Investing

One of the questions we are most frequently asked by clients is whether now is a good time to convert their rands into dollars to invest offshore. There are two big factors to consider when dealing with this question, namely:

• What is the conversion ratio between the rand and the dollar?
• Is it a good time to invest in offshore assets?

In answering the first question it is important to note that currency fluctuations are unpredictable and can impact returns over the shorter term. If you convert your rands into dollars and the next day the rand strengthens against the dollar, you will have an immediate currency loss on your investment if you should convert it back the same day. Taking an extract from one of Anchor Capital’s recent newsletters, we learn the following:
“Analysing the rolling one-year performance of the rand from January 2000 to February 2024 reveals that the local unit depreciated relative to the US dollar on approximately 67% of the measured days over one year. This likelihood increases significantly over longer periods, reaching 77% and 82% over three- and five-year rolling periods, respectively. These statistics suggest that, historically, the rand has been more likely to weaken than strengthen, reinforcing the notion that history is on your side when externalising your funds”.

It is clear that one should not wait for the rand to strengthen if your aim is to invest in offshore assets for the longer term, unless there has been a dramatic movement in the currency due to a clearly identifiable event, in which case one could wait for a normalization in currency levels.

The answer to the second question is of more importance. We have to start off by saying that it is very common for international assets like bonds and equities to increase in value at the same time that the rand strengthens against the dollar. So even if you do decide to wait for the rand to get stronger before you buy dollars, and you are lucky enough for this to happen, you will more than likely pay more for your bonds and shares once you do convert your rands into dollars. The decision to invest offshore should be based not on the level of the currency, but on the longer-term risk/reward you can get.

Over the last decade it has definitely been better to have been invested offshore, not only because the rand has weakened against the dollar, but also because offshore equities have performed better than local equities. Currently we believe that although there are companies in our local market that do offer value, the uncertainties facing our political environment cannot be ignored. We believe that there are many international companies offering similar or even better valuations than those available in South Africa, but in countries where the economic and political environments are much more stable and predictable than our own.

When deciding where to invest your funds, currency should not play a major role. It is more important to decide on the duration of your investment and the relative valuation of potential investments. If you live in South Africa, shorter-term investments and cash should be held in rands and only money earmarked for longer-term purposes should be invested offshore. For the time being, investing in American companies is still a good idea but countries like India, Indonesia, Vietnam and Korea do offer better value in some cases, with loads of potential.

Before investing offshore, you have to decide whether you want to invest directly offshore by using your discretionary tax allowance, or whether you want to invest indirectly by using a rand-denominated offshore fund. One of the big advantages of investing directly offshore is the fact that you do not pay tax on the currency gain over the period of the investment. Let us illustrate with an example:

You invest R100 000 when the dollar/rand exchange rate is $1/R10 directly into the XYZ world equity unit trust fund when the fund trades at $1 per unit. So you convert your R100 000 into $10 000 and buy 10 000 units, ending up with an investment of $10 000. Ten years later you sell your XYZ world equity fund investment when the dollar/rand trades at $1/R20 and the value per unit has increased to $5, realizing $50 000. When you convert you investment back into rand you get R1 000 000 ($50 000 x R20)

Because you made a direct dollar investment, you will be taxed on the dollar gain translated back into rands on date of sale. So the dollar gain was $50 000 – $10 000 = $40 000 and the $/R exchange rate was $1/R20 = R800 000 profit.

If you invested in the rand-denominated XYZ world equity unit trust fund, you will pay tax on the profit made from the fund as well as the currency profit. You invested R100 000 and sell for R1 000 000 so you made R900 000 taxable profit.

At the end of the day, with the current 40% inclusion rate of any capital gains made and a tax rate of 45%, you can pay up to R18 000 more in taxes just because you didn’t invest directly offshore.

It is important to note that due to personal circumstances, it might not be in your best interest to invest directly offshore and that the investment via a rand-denominated fund might suit you better. The ultimate goal is to get the offshore exposure if your personal investment plan requires it, no matter the vehicle.

