Desperate local investors look offshore
Poor returns, gloomy economic outlook hit investment in SA Inc
● Investment managers are reporting sharp increases in the number of South Africans seeking offshore investments as poor returns from SA Inc stocks on the JSE over the past five years and the country’s gloomy economic prospects weigh on sentiment.
Watershed events such as Nenegate, when Nhlanhla Nene was sacked as finance minister by former president Jacob Zuma at the end of 2015, and rhetoric from some political parties have made investors wary about investing locally, they say.
The EFF, for instance, has often called for key sectors of the economy such as banking and mining to be nationalised.
The government’s handling of lockdown and the continuing debate about instituting prescribed assets for pension funds have also fuelled the drive offshore. As has the fact that the local investment universe has shrunk in the past 20 years from 668 in 1999, with 341 as of October 8 2020.
Vestact portfolio manager Michael Treherne says that, driven by clientswanting US trading accounts, the group’s business is now 85% focused on American shares. The strong US focus is a “complete 180 [degrees]” from 2013, when he first started at Vestact when it had about R1.7bn under management, with only about a 15% of its investment in American shares.
“We are now in a position where we have over $300m [about R5bn] offshore and only about R650m or R700m locally.”
In 2013, Vestact was opening local accounts for investors “every other day”; now “it’s a lot if we open one local account in a month”. Every month it closes about five local accounts and opens about 16 US accounts for South African investors, who typically have a minimum of about R450,000 to invest.
The majority of clients are “in their 40s and 50s, where they are at the peak of their careers and their children are now out of the house”.
Others are seeing a similar trend. Charles Savage, CEO of JSE-listed Purple Group, which owns 70% of EasyEquities, one of SA’s biggest online share-buying platforms, says that over the past 12 months about 22,000 EasyEquities investors took about $45m offshore compared with the same period a year before, when about 5,000 investors invested $12m offshore.
Treherne says the big event that triggered the negative attitude to South African stocks was Nenegate. “SA was always highly regarded internationally because of the independence of our financial system. As soon as you start playing with finance ministers, international investors say hang on. We could have come back from it [Nenegate] if we had had GDP growth.”
Treherne says unintentionally the EFF has perhaps been Vestact’s “greatest marketing asset” because whenever the party makes bold political statements, Vestact sees an influx of new customers as well as existing clients wanting to open offshore accounts.
Abdallah Moosa, a planner and actuary at Fiscal Private Client Services, says rand weakness and comments by politicians that people believe will negatively affect their financial and personal security drive another wave of requests to invest offshore.
But South African companies are themselves a problem, with many having used debt to make acquisitions during periods of strong economic growth. Treherne says: “As soon as you go from high GDP growth to zero you get caught with your pants down.
“If you look at the performance of the JSE over the last five years, and you take Naspers out of the mix, it’s been absolutely terrible,” he says.
In the past five years the JSE’s all share index has gone up about 4.6%. Over the same period the S&P 500 in the US is about 72% higher in dollar terms.
Gary Cahn, head of stockbroking at Cratos Asset Management, says from a “portfolio management point of view” it is far easier to put together a “sufficiently diversified” portfolio of quality companies when “selecting from the offshore universe”.
Demand for global stocks has resulted in products being brought to market to cater for investors who don’t have sizeable sums to invest.
This month, First National Bank listed 10 exchange-traded notes on the JSE that will enable individual consumers and institutional investors in SA to buy into the likes of Amazon, Facebook, Microsoft, Netflix, Tesla, Apple, Coca-Cola and Alphabet, which owns Google, for “from as little as R10”.
But as an increasing number of South African investors clamour for offshore opportunities, Allan Gray, one of SA’s largest fund managers with about R500bn under management, says it is important to be circumspect as the US and UK also carry risks, for instance both countries carry a lot more debt than SA.
Jacques Plaut, Allan Gray portfolio manager, says: “When there is an epidemic or pessimism and everyone is rushing for the doors, my instinct is to question that and ask could it work out differently or could people maybe be focusing on a different issue in a year’s time?”
Allan Gray acknowledges SA’s problems will be “extremely difficult to overcome” but says JSE stocks must be considered case by case. “You have to be dispassionate. If the crowds are extremely fearful of something, don’t sell SA Inc without evaluating the stocks on the facts and the merits of each case,” says Plaut.
He says a lot of shares on the JSE don’t depend on the South African economy and will benefit from a weak rand, such as Sasol, or platinum and gold miners.
And some listed companies with exclusive exposure to SA will do well in most scenarios anyway. Despite the weak macro environment, Capitec’s share price has increased fivefold since the beginning of 2104.
The performance of the JSE over the past five years [has] been absolutely terrible Michael Treherne
Vestact portfolio manager