Magnus Heystek has spent a life time sharing his private finance knowledge with whoever cares to hear. He has co-authored many books on methods to enhance your odds of earning money in investing, from Making Money Made Simple to a collection on unit trusts and retirement. Usually, he has come under criticism and even assault for his views, together with from senior executives at corporations resembling Previous Mutual who didn’t like him unpacking the extreme and hidden prices in merchandise marketed to people searching for an revenue in retirement. A journalist who began his personal funding recommendation firm, Brenthurst Wealth Administration, Heystek highlights how very mistaken it has been to maintain all of your cash in South African property, specifically Johannesburg shares. In a nutshell, your wealth has been worn out – and that’s earlier than the Covid-19 virus swept in. – Jackie Cameron
Center class wipe-out briefly ten years
From Child Boomers to Ravaged Retirees
By Magnus Heystek*
CAST your thoughts to the 12 months 2010. It was two years after the Nice Monetary Disaster: the JSE, rand and the residential property market had recovered in a short time from the ashes of the downturn and — extra importantly — SA was internet hosting the Soccer World Cup later in that 12 months. The temper was excessive and a sense of virtually unrivalled euphoria was sweeping the nation accompanied by the sound of the ever present vuvuzela ringing loudly in your ears.
You had been a part of the Child Boomers — that generational grouping of individuals, lucky sufficient, it appeared initially, to be born within the years 1946 to 1954. This was a bunch of individuals — swelled by the pent-up power and victorious libidos of hundreds of thousands of man-soldiers returning house after years on the entrance line, doing — effectively what man-soldiers do once they return from the wars.
You had been one in all this age group — something between 56 and 64 — placing collectively the ultimate phases of your long-awaited “care-free” retirement your monetary advisor/dealer has been promising for therefore lengthy. In any case, wasn’t the JSE simply one of the best place on the earth to out your cash, because it was among the finest inventory markets on the earth over 100 years in accordance with Swiss financial institution Credit score Suisse.
Why trouble with world equities? Native is lekker…
As did the residential property dealer who satisfied you that “Purchase -to-Let” was the best way to monetary nirvana. Purchase and hire to these suckers who’re too dumb to personal residential property.
Ditto the pedlars of property syndications/unique recreation farms/uncommon wines, stamps, cash — you identify. If it could possibly be flogged to an unsuspecting public, typically with an excessive amount of cash and never an excessive amount of frequent sense, South Africa would have been the place to do it.
At this time, ten years later, virtually all of these carefully-crafted monetary plans and techniques have been laid to waste.
In actual fact, SA has most likely skilled extra Growth-Busts in a variety of asset lessons than some other nation on the earth.
Let’s take the rand for instance. In 2010 the common rand/USD change fee was R7,54. It really strengthened to a median of R6,77 a 12 months in a while the again of a rising world demand for commodities, which happily we nonetheless managed to dig out of the bottom moderately effectively and managed to get onto trains and vans which took them to our export harbours, notably Sishen and Richards Bay.
So in 2010 it value you R75,400 to buy $100 000 and even much less, R67 700 on common a 12 months later. These had been the times my buddy. That $1million house in Mauritius would solely have value you R6,700 000. To place it into context, as we speak it might value round R19 million for a similar house, assuming no dollar-growth within the worth. Briefly: shopping for offshore property has all however disappeared from the wish-list of many aspirant property traders. All these seminars advertising and marketing properties from England, Cyprus, Portugal, Malta and even Mauritius have all been placed on maintain.
The decline within the rand since 2010 works its method by means of the system, slowly at first however eternally relentless. You pay rather more for something imported as we speak be it cellphones, automobiles, cameras, computer systems, printers, overseas meals and wine and, in fact, overseas journey. A primary meal at an Italian eatery in London with a bottle or two of Chianti will set you again say £240. At as we speak’s change fee that quantities to about R5 500. Ouch and ouch once more!
And even if you happen to suppose you possibly can keep away from all these objects and received’t be affected by the weak rand, it hurts you by way of the sharp improve in medical help tariffs, which have been rising at between 10-13% each year largely primarily based on the price of imported gear and medicines.
So, in case your desires had been to journey the world throughout retirement, the one travelling you may be doing is to Margate over Xmas.
VERDICT: BUSTED.
JOHANNESBURG STOCK EXCHANGE:
For years, even generations, the JSE was the fulcrum of your long-term wealth planning in SA, both instantly but in addition not directly by way of unit trusts, endowments, life assurance insurance policies and change traded funds.
As alluded to above, Credit score Suisse analysis indicated that the JSE, alongside Australia and the US, was one of the best place to place your cash over intervals as much as 100 years as much as 2011. So, primarily based on these historic returns, what may go mistaken? Your pension fund was roaring forward, as had been your share choices and discretionary portfolios.
All of your retirement calculations had been exhibiting a wholesome income-replacement issue, which allowed you to contemplate being a swallow, spending six months in Gauteng and 6 months on the coast or within the Bushveld to get away from the winter’s chilly.