We all know by now that different asset classes provide different benefits at different times. If we look at the accompanying graph, we can see that the longer-term winner has been the S&P500 index and cash the loser. It is also worth noting that all these asset classes, except for cash, have experienced periods of underperformance. Most recently we have seen some very positive moves in equities and gold, and some disappointing performances from bonds. If we want reasons for these moves, we have to look at historical and current developments. We usually look at graphs of historical interest rates, valuations, debt levels, inflation levels, GDP growth rates, unemployment levels and a thousand other indicators. What we sometimes neglect to take into consideration, are future developments.

There are times in our lives when something happens that negate all these historical data we analyze for answers because it creates an opaque, yet exceptionally powerful potential. We are at one of these inflection points with the birth of Artificial Intelligence. AI will have such a profound impact on our lives over the next decade or two, that it will necessitate the adjustment of historical data to create a new entry level for measurements going forward. Before we go into too much detail about AI, we have to acknowledge that we are not experts on the subject but due to the impact it is having on the world around us, we have to think about it deeply. What we do know, is that a lot of people will be replaced by AI, and a lot of new job opportunities will be created. Consider this simple example: the efficiencies of using AI will replace a 5-day workweek with a 4-day workweek. People will now have more leisure time, which will benefit the hospitality industry. Hotels, airlines, online travel sites, sporting events, music festivals and many more businesses will thrive, and any business supporting these will be caught up in the surge.

The point we are trying to make is that just relying on historical data to make future predictions can be very dangerous. If you don’t get the feeling that things are changing at an accelerated speed, then you just have to wait a little bit because it is going to catch up with you soon. Sometimes we just can’t see the potential in something. If we take Instagram as example: in 2012 Facebook (META) bought this video-sharing app for $1 billion. Personally I thought they had lost their way, because how were they going to make money with an app where people just shared a little video clip? Well, the answer, of course, was online advertising – in 2021 Instagram made $32.4 billion.

To take this discussion full circle, let’s get back to asset class returns. If you listen to market commentators, you will always get two different points of view, both of which are backed up by very solid historical data. This, of course, creates a market with some people who want to sell at the same time someone wants to buy. Over the shorter term these different opinions about things like inflation, interest rates, equity valuations, bond prices, geopolitical tensions, the level of your currency, the potential for GDP growth, unemployment and many more will prove one opinion to be right and the other to be wrong. But these small victories will not win you the war because things can change very quickly.

As individual investors the war we have to win is the ability to fund our required lifestyles with the growth generated by our investments for the rest of our lives. The only way to do this is to get the paradigm-shifting calls right. So what are those you might ask? Well, if we take some examples, in 1886 it was whether to invest in horses or the internal combustion engine; in 2007 it was whether to invest in the Apple iPhone or in Kodak film; and in 2023 it was whether to invest in companies leading the AI race like Nivida, Microsoft, Meta, Alphabet and Amazon.

Perhaps we should worry less about the valuation of big tech companies in the USA, or the falling profitability of Apple and Tesla in China, or even when interest rates are going to come down and whether we will see a mild recession soon; and rather worry about what will happen if the USA can’t repay their massive debt because the dollar has lost its status as the number one reserve currency, or if the rand depreciates with 100% due to bad policy decisions made by a desperate ANC government.

The bad news is that the future is uncertain, the good news is that it has always been. Most of the petty potential problems we fixate on will be solved by human ingenuity and most of the major disasters we have endured have made us stronger. We believe this will be the case going forward as well.

The world is a board game and we as normal citizens are not making the rules. As we have stated before, we cannot advise on or manage money based on the expectation that a calamitous event will occur. The most we can do as advisors, is to take the current situation and the most likely unfolding of potential unknown scenarios into account when structuring your financial roadmap. Charlie Munger, vice-chairman of Berkshire Hathaway and one of the wisest investors of the last century, passed away on Tuesday, November 28, at the age of 99. He often said that it is futile to make any investing decision based on forecasts of future results. That is an admission of ignorance, an understanding that the future is so unpredictable that it’s not worth even trying to predict it.

