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‘Optimism is not an investment strategy’ – Magnus Heystek on SA economic catastrophe

Magnus Heystek, journalist who started his own investment advice company, Brenthurst Wealth Management, is no stranger to criticism for his grim outlook on the South African economy. One of the most high-profile investment advisors who have recommended offshore diversification, Heystek tells it like it is. This conversation between BizNews founder Alec Hogg and Heystek is no exception. Heystek paints a very gloomy picture of the reality that South Africans face today, with a disappearing tax base and gaping budget deficit being two of the many issues the country is confronted with. While he is not hopeless, Heystek states that optimism is not an investment strategy. Turning the spotlight onto local asset managers, he makes the point that ‘Asset managers, fund managers – call it what you like – are not investment advisors, they have no consequences that come back to them if they get it wrong.’ – Nadya Swart

Magnus Heystek on the South African government adding to the public sector wage bill:

I don’t know how much time you have, Alec, but that’s a very big issue and we can talk for hours, if not weeks. And it really is a very big concern to myself and to a lot of my clients, if not most of my clients. My kids are here. All of them are here, my grandkids are here. But that doesn’t mean [that] we can just accept what’s going on – there are a lot of things that individuals, families and family units can do. To protect themselves – that is their first priority in my life – is to seriously look at their finances and look at what they are doing and how they react to what’s happening.

And this has started a long time ago where there were certain trends very evident 10, 15, 20 years ago. And it’s already happened. A lot of people who have money have moved into security estates, golf estates. They have. That’s the nature of [the] human condition. They go and form these bubbles. They go and buy their own security. They go and buy their own education from private schools, medical care, etc., etc.. That’s for the people who can afford it.

Now, Frans Cronje – in his book and in his talks – has been talking about this for a long time as well. So people have been moving physically from less safe areas of the country, mostly up north. They’ve moved down to the Cape in enormous droves, [not because they really perceive it as safer and better – it really is. It is a better managed province of this country, so the north south movement has been substantial and is accelerating, in my view.

On why he hasn’t relocated to the Cape:

I have a property or two in the Cape, and it’s well known that I have a property in Mauritius. Up to now – for personal reasons – my daughter matriculated last year and I was not going to move and she was doing very well at school academically [and] sport wise – and I was not going to upset her and disrupt her schooling to move down to the Cape. That is still on the agenda in the next year or two.

So now it’s becoming a real decision that my wife and I have to make. Do we sell up north and then move down to the south? The problem is the property market in Johannesburg, the greater Johannesburg, is very, very quiet and in fact, quite dead. And, you know, it’s not a great time to be selling. So, yes, in the next year or 12 months, 18 months, I will be seriously considering selling and moving down to the Cape. As an alternative, I do want to spend some time in Mauritius, building up my businesses there and even spend some time in Europe – three months in Holland or three months in the UK. But not everybody is as fortunate as I am.

On the reality that the average South African is facing:

Now you come to the average South African family who has got a limited portfolio, maybe one or two properties, a pension fund and some discretionary investments, and that’s where – and I’ve sent you some stats on the relative performance of the JSE versus offshore, and I can send you mountains of stats – that’s where the individual needs to step in and start making decisions in terms of creating an offshore nest egg, which has protected you over the last ten years and perhaps even liquidating some of your assets in South Africa, which is a drag on your performance.

We have a lot of clients who sit across the table from us and they say, ‘Magnus, I am asset rich, but I’ve got no cash.’ They’ve got properties, they’ve got maybe a farm, but they don’t have money. Their pension funds have also not done extremely well the last five to ten years. So they’re starting to run into a real problem and people need to start making decisions and start looking a little bit broader when it comes to building an investment portfolio. And you need to start thinking as a global citizen, an international citizen, because who knows where this can all end.

Three or four years ago, we were just talking, you know, fast and loose about the platteland that’s falling apart. Now it’s become a major, major economic catastrophe. We can quantify it. It’s billions and billions of rands. It is now on our doorstep, I think our biggest issue to come still, in my view, is the collapse of our public finances. We got very lucky. Your guest last night, Steven Nathan, said we’ve got a get out of jail [free] card, because the commodity cycle spiked up last year and it attracted a lot of revenue. But with that, we can plaster over a lot of the gaps in our budget system. That cycle is already turning and I don’t think it will be repeated.

So, the budget deficit is going to come back to be a major problem. You and I are going to talk about it more often in the future. The tax base is just disappearing. It’s melting away. And at some point – reality is going to catch up with all the political promises and the poor old taxpayer is going to pay more taxes. Our budget deficit is going to blow through the roof or it could blow through the roof and there could be further downgrades and defaults. That’s the economic scenario. I know it’s a bad news story, but that is the reality that we are living with. 

On the reality of the South African economic picture and what taxpayers can do about it:

Well, first of all, most taxpayers feel powerless. They can’t control it. They can’t vote out the ANC controlled municipalities. And that’s the starting point – local government elections, where I think we could see some surprises and that would be one step. But in certain areas of the country, the ANC is so dominant, it’s not going to change. And there’s that article [that] I explained last week; I mean, it’s affecting listed property, unlisted property, small towns, big towns. There’s just a massive evaporation of money taking place. On a personal level. What’s happening to you and to me and to my neighbour is happening all around the country. And everybody, most people are sitting at night or at the end of the week or month [and] saying, ‘I don’t have cash. I do not have disposable income to go and spend on luxury items.’ You can see it in a wide variety of places.

You look at the Discovery membership that’s dropped by 30% in three years, especially the high end schemes – everybody is downgrading. People are downgrading their cars. People are driving their cars for longer. They’re downgrading their schooling. And we now hear about private schools that are shrinking because people cannot afford those extravagant fees for schooling. They’re taking kids to cheaper schools and even to government schools. So you’ve got cars, schooling, medical – people are travelling less. Our motor car sales, if you compare it to five years or ten years ago, are actually 50% lower than 10 years ago. That shows.

The bottom line is – and there’s a piece in another website called Business Tech this morning, which I 100% agree with – middle class is being wiped out. Our middle class is very quickly moving down to upper lower class in the sense that there’s not much money left over. Why? Rates and taxes and all kinds of taxes have shot through the roof. Investment returns in SA have been pedestrian or sideways and in fact, down in many cases. Salary and wages have not kept pace with inflation. And now we have crunch time. There’s just not enough money. People are starting to drag down on their savings. They are taking more debt just to get to the end of the month. So that, together with the low economic growth for the last 10 years, has really, really shrunk the middle class fairly dramatically.

And even the rich, the rich or the so-called rich – especially if they are asset rich with lots of property and farms and a wine farm or two – I’m hearing talk about people seriously going under because of, first of all, the economic stagnation leading up to the covid and then you had the covid. People are going bankrupt. They’re just losing their assets. There’s no denying anymore.

On financial advice in this economy:

I can’t give you one rule that applies to everybody, but it’s surprising how some people – perhaps they’re not that informed – tend to stick to the old formulas that have created their wealth and they refuse to change their mindset, ‘No, no, no, no. I must not sell because the property guys are telling me the upturn is coming.’ So they hang on, and they hang on, and they hang on – and it just gets worse and worse. The same with a badly performing stock market portfolio or a local asset portfolio. I mean, every time you open up the media, someone is saying, ‘Now is the upturn, our stocks are cheap.’ So people have been brainwashed and they’re actually petrified – they are so terrified to make a mistake, because there’s this overwhelming marketing machine out there and it’s a very powerful marketing machine from the local asset managers who can spend considerable amounts of money.

And the one message that they’re pumping out is, ‘Don’t sell – wrong time. Offshore markets are expensive.’ And they’ve been wrong for ten years. And I’ve got a whole file here – I actually call it my forecast file. Year after year, I find all these forecasts – and nobody is holding them to account for getting it horribly wrong. And here’s a very important point. Asset managers, fund managers – call it what you like – are not investment advisors, they have no consequences that come back to them if they get it wrong.

It’s the adviser who has a different relationship with their client, who actually needs to be concerned about the outcome and what happens to that particular client. So a fund manager can say, ‘Oh sorry I made a mistake, tough luck – those are the markets.’ I cannot take that position. And I am deeply, deeply concerned about so many people who still take bad advice, which is biased towards supporting a badly performing economy. And it just doesn’t make sense to me.

On optimism not being an investment strategy:

Well, you tell people to consider the various alternative outcomes and you tell people that you cannot predict the future, but these are your alternatives. Do you have enough liquid cash offshore that will give you some growth? You could still live very well in Africa in a bubble in an area that has lesser crime. And you have an investment portfolio, totally legal, totally acceptable everywhere in the world to have a big chunk of your money offshore. I mean, I saw a report last week where the average Australian’s super – they call it their super portfolios – has a 60% offshore exposure. So Africa only allows 30% via the pension funds. So in Australia, a modern country, more than two thirds of their National Pension Fund is invested offshore – and that has protected them, that has built wealth.

In South Africa, we come with this approach and say, ‘No, 30% is enough and you must be happy with that.’ It has not worked for us. Pension funds – and I’ll be sending you an article very soon – have not grown in real terms after inflation for the average person in South Africa in the last seven years and getting up to 10. Your pension fund has not grown because of regulation 28, which limits their offshore exposure. But the big asset managers know this is the truth, but they like to conceal it and they do not want to talk about it because they have a very cozy relationship with Treasury.

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