It is that time, when we look back at what was and perhaps what might have been. From an investment point of view it will depend on your point of view – whether you were invested outside or inside South Africa.
Locally we continue to suffer from the legacy of bad politics and continue to be fed empty promises. Our structural fractures are so deep that mere tinkering will not mend our broken economy. Perhaps the only positive (if one can even think of it in those terms) is that it is no longer possible to hide from the truth and the barrel has been scrapped bare, with little to no money to throw at the problem. This has forced closure or privatization of State Owned Enterprises onto the table, but even this is done reluctantly and with continued political pandering to narrow interest groups. There are solutions to our problems, but a lack of political will. With most of the population now reliant on either government grants or government employment, to hold onto power means to hold onto a socialist ideology that is so evidently failing. Our massive population of unemployed will desperately cling onto every word of rhetoric that promises better times through redistributing from the “haves” to the “have nots”. I think it is Margaret Thatcher who said that “the problem with socialism is that you eventually run out of other people’s money”. We have run out of other people’s money and many of the “other people” have run for the hills and taken their money and skills with them. We must always have a social conscience, but to drive such an agenda requires wealth creation. Our policies do not provide such a platform.
The irony is that the Rand has only depreciated by a relatively small amount. Perhaps it is because it is already so weak, but given all the bad economic news it is curious that it has maintained at these levels. Our relatively high real interest rates still appear to offer attractive returns for foreign investors, but I fear that this situation can quickly reverse. Already there have been big portfolio outflows, but a Moody’s downgrade (which seems inevitable) will likely cause an even greater outflow – although it is hard to believe precautionary measures have not already been taken through a gradual exit by foreign investors.
Those clients who are invested locally or are forced to do so through Pension Fund Regulations, have received disappointing returns, not only over the past year, but for a number of years now. Quite frankly, you would have been better off in cash (although tax then takes away a big chunk of this). Whilst in any situation there will be pockets of opportunity and one should not be blind to the possibilities, I continue to feel that for the most part you will be better served by being invested offshore.
The USA continues to dominate globally. Their economy is strong, unemployment at historic lows and wage growth solid. 2018 was somewhat negative as the White House waged its trade war and at the end of the year partially shut down government in protest over a lack of funding for a wall along its southern border. However, markets rebounded in 2019 and it has been a very good year with the S&P likely to end close to 30% up in USD. There is now agreement in place to end the trade war with China as well a new agreement with Canada and Mexico for a free trade zone. This will take some of the uncertainty out of markets and I feel there is still upside and that the USA will remain a force for a long time to come. This has been and continues to be my preferred destination for investments.
Asia is the future, with China likely to surpass the US economy. For long the East has been the manufacturing hub of the world, but with time its own consumer base has grown. China and India alone account for about a third of the world’s population. This new middle class has enormous purchasing power not only for computers and cell phones, but for small luxuries such as coffee and toothpaste as well. The share portfolio I have been strongly recommending taps into this potential. There are challenges in this region and markets are volatile, but fundamentally this is not a region to be ignored by the long term investor. Even the USA recognizes its force and I believe have taken the “trade war action” to try stem the advance. This is however futile and Asia will come to be the dominant region economically. Returns have not been bad at all this year, except India which has lagged. The resolution of the trade war should boost markets again. I like the region as a whole, particularly China and India where the huge populace will drive consumerism. The exception is Japan, where a declining population will weigh on returns.
Europe offers pockets of opportunity, but on the whole it too has structural problems which will weigh on returns.
I continue to encourage offshore investment, with the USA and Asia my preferred destinations. This strategy has served well in the past and I believe will continue to do so in the future. There will be peaks and troughs on the way, but structurally I believe these regions offer the best prospects for growth and for the long term investor.
I guess my letter does not exactly exude local Christmas cheer, but for the foreign investor there is much to cheer about. If you are reading this letter you likely have the good fortune to consider such worldly problems as to where to invest your savings and if you enjoy good health then that is perhaps all we can ask for.
I wish you all a blessed Christmas and a healthy 2020, with good returns for that added joy.