Being ignorant about the potential of our current financial system crumbling like a house of cards, prevents us from living in fear and squandering this one beautiful life we have. These potential threats to our immensely complex, man-made financial systems, can take the form of either natural disasters; or wrong or criminal decisions by the people who make the rules for this board game we live in (our governments); or a combination of the two, as we got a taste of with Covid in 2020.

If you are interested in the potential dystopian future that can result from an implosion of our financial systems, feel free to read books like Currency Wars by James Rickards; Endgame by John Mauldin and The Mandibles by Lionel Shriver. The main potential triggers for such an implosion will be too much debt and people losing trust in a major currency like the US$. As recently as 2008, we saw what too much debt can do to the world economies, when the global financial crisis rocked our world. Simplistically, what happened was that everything was going so well that people borrowed huge amounts of money from their banks to build houses. The banks created financial instruments called mortgage-backed securities and sold them to investors as a low-risk investment. When people couldn’t repay their mortgages and so many houses came on the market that valuations dropped, the proverbial bubble burst, and the world went into recession. Our whole financial system has little collateral backing it up. It is based on sentiment and promises.

The same happens to major companies every now and then. Just look at the disaster at Aspen and Tongaat when their debt became unbearable. Even on a micro scale you will see many households going under due to excessive borrowing. Another risk to our current investment stability is the strength of the US$. Because the US$ is the currency in which the majority of world trade is conducted, any instability or excessive weakening of the dollar can lead to spectacular fireworks. The USA’s debt is higher than its income and although it has always been high, the current level of 123% debt to GDP, is the highest it has been in a long time – and they continue to increase it. So if the US$ should weaken significantly in case, for example, BRICS succeeds in creating a new reserve currency and selling their US$ holdings in favour of the new currency, all the investments we have in US$ will collapse and our little dystopian story will come to fruition.

So at the end of the day we cannot invest based on what-if scenarios. Should we do so, we would have only a box of gold on an off-the-grid, self-sufficient smallholding somewhere in the bush, because anything else could in theory be wiped out overnight. The good news is that financial disasters are not that uncommon and we even have names for them, namely depressions and recessions. What we have learned from them is that the best way to avoid a complete permanent loss of capital when they happen, is to be well-diversified and to never allow yourself to be stretched too thin when it comes to your debt to income ratio.

In a recent Vestact newsletter, reference was made to a study by the Schwab Center for Financial Research which touches on one of the most important factors influencing your investment returns, i.e. when to start investing.
Giving full credit to Schwab, and Vestact for picking up on this study, we provide you with the following summary of the Schwab study:

We ran the numbers on market timing. Our findings? There’s a high cost to waiting for the best entry point.

Imagine for a moment that you’ve just received a year-end bonus or income tax refund. You’re not sure whether to invest now or wait. After all, the market recently hit an all-time high. Now imagine that you face this kind of decision every year—sometimes in up markets, other times in downturns. Is there a good rule of thumb to follow? Our research shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing. And because timing the market perfectly is nearly impossible, the best strategy for most of us is not to try to market-time at all. Instead, make a plan and invest as soon as possible.

But don’t take our word for it. Consider our research on the performance of five hypothetical long-term investors following very different investment strategies. Each received $2,000 at the beginning of every year for the 20 years ending in 2022 and left the money in the stock market, as represented by the S&P 500^® Index. (While we recommend diversifying your portfolio with a mix of assets appropriate for your goals and risk tolerance, we’re focusing on stocks to illustrate the impact of market timing.) Check out how they fared:

1. Peter Perfect was a perfect market timer. He had incredible skill (or luck) and was able to place his $2,000 into the market every year at the lowest closing point.
2. Ashley Action took a simple, consistent approach: Each year, once she received her cash, she invested her $2,000 in the market on the first trading day of the year.
3. Matthew Monthly divided his annual $2,000 allotment into 12 equal portions, which he invested at the beginning of each month. 
4. Rosie Rotten had incredibly poor timing—or perhaps terribly bad luck: She invested her $2,000 each year at the market’s peak
5. Larry Linger left his money in cash investments (using Treasury bills as a proxy) every year and never got around to investing in stocks at all. 

