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Don’t forget recent investment lessons SA

Decusatio > Our Views > Don’t forget recent investment lessons SA

While there will be much euphoria around a Cyril Ramaphosa victory at the ANC elective congress yesterday, investors should not forget that the SA economy remains in a tough place and the current Rand strength may be a reason to in fact continue to diversify offshore.

If you are reading news headlines and social media this morning, you would not be blamed for basing your investment strategy on the Ramaphosa “New Deal” but we can’t sweep under the carpet a number of investment lessons we have learnt in the past three years.

  1. South African State Owned Enterprises (SOEs) are in absolute disarray with the likes of Denel, SAA, Eskom and the SABC all battling to just pay salaries at the moment. Most of theses SOEs are in negotiations with creditors to ease cash-flow constraints and have approached National Treasury for various “bail-out” packages.
  2. The state of our SOEs remains a major concern for ratings agencies, a concern which is likely to be exacerbated by the pronouncement of “free” education by outgoing ANC President Jacob Zuma.
  3. To address this funding shortfall, government has made a lot of noise around the concept of “prescribed assets” – forcing pension funds and retirement vehicles to invest in “developmental assets” (struggling SOEs)
  4. These SOEs are major employers in South Africa and will be expected to cut headcounts and implement austerity measures – contributing to chronically high unemployment in the country.
  5. While growth rates are notoriously hard to predict, the general consensus is that the SA economy will not grow by more than 2% in either 2018 or 2019. These levels of growth will not make a dent in the current unemployment figures.
  6. Shares on the JSE have not done particularly well over the past 3 to 5 years and while 2017 saw something of a rally, much of this was driven by Naspers and Richemont.

To highlight this last point, I have mapped the JSE (Orange), the S&P500 (Blue) and the German Dax (Red) against eachother for the year-to-date:

As you can see, the 3 bourses all started in roughly the same place and will probably end the year with about the same investment return.

However if we overlay Naspers (bright green) and Richemont (darker green) over the same graph, we realise that much of the JSE performance has been delivered by a Chinese internet stock and a Swiss luxury goods business: