South African Outlook Post the May 2019 Elections
Over the last year, in the run up to the 8 May 2019 general election, I have been asked regularly what I think about the future of South Africa. Of course, this question is heavily loaded, since most people are probably less interested in my views on the actual political outcomes per se, and rather more worried about the impact the election results may have on their money. Most investors have experienced pedestrian returns from their retirement portfolios over the past five years and many think this erosion of their nest egg, in real terms, is going to continue into perpetuity. For the record, I do not adhere to this line of thinking.
Seen in the context of nearly a decade of severe ANC misrule, rampant corruption and a deteriorating economic performance by South Africa Inc, this is an important question to consider. Research suggests that people across the South African social demographic spectrum are generally more fearful and less optimistic about the future.
Moreover, by all accounts the current wave of emigration washing over South Africa is huge. According to migration specialists, young, qualified professionals and skilled artisans are mobile and leaving our shores to deploy their skills in foreign economies in record numbers.
Some high-profile investment advisors have even been writing doomsday articles in the mainstream media suggesting that South Africans should liquidate their lifesavings and take all their money offshore, while they still have a chance to do so. The domestic backdrop creates the perfect environment for this type of misguided message (in my opinion) to take root and flourish.
To be honest, I have no clue what the actual election outcome is going to be – nobody does. However, as do most people, I have an opinion. In my evidence-based worldview, I strongly believe that the ANC will, under the leadership of President Ramaphosa, succeed in doing a little better than most analysts expect them to do, but overall secure less votes than in 2014.
I am fairly sure, notwithstanding their pretence of being the official opposition and government in waiting, the EFF will do only marginally better than in the last election, but worse than their marketing hype and Twitter account suggests they will.
I have some confidence in the view the DA will score a similar level of voter support to the last national elections. My final conclusion is that the collection of smaller political parties will increase their collective percentage of the overall national vote, as the mistreated electorate seeks new political avenues to express their dissatisfaction with the status quo.
The point is that my perspective and perception on the future (not just the 8 May election results) is not fact but opinion. An opinion heavily influenced by many factors including; one’s age, gender, race, education, employment status, religion, interests, financial position, personality type and many other softer influences. These influences also morph over time and may cause a change or drift in one’s perception of the world surrounding them. All these factors lead to the study of the so-called behavioural sciences as market researchers and society influencers try to grasp what makes people “tick” and behave in a certain manner.
Investing is no different and individual results can be heavily impacted by behavioural factors. In a recent blog penned by Peter Gross of the CFA Institute he opined, “Behavioral (sic) finance rests on a simple premise: The biggest risks in investing are embedded in ourselves as decision makers. Biology encourages our brains to take cognitive shortcuts that can cause big problems.”
After 24 years of observing my own and my clients’ investment decision making, I would agree with this statement. Behavioural elements have a large impact on decision-making. After periods of good returns investors feel smart and enthused. Confidence about the future edges higher, risks are systematically underestimated, and overconfidence gradually creeps into the decision-making process. The future begins to look rosier than it will ultimately prove to be in time. Investors seldom change their investment manager or strategy under these conditions.
Conversely after periods of poor returns, investors are often more sombre and loss-aversion behaviour kicks in. Their confidence is shattered, and pessimism clouds their decision-making process. They simply cannot endure the emotional pain of experiencing further losses for a sustained period of time, even though short-term losses are as much a part of long-term investing as the gains are. Investors almost always want to change their investment manager and/or de-risk their investment strategy when they have experienced losses and perceive times are bad and deteriorating.
If one accepts that the vast majority of people reading this article will live, work, retire and die in South Africa, a more scientific and less emotional assessment of the investment future is required. If this does not apply to you, then your retirement assets should be predominantly exposed to the assets on offer in the country that you intend to retire in and incur the bulk of your expenditure in.
The following pointers are the most important for investors to consider and help protect them from their own poor behavioural decisions:
- Time – statistically you are going to live longer than you think. You should be planning to live for at least 25 years off your retirement capital. Over a 25-year period, you will require high inflation beating returns and a growing income stream to sustain your retirement, or you face the risk of outliving your savings. Ensure that you adopt an investment strategy that is aligned with a single 25-year period, not 25 discrete one-year periods where you chop and change your asset allocation every year based on recent market conditions.
- Inflation – the principle reason why we invest is to grow our capital at a rate that exceeds inflation over the long term. We call this the real rate of return. Low-risk assets such as cash offer virtually no opportunity to deliver returns in excess of inflation (after-tax) in the long run and should be avoided for this reason. Even if cash happens to have beaten equity and property returns over the last few years, it is very unlikely to do so consistently in the long run.
- Asset/liability match – for most long-term investors who will probably live and pass away in South Africa, it is very important that they match the assets of their portfolio with their long-term liabilities i.e. the cost of living they will experience. If you intend to retire in South Africa, you should have the majority of your retirement assets exposed to those domestic assets that will give you the best liability match. At present SA equities and listed property offer the best opportunity of achieving above inflation long-term future returns.
- Growth asset exposure – whether you are optimistic about the future or pessimistic about the future, one thing is safe bet. South Africa will have a structurally high rate of inflation relative to the developed countries. This inflation rate will vary between 3% and 6% per annum if the future normalises, corruption is reduced, business confidence returns, and South Africa recovers its previous economic growth rates of the late 1990’s and early 2000’s of between 4% and 5%. Under these conditions, equities and listed property will deliver good sustainable inflation-adjusted returns. However, if SA deteriorates and experiences more poor policy, unemployment is not tackled, corruption remains rife and the country loses its investment grade status, one can expect inflation to ignite and rise to the 10% to 15% per annum range. Under this scenario, equities and property will probably be the only domestics assets capable of inflation protection for long-term investors as these companies pass on the inflation to the consumer.
- Currency exposure – investors are often enticed to invest offshore because they believe that the SA rand will continue to devalue against major global currencies by 3%-4% per annum into perpetuity. While this belief may be true (it may also not be true), what it ignores is that currency volatility in the short term can cause major disruptions to the income demands of the retired investor. Added to this higher costs, lower offshore yields and withholding taxes dilute the return from the global portfolio in the hands of the South African investor. These negative effects of currency volatility, higher costs, lower returns and withholding taxes are often underestimated in the long-term portfolio outcomes.
Chief Executive Officer