Naturally, the best results belonged to Peter, who waited and timed his annual investment perfectly: He accumulated $138,044. But the study’s most stunning findings concern Ashley, who came in second with $127,506—only $10,537 less than Peter Perfect. This relatively small difference is especially surprising considering that Ashley had simply put her money to work as soon as she received it each year—without any pretence of market timing.

 

Rosie Rotten’s results also proved surprisingly encouraging. While her poor timing left her $15,214 short of Ashley (who didn’t try timing investments), Rosie still earned about three times what she would have if she hadn’t invested in the market at all.

And what of Larry Linger, the procrastinator who kept waiting for a better opportunity to buy stocks—and then didn’t buy at all? He fared worst of all, with only $43,948. His biggest worry had been investing at a market high. Ironically, had he done that each year, he would have earned far more over the 20-year period.

We also looked at all possible 30-, 40- and 50-year time periods, starting in 1926. If you don’t count the few instances when investing immediately swapped places with dollar-cost averaging, all time periods followed the same pattern. In every 30-, 40- and 50-year period, perfect timing was first, followed by investing immediately or dollar-cost averaging, bad timing and, finally, never buying stocks.

In Brief:

• Given the difficulty of timing the market, the most realistic strategy for the majority of investors would be to invest in stocks immediately.
• Procrastination can be worse than bad timing. Long term, it’s almost always better to invest in stocks—even at the worst time each year—than not to invest at all.
• Dollar-cost averaging is a good plan if you’re prone to regret after a large investment has a short-term drop, or if you like the discipline of investing small amounts as you earn them.
• Lastly, it’s important to note that there’s no guarantee you’ll make money through investing in stocks. For instance, there’s always a chance we could enter another period like the 1960s through early 1980s.

There are two attention-grabbing wars being fought at the moment, with the Israel/Gaza conflict just over a week old. If we put aside our own thoughts about these wars and other major events in history, and just look at the impact they have on our investments, we shall see that most of these events have a negative impact over the shorter term, but even twelve months later this impact has already become minor compared to other influences.

The way our governments manage the economy can be much more damaging to our investments, and the damage can also last longer.

If we look at the United States we see that their debt is reaching epic proportions.

The interesting thing about debt is that it can be good up to a certain point, but like everything in life, too much of a good thing is bad. Another problem in the US is that their mortgage rate is 8.09%, the highest it has been in 23 years.

So, people who want to buy a house now cannot afford it, which forces them to pay higher rental rates. This keeps inflation high, which in turn keeps interest rates high. The upside for the US is that their economy is strong, unemployment is low and the consumer is still liquid. If you are a betting person, do not bet against their getting out of their debt problem.

South Africa, on the other hand, is suffering. Since around 2015, foreigners have been selling our stocks and bonds.

We all know that our unemployment is out of control (60% youth unemployment); our infrastructure is collapsing; and our government is siding with the likes of Russia, Palestine and China. On the positive side, our shares are very cheap with a P/E ratio of 8.8 compared to the world index P/E ratio of 15.4.

It is interesting to note that if you compare the share performance of the biggest emerging economy, China, with that of India, the latter has outperformed over the last three years.

Most investors trust the managers of the funds they invest in to make the right decisions. It is good to see that some fund managers have been increasing the international exposure of their funds over recent years. One of these funds actually have 43% local vs 37% offshore; compared to 70% local vs 13% offshore in 2007.

