Float like a butterfly, sting like a bee…: Analysts trade blows over whether to return offshore capital to South Africa
There are matters of greater import to South African investors than whether Biden or Trump snatch victory from the jaws of defeat in the 2020 United States Elections boxing match. As the post-pandemic economic order unfolds, we can either leave our capital offshore in an increasingly low yield environment, or risk everything by repatriating our wealth to seek out higher yields and avail of the stellar returns promised by our nth new dawn. The idea of bringing capital back to South Africa after taking so much care to diversify our portfolios offshore seems counterintuitive; but is it something we should be considering?
Two thirds majority says: “Hell no!”
The 2020 CFA Society South Africa Annual Investment Conference, held 5 November 2020, featured an interesting debate under the banner: “Should investors be shifting capital back to South Africa from abroad?” Kudos to the CFA Society for hosting this discussion in a classic debate format, with two experts arguing for the proposal, two arguing against it, and a competent moderator to ensure strict adherence to the allotted times. A pre-debate poll of conference attendees revealed a two third majority who were dead set against bringing capital back to the country.
Would the ‘for’ team of Patrice Rassou, CIO at Ashburton Investments and Mamokete Lijane, Institutional Fixed Income Sales Trader at Absa Group, succeed in changing their stance? Or would the ‘against’ team of Adrian Saville, founder and CEO at Cannon Asset Managers and Thato Mashigo, CFA Society of South Africa Board Member and chairperson of the Conference Committee hold on to their seemingly unassailable lead? Each team was allocated five minutes for an opening statement, four minutes for a second statement and three minutes to close, with 15 minutes of audience QNA in between. It is impossible to report on all the ground covered during the fast-paced discussion; but we will share some key points made by each participant, spiced up with some ‘spin’ of our own.
The policymakers’ gambit
Lijane opened the debate with reference to the pro-growth posturing from South Africa’s policymakers which would result in positive growth and momentum from domestic markets. She questioned the return potential from offshore investments given the global interest rate environment and suggested that the decade-long outperformance from offshore diversification was running out of steam. “This is the time, from an economic and policy perspective, to bring money back,” she said. Her opening comment acknowledged the difficulties facing the domestic economy, including poor GDP growth; chronic power shortages; poorly calibrated fiscal policy; poor educational outcomes and labour market issues.
Would the audience respond to a ‘growth and momentum’ story underpinned by nothing more than government’s promise of sensible policy and improved policy implementation? The ‘against’ team suggested that their opponents would have a tough time defending the following statement: Investors should have more than 80% of their capital in South Africa. Mashigo observed that the country had been in relative economic decline for six decades, consistently underperforming is closest rivals as measured by per capita GDP. “We are closer to Jamaica than the other high flying emerging market economies,” he said, before asking whether anyone in the audience would invest 80% of their wealth in that country.
Of greater concern is that South Africa Inc is out of trend with its global peers. The economy remains focused on legacy industries with ‘second industrial revolution mindsets’ at a time when technology rules. And we have an export basket dominated by dirty industries as the global focus turns to environmental, social and governance (ESG) investing. “It makes no sense to bring your capital back when South African assets are unlikely to earn risk-adjusted dollar returns,” he said. “It makes more sense to have a structural underweight exposure to South Africa.
On Martians and offshore diversification
“Investors should be bringing their capital back,” countered Rassou, who observed that locally-listed companies generated more than half of their revenues from outside our borders. He also quoted a long list of firms that had suffered financial losses in their attempts to diversify offshore, including the likes of Aspen, Famous Brands, Mediclinic, Sasol and Woolworths. This argument rang a bit hollow given the obvious difference between corporate versus individual motivations to invest offshore. Saville pulled no punches, warning investors to steer clear of structural stagnation. He argued that risk should be the first input to the investment decision making process before leading with an unexpected ‘alien attack’. “If you lived on Mars and you were given an opportunity to invest in the world, then anything more than 0.5% of your portfolio would be too much to invest in South Africa,” he said. He opined that the only time you might consider bringing your offshore cash back home were if it had somehow ended up in Venezuela.
The ‘for’ and ‘against’ teams faced off for just short of an hour, sparring, throwing punch and counter punch; but which team would deploy the Muhammed Ali “float like a butterfly, sting like a bee” tactic for the win? “The future is empirically unknowable,” concluded Saville. “South Africa requires us to consider risk before return in our investment decisions”. He dismissed shoots of new growth with concerns about nationalisation, a return of state capture and a dire fiscal outlook. It was up to Rassou to deliver the final volley by reminding the audience that their investment decisions should be based on the future rather than the past; but immediately contradicted himself with: “Over 100 years, the JSE All Share Index is the second best performing market behind Australia”.
KO in the final round
The ‘for’ team concluded with: “The All Share Index has done well. Our equity valuations are cheap. Take your profits, bring your money home and invest in cheaper assets”. The debate offered something for both camps. Those considering reinvesting in South Africa were comforted by the allure of market-beating returns on the back of a rand recovery and improving asset prices. Those determined to remain invested offshore could do so comfortable in the knowledge that they were already overexposed to South Africa assets. They would continue to enjoy the “free lunch” that goes with diversification. But few were persuaded to abandon their pre-debate views.
It seems that the ‘against’ team landed a knockout punch somewhere in the final round, as evidenced by the post-debate poll remaining virtually unchanged. If anything, after evaluating the facts, there were slightly more people inclined to remain invested offshore following the debate than before.