hands on the Treasury.

From the beginning of the year the ANC under President Jacob Zuma has embarked on his journey of “radical economic transition” which at this early stage talks about land occupation with compensation and a dramatic restructuring of the economy allegedly controlled by “white monopoly capital”.
More extreme measures are in the pipeline as Zuma gets increasingly desperate about his flailing grip on power. Today there is very little difference between the EFF and the ANC and a potential merge of the two parties cannot be ruled out.

The ANC knows full well that if it really embarks on this journey, more money will flow out of the country. Under those circumstances it would be foolish to leave the forex gates open.
And then there is still the potential downgrade by one or more of the foreign credit ratings agencies. While the news flow around this issue has dissipated somewhat in recent weeks, the danger of a credit downgrade has not gone away. Far from it. A downgrade will just hasten the scrapping of the offshore investment allowance, I feel.

In ANC circles the issues of foreign exchange (and the reduction or scrapping in the offshore investment allowance) frequently comes up for discussion. Prof Patrick Bond from the University of the Witwatersrand economics department and a leading light in the world of ANC economic thinking has long advanced this idea, and so have others.

The feeling is that the outflow of capital in terms of this allowance (R70 billion last year I believe) is white monopoly capital fleeing the country and should be stopped.
Should that happen, will there really be no floor as to how far the rand can fall.
*Magnus Heystek is investment strategist at Brenthurst Wealth. He can be contacted at magnus@heystek.co.za for ideas and suggestions.