Focus on the South African economy and investments

Over the last year we have mentioned in our writings that South African shares should recover from a very low base and that technology stocks in the USA are expensive and could come down a bit. In our blog a month ago (9 February), we mentioned how fund managers saw the potential in South African companies and that we could see some good returns from them.

All of this is playing out nicely and the SA All Share index is up 16% compared to the Nasdaq, only up 4%. The FAANG stocks took a tumble over the last few weeks and are trading well below their all-time highs: Apple -15%, Facebook -10%, Alphabet -3.6%, Amazon -11%, Netflix -13.6%.

The question now is: Can this last or should we bring some of our offshore investments back to South Africa?

The correct answer will be different for every investor but as a start we have to consider the following facts regarding investing in South Africa:

  • Rating agencies are still not convinced by the latest budget presented by Tito Mboweni and are still leaning toward another credit downgrade.
  • We still have one of the highest real long-term interest rates relative to other emerging economies, indicating the doubtful outlook from international investors.
  • Our government debt-servicing cost is still unsustainably high.
  • Our government is still paying one of the highest percentages of GDP to public servants (14.8%), which can be compared to countries like Denmark and Norway.
  • Our debt to GDP will result in a debt default if not addressed urgently.
  • Our government is still spending more than it gets from taxes, and our tax base is emigrating.
  • Our personal income tax is one of the highest, and can be compared with the UK, Germany and Norway.
  • 14% of taxpayers pay 70% of income tax.
  • The Covid-19 vaccine rollout is desperately slow.
  • Eskom is still switching off our lights every now and then.

Once again we have to take a step back and look at the broader picture. If our government does not address the massive structural problems we are facing in South Africa, you definitely do not want any money invested in South Africa. The reason for this is the fact that the risk-adjusted return will be much better in a stronger economy like the USA. The rand will weaken substantially against the US$ which means that even if you keep your money in dollar cash, your return when converting to rand will still be substantial. But if government can solve our problems, or even just start to do so, investing in South African companies or holding a shorter-term cash requirement in rands is not such a bad option.

We stick to our guns when we advise clients to make a clear distinction between shorter-term and longer-term investments. Have enough SA cash, SA bonds and even SA equities for the next 7 years’ cashflow requirements but have your 8+ years’ funds predominantly in international equities. Take some profits when there is a good run to re-balance your weightings and do not be afraid to get back into equities when there is a sharp pullback.

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