Risk versus Reward

A basic principle of investment is that you should be rewarded for the risk you take. Why would anyone invest in something where they get a lower return and take on more risk than in another investment elsewhere? South Africa used to be a country where the risk vs. reward ratio for investment was favourable. Because of the unstable political and economic circumstances in South Africa, uncertainty always lingered in the background and as an investor you were rewarded for this risk by getting higher returns on your bond and equity exposure. But over the past decade things have changed substantially. One of the biggest negatives for South Africa has been the worldwide investment shift away from resources into services and technological innovation.

South Africa used to depend on its mineral wealth and the commodity super cycle driven by China for GDP growth and employment. Then two things happened: China’s demand for resources declined; and our mines became less productive and thus more expensive than our competitors in Australia, South America, Russia and the rest of Africa. Our Socialist government with its very rigid labour laws and the depth at which we needed to extract the ore, already squeezed the margins and then the corruption set in, making us lose out on even the little trade that was still going on.

Currently South Africa is on the cusp of a complete downgrade to junk status on our debt, as well as an IMF bailout which will confirm the point of no return for our economy standing on its own two legs. The only thing that can turn this ship around is a very severe pro-business policy from government where the labour laws are drastically relaxed, making it easier for businesses to hire and fire; plus a material cut in taxes (like in the USA recently), making it more attractive for foreign companies to do business here and enabling the SA consumer to start spending again. Last but not least we need the privatisation of bankrupt SOEs like Eskom, Denel, SAA, SABC, PRASA, etc.

Unfortunately our government is of the opinion that raising taxes; bailing out the SOEs; nationalising land without compensation; calling business “white monopoly capital”; forming commissions to debate rather than implement; and sticking to a failed initiative called BEE (which only enriched the politically connected); remain the best path forward.

As a South African investor your options are limited if you cannot follow the thousands of highly educated, hard-working citizens heading for other countries where their efforts are appreciated and their taxes give them something in return. The best those of us who stay here can do, is to externalise our wealth by investing in these far-off countries and companies.

At JWR we have watched this landscape unfold and have increased our exposure to international markets gradually. As an investor you have to understand that we do not propagate an immediate externalisation of all your wealth, but by taking the rand and the price you pay for any new assets into consideration, we do believe that the risk/return ratio in South Africa is not favourable at the moment.

 

 

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