It feels as if life is more intense now than twenty years ago. There are more people, more traffic, more events and more news. A constant stream of information flows through our mobile phones and every time we buy something, it is more expensive than the previous time. There might be an element of age involved. The older we get, the broader the spectrum of responsibilities. Another potential reason for our increased anxiety is social media. It is almost impossible to relax when your phone constantly updates you on the news around the world. Inevitably, the majority of the news is negative, and although it does not necessarily have a direct impact on your life, it still makes you worry.

The good news is that although we may think otherwise, people’s lives are actually getting better on average. Owing to advancements in medical technology, child mortality is much lower than just a few decades ago (see graph); your children will live to be a hundred years old, never develop cancer, and previously irreversible conditions like blindness will be cured. It is also a fact that many more people now live above the poverty line than a few decades ago.

Two of the most talked-about worrying factors currently are climate change and market volatility. Consider the fact, however, that the earth is actually overdue for another ice age; but thanks to the amount of carbon dioxide mankind’s activities have pumped into the atmosphere, we have actually avoided being frozen by now. Unfortunately, the fact that we are so good at causing global warming does upset our weather systems a bit. So perhaps we should do what we can to live in harmony with nature; but the future of our climate is determined by way bigger cosmic cycles than our human activity.

If we consider the much more manageable problem of market volatility, we have to take some comfort from the fact that what we are witnessing now, is not unusual. If we look at the S&P500 Index in the USA since 1928, we can see that there has been a period of negative returns (drawdowns) in every single year, but we have still had a positive close for the majority of them. The thing to do, is to stay calm. Take precautions and implement a plan. Then test your plan by going away for a couple of weeks to a place where you have no internet signal and little interaction with other people. If you come back relaxed and people tell you about the storms that washed away bridges and the markets that fell by 7%, but your house is still standing and your investments are still positive – stop worrying. If you have been affected by the chaos, then work on your plan.

Late one night, on August 15th, 1977, the Big Ear radio telescope in the USA picked up a strong narrowband radio signal on the frequency of 1420 megahertz. Astronomer Jerry R. Ehman discovered the anomaly a few days later while reviewing the recorded data. He was so impressed by the result that he circled on the computer printout the reading of the signal’s intensity, “6EQUJ5”, and wrote the comment “Wow!” beside it, leading to the event’s widely used name. The signal appeared to come from the direction of the constellation Sagittarius and bore the expected hallmarks of extraterrestrial origin.

The two most common instincts for humans and most animals when they encounter something unusual are to fight or to run away. It turned out that the “Wow!” signal made people run away and buy extra toilet paper.

It was a calm night on October 19th, 2017, when Robert Weryk, using the Pan-STARRS telescope at Haleakalā Observatory, Hawaii, observed a small object estimated to be between 100 and 1 000 metres long, with its width and thickness both estimated between 35 and 167 metres, enter our solar system from beyond the stars. It was the first interstellar object ever detected passing through the Solar System, and when the news exploded on the airwaves, people rushed out to buy extra toilet paper. This object was later called “Oumuamua”.

On 5th March 2020, it was reported in South African news that a traveller returning from Italy tested positive for Covid-19. Within a space of 18 days, 402 cases were detected among people with no travel history. So naturally people rushed out to buy extra toilet paper.

The moral of these stories is that when something unusual happens, human beings tend to panic first and then ask some questions later. It is very important for us as investors to know this, because in most cases, when people panic and sell every single share they own, it creates a buying opportunity for those people who choose to stand and fight rather than run away!

We are often told that when you buy a share, or some other investment that invests in shares, you have to just forget about it and let it grow over time. There is a lot of truth in this advice because shares as an asset class do increase in value over a longer period of time. There are, however, three very important points to consider with a view to reducing your risk and enhancing your returns over time.