The longer-term returns as much as 2010 or whereabouts had been wonderful, if not spectacular. It was not unusual for one of the best fairness funds to boast inflation+ 6% returns, generally far in extra of that.
Nonetheless, to the horror of JSE traders, the final 10 years has seen a collapse in the actual and relative returns. Actual towards inflation and relative towards overseas markets.
The efficiency of the JSE All share index over the previous 10 years has proven the next decline in annual returns.
10 years (7,64% pa.), 9 years(6,81% p.a.), Eight years (6,58% p.a.) ,7 years (4,57%p.a.), 6 years (1,09% p.a.),5 years(-1,94%p.a.), Four years (-3,06% p.a.), Three years (-4,56% p.a.),2 years (-10,8% p.a.) and I 12 months (-20%).
(Supply: Cash Mate report 30/03/2020).
The pattern right here is quiet clear- ever -diminishing actual returns over ten years and over the previous 5 years damaging returns. This comes regardless of the stellar efficiency of world media and web firm Naspers, which at one time represented about 22% of the market capitalization of the JSE. Stripping out the performance of Naspers, the returns would have appeared even worse. Only a few mid- and small cap shares have made any cash for traders over the previous 5-7 years.
Even worse, repriced into US {dollars}, the JSE has given no actual return and because the peak out there in December/January 2018 on the time of Ramaphoria, has the JSE misplaced you 58% in USD phrases.
VERDICT: BUST.
Over the identical time period, world fairness funds have delivered returns on common 12-15% in rand phrases. A lot for the argument that the JSE is a proxy for world markets. This was advertising and marketing hype which we now know is garbage. The JSE has disconnected from the remainder of the world when it comes to efficiency, even rising markets, the place for a lot of a long time it was a entrance runner of be aware. How issues have modified.
MIDDLE CLASS WEALTH
Most middle-class wealth in South Africa is to be present in (a) pension/retirement funds and likewise residential property. Right here to we’re witness to, not one prepare wreck, however a number of, all on the similar time. Let’s take a extra detailed have a look at the varied asset lessons which outline middle-class wealth.
PENSION FUNDS:
Pension funds spend money on extra than simply listed equities. They’ll make investments (inside the tips of Regulation 28 of the Pensions Act) not solely 30% offshore and an extra 5% in Africa, but in addition in money, bonds, listed property and various investments resembling hedge funds. Regardless of this better latitude the returns of SA’s pensions business have additionally not crushed inflation over any interval as much as 10 years, particularly not when funding and advisory prices are considered.
Listed below are the median returns of the SA Multi Asset (medium fairness) funds over the previous 10 years, as in accordance with the newest Cash Mate survey (30/03/2020).
10 years (6,54% each year), 9 years (6,26% p.a.), Eight years (6,06% p.a.), 7 years (4,71% p.a.), six years (3,24% p.a.),5 years (1,64% p.a.),Four years (0,92% p.a.),Three years (1,19% p.a.), 2 years(-1,20% p.a.) and one 12 months (-7,78% p.a.).
The opposite two classes of pension funds, excessive fairness and low fairness, have comparable returns: on common now over 5-7 years effectively underneath the inflation fee.
VERDICT: BUST
RESIDENTIAL PROPERTY:
Who will ever neglect the rip-roaring residential property market, roughly from round 2003 to 2008, after which all of it got here crashing right down to a shuddering halt. SA was awash with wanna-be landowners, property builders, banks, brokers, builders and bond originators all touting the subsequent scorching factor within the residential property market. Banks threw warning to the wind, extending loans to newby landlords who ought to by no means have been allowed close to these developments, by no means thoughts the mountains of credit score prolonged to them.
The SA panorama is as we speak, virtually 12 years after this market got here crashing down, nonetheless dotted with half-built and unfinished gated communities and {golfing} estates, testimony to this era of insanity.
Purchase-To-Hire was the newest buzzword and virtually everybody grew to become an instantaneous landowner with pores and skin within the recreation. I attended a number of of those Get Wealthy With Property seminars and it was astounding to see how gullible individuals allowed themselves to be swept up on this property feedings frenzy.
The height of the residential property market was really Could 2008, in accordance with figures from FNB, after which development first collapsed after which went right into a 12-year sideways motion. At this time the common residential property is price 23% much less in actual phrases than on the peak of 2008.
For these nonetheless hanging on to the rental properties, the actual yields have been drifting downwards to zero for a very long time. Leases should not rising sooner than inflation than they used to whereas charges and taxes and maintenance are. Even within the Western Cape — which for some time marched to its personal drum — costs, turnover and rental ranges have all however collapsed.
Right here’s an instance: a colleague of mine is renting a elaborate sea-facing house in Bantry Bay, Cape City at a rental which supplies the proprietor with a yield of no more than 3% primarily based on the preliminary buy worth. After the proprietor’s bills and prices, the actual yield is nearer to 1%. In a single phrase: insanity, and a short-cut to penury if this property was financed.