The first point to consider is the concentration of your share investment. If you or your fund manager invests in only one or two shares, and one of those shares underperforms for whatever reason, you will have a very unfavourable return on your portfolio. So, if you bought these shares while they were doing well and locked them away, you would not notice a change in the environment that could potentially have a negative impact on your shares, and a share that once was a star, might turn into a dog. We have seen numerous examples of this, and just looking at the list of companies that currently dominate the world stage, compared to the companies that dominated twenty years ago, tells you this story. If, on the other hand, you have a portfolio or fund in which you have a variety of shares, the impact of one or two negative performances will not be so severe. The lesson to take away from this is that the more concentrated your investment, the more you need to pay attention.

The second point to consider is the impact of better returns on your portfolio over time. This is a point that invites a lot of argument in the “active versus passive” debate. If you decide to just invest in the broader market like the JSE All Share Index, the main driver of your investment performance will be the asset class as a whole, and not much thought has to go into the quality of the individual companies that make up that asset class. So if one or three of the companies in the Index should go out of business, you will still earn the average return of the remaining companies. If, however, you take a more active approach to the management of your portfolio, and not just invest in the Index, you can theoretically avoid those bad companies and concentrate more on the winners, resulting in a better return over time. It has been proven that it is not easy to outperform the Index over time and that is why a lot of investors decide to just invest in the Index; which will require no work from their side and also costs less when they use fund managers. But there are some fund managers that do outperform the Index over time, and the result can be quite profound. If, for example, you manage to outperform the Index by 1% over time, the compounding effect of this outperformance will be as follows, simplified to make it easy to understand: in the case of an investment of R1 million, your outperformance will be R101 000 after ten years; R249 000 after twenty years; and R441 000 after thirty years.

The third point we need to understand, is that combining the two previous points can result in a “Goldilocks portfolio”; where the number of shares are just right. If we have a portfolio where there are just the right number of shares to decrease the risk of a bad one impacting the returns too much; but time and compounding will do its work with a good one big enough to have a noticeable impact on the performance. Thus, at the end of the day, it is worth your while to pay attention to your investments. If you have a longer-term portfolio where you see a 1% or 2% average outperformance, in the good years and the bad years, remember that underneath it all your portfolio risk is less over the shorter term and over the longer term these small gains will pack a big punch.

Your personality plays a big role when it comes to how you invest your money, but when it comes to how you manage your investment risk, age should play that big role. Understanding the longer-term nature of the various assets you can invest in, is important when you construct your investment plan. As a general rule, investing in cash will provide you with a lower, yet stable return, and investing in equities will provide you with a higher, yet volatile return. The obvious result is that a more risk-averse person will prefer to invest in cash and a person that is more risk-tolerant will choose equities. These personality-driven investment choices can, however, have a dramatic impact on your investment performance over time.

When you are young and just starting out on your investment journey, you have very little. If you are a risk-averse investor, it will be very tempting to invest the little you have in cash, because losing it will be painful. But that will be the wrong choice. If the money you are putting away is truly for retirement purposes, you should invest it in something that will give you the highest return, and risk should play second fiddle. Let us, for the sake of argument, consider only equities as our high-risk investment option; and leave out the other high-risk options like investing in your education, your own business or property. The argument for investing in equities when you are young – even while accepting the possibility that you can lose it all – stems from the fact that even if you do lose it all, time is on your side to make it all back. It is also highly unlikely that you will lose it all permanently in a well-diversified equity portfolio. The upside of investing in a portfolio of equities, is the likelihood that over time, the compounding effect of the higher return you get, will obliterate any return you would have received in cash.

However, when you reach the age where your high-earning years are behind you and your investment portfolio becomes your main provider of monthly income, you have to make the switch to wealth preservation, rather than wealth creation. Chasing the highest return at any cost during this stage of your life can undo all the good you and your investments have done over your life and leave you destitute. Equities are unpredictable and even fantastic companies can stay depressed for long periods of time. The best thing to do during the time of your life when you rely on your investments for income, is to increase your diversification and provide cash liquidity for longer periods, so that shocks in the equity markets can be tolerated.

In summary, we can say that there are life stages to investing. You have to start early, and focus on getting rid of any debt. You have to concentrate on equities in your high-earning years and gradually increase the cash or cash equivalent portion of your portfolio as you grow older. Once you rely completely on your investments for your income needs, your portfolio should be well-diversified and sufficient cash should be available for long periods of market instability.

In a recent tweet by Karin Richards, she had this interesting wealth comparison graph (see below), showing how much you would need in net wealth to be among South Africa’s richest 1%. Knight Frank’s current model estimates this at $109 000. At today’s exchange rate, that would be R2,14 million. In 2021 this amount in SA stood at $180 000, or three times that of India, then at $60 000. India is now at $175 000. You can interpret these statistics any way you want to, but what stands out is that the average wealth base in South Africa is very low relative to some other countries, and that the base continues to drop. These figures are very selective and might even be inaccurate, but the comparison still makes for an interesting discussion.

Money does not automatically translate to happiness, of course. Every person living in Monaco is a dollar millionaire, but imagine the pressure of always having to live up to the neighbours’ latest extravagance!

What is of concern, however, is that money is the primary incentive in a capitalist system. Any hard worker who knows there is an opportunity to earn a very large bonus, will try to do just that little bit more. Capitalism is designed to reward overachievers and eliminate mediocrity.

So, when we look at the small amount of money you need to feature in the top 1% of South Africa’s richest, and the fact that the amount continues to drop, everything indicates that the average South African is not generating anything valuable enough to warrant a larger monetary reward than the previous year. In fact, they continue to offer society less than the previous year! The other rather obvious reason why the wealth base in South Africa continues to drop, is that large numbers of wealthy people emigrate.

So, once again we can turn this negative into a positive. Let all of us who remain in South Africa while the competition is emigrating, step up to the plate and become an overachiever!

After a very strong start to the year, with the JSE All Share Index outpacing even the strong US market, things have been going south for South African equities over the last few months. It is a situation where you just want to put your head in your hands to smother a scream. The problem with investing in domestic stocks is that, although the general sentiment towards equities is negative all over the world, we add to that our ability to score own goals every opportunity we get. We cannot judge the performance of some of the companies listed on our stock exchange against things that are happening in the rest of the world, or for the specific negative conditions in their business cycle; but when the local consumer-driven stocks are washed out, we know it is an internal problem.

Borrowing a graph from Traders Corner, we can see that assuming a $10,000 investment in each of a variety of domestic-focused stocks, we get the illustrated outcome (in USD). Only the Clicks group is close to giving you your money back. And if you were a foreign investor who converted your dollars into rands five years ago to buy into one of these companies on the JSE, you would have suffered a substantial currency loss. The problems we face in South Africa are numerous. We have to take into consideration that the cost of living and the cost of borrowing will rise because the country has been mismanaged for decades and a potential coalition government in 2024 will have a negative impact.

Companies operating in South Africa have seen their profits being negatively affected by the cost of diesel for their generators; the reality of South Africans dying from cholera because municipalities do not maintain the water infrastructure; and a potential stage 8 load shedding causing a loss of 50% of operating hours over any four-day period. Add to this the fact that the most important rail network running between Durban and Gauteng operates at only 25% of capacity; and the fact that we get our money from the USA and Europe but prefer to cosy up with Russia and China; and the outlook becomes pretty grim.

The questions we have to ask ourselves as investors are: can our government change; can Eskom be fixed; can the intervention of the private sector save us? The answer can never be an absolute “no”, so that brings us to the next question: have domestic-facing shares priced in all the bad news yet? The answer has to be that they probably have not, but we are closer to the bottom than the top unless we do become a Zimbabwe or a Sudan. I think most investors today are of the opinion that holding a bit more cash than necessary is prudent, and when the currency opportunities arise, rather invest the surplus cash into international equities than local.