VERDICT: BUST
PROPERTY SYNDICATIONS:
The marketplace for property syndications — primarily pushed by two main gamers, Sharemax and Picvest — boomed for about 10 years till 2011 or there about when all of those schemes collapsed, the one after the 12 months. No-one actually is aware of him a lot cash was misplaced in these schemes however simply Sharemax and Picvest misplaced traders an estimated R8 billion. Throughout the nation a lot smaller however equally harmful property syndications sprung up and closed down, with main losses to unsophisticated traders who joined the feeding-frenzy. Commentators who warned about these schemes, together with Deon Basson, Vic de Klerk and myself had been both threatened with authorized motion or described as being silly.
At this time 10 years later the method remains to be ongoing in attempting to get better some cash however as of as we speak, has not one individual being criminally charged for these fraudulent schemes.
VERDICT:BUST
EXOTIC GAME, BUFFALOES AND OTHER CAPITAL TRAPS.
Who can neglect the uproar when the story broke about our personal president getting concerned within the commerce of disease-free African buffalo, allegedly paying R20m for one such beast. Right here too was a extremely manipulated market which sucked in numerous wannabe-breeders, particularly within the Afrikaans group. I personally attended one such unique recreation public sale in August 2015 —roughly round its peak. I watched in absolute astonishment how 400 or so extra khaki-clad farmers forked out hundreds of thousands of rands for disease-free buffaloes, along with loopy costs for sable, kudu, giraffes and rhino.
After the public sale — which by the best way was opened by the native dominee who put in a request to the Greater Powers for a great public sale — I discovered myself in some verbal altercations concerning the funding deserves of what I had simply witnessed.
At this time that market has gone deathly quiet and the losses for many who acquired concerned on the peak should run into the lots of of hundreds of thousands of rands.
VERDICT: BUST.
So, has there been any asset class which has survived the collapse of mainstream wealth in South Africa?
Nicely, money — which the asset managers love describing as “trash”— has been a protected and dependable asset class, with returns over the previous 10 years averaging simply over 7%, as did SA bonds, which have been producing even higher returns, nearer to 9% each year.
The opposite asset class was SA’s personal distinctive gold coin, Krugerrands, as we name them. The mixture of a slowly rising gold worth since 2011 plus the weakening of the change rand has produced superb returns to native traders, averaging round 15% each year. On the time of writing the value of a Kruger rand was near R30 000 a coin whereas a one kilogram bar of gold was price a cool million, give or take a few cents.
One of many sights of proudly owning bodily gold is (a) it’s gold that has already been mined and (b) is unrelated to the political and financial occasions unfolding in South Africa. An extra attraction is that it’s authorized tender and doesn’t appeal to VAT when bought.
VERDICT: BOOM.
OFFSHORE EQUITIES
Offshore equities, particularly corporations listed on the Nasdaq and Wall Road-exchanges have been a main driver of wealth creation over the previous decade. The Nasdaq, pushed by shares resembling Netflix, Amazon, Tesla, Fb and others, has been the excellent performer, with compounded all-in development in extra of 1 000% in rand phrases over 10 years.
The Dow Jones industrial index (DJ) over the identical time returned 637% whereas the MSCI International Index was up 457% each year over the identical time.
Rising market equities lagged fairly badly with a return of 273% whereas the JSE Allshare index was stone final with a return of 206% over the identical time period. This was one the weakest intervals of development for the JSE ever on file, each in relative phrases and in actual phrases.
For each R1 you made on the JSE over this 10 12 months interval, the Nasdaq returned you R5 and Wall Road R3. Even a inventory commonplace world index greater than doubled the returns on the JSE.
Please look rigorously on the chart beneath, a chart native asset managers desperately doesn’t need you to see.
A really horrific chart with nowhere to cover fo the JSE
Sadly, most South Africans traders had the majority of their cash, both instantly or by way of retirement funds, invested in one of many world’s poorest-performing inventory markets.
However so far as offshore equities are involved, the VERDICT IS:BOOM!!!
Abstract:
The collapse of non-public middle-to higher center class wealth over the previous 10 years is already noticeable in lots of areas, particularly amongst these Child Boomers, who are actually 10 years older and most often a lot poorer than they ever thought they’d be. Automobile gross sales are down, as are memberships of medical aids and golf golf equipment and even overseas journey.
Retirement plans — way back proven to be nugatory — are swiftly being redrawn with many individuals extending their working life for an additional couple of years, if in any respect potential. However company SA nonetheless has, in lots of circumstances, an virtually archaic retirement fund guidelines, the place senior individuals have to retire at 60. Most senior executives will probably be heading again to work with freshly-polished and up to date CVs.
What number of greenback millionaires do we have now left in SA? Final 12 months New World Wealth estimated the quantity at round 44 000. Already down from 48 000 a few years in the past.
My very own estimate is a severe culling amongst our dollar-millionaires to ranges effectively beneath 40 000, except they took good recommendation to externalize a substantial amount of their property timeously.
What does the subsequent 10 years maintain?
Maybe that’s the topic of a subsequent article.
*Magnus Heystek is funding strategist at Brenthurst Wealth. He might be reached at [email protected].
