You still invest in South Africa? Hehehe, for what, hehehe?

Considering organised crime

Personally I’d recommend government, they never go to jail

This is not going to be a cheerful topic. We’re in a recession at the moment and there’s very little laughter around. The (no.) 1 person who is laughing isn’t helping cheer us up either. The mood in the country is miserable, David Shapiro from Sasfin Securities says the country is at the lowest level he’s ever seen. There are posts all over the forum complaining about how poor the JSE’s performance has been this year:

“This is a bad bad year…”

“Wow, ArcelorMittal @ R5 level and Lonmin @ R10 Level, Nice ANC nice …”

“It’s mind boggling. Almost as if there’s a committee somewhere who try come up with the most damaging own goals around.”

“Pretty damn sad that an inflation ETF is in the top 6 of the investor challenge. This must be the worst year so far for the challenge.”

“Zuma, Gigaba, PP Busisiwe Mkhwebane and Zwane are competing on who can destroy the SA markets the most. SA market up 1,9% since January while the emerging market index is up 17%”

The competition confirms the situation. We have 319 contestants this year, and only 60 have made any profit. But that’s actually far more optimistic than reality. Because inflation eats up the value of our currency at a fairly rapid 6% a year. Only 11 contestants are actually in profit after inflation, the other 308 have lost money in this challenge. I would say thank goodness it’s only a game, but sadly this is what’s happening to anyone who invests in South Africa too, right down to the mine worker who probably has no idea his pension fund is shrinking in value rather than growing over time.

Sounds pretty bad right? Sadly it’s far worse. If we ignore those funny bits of rapidly devaluing paper in our worn out wallets and use a real currency, we can see that South Africa has actually been a really bad economy to invest in for over a decade.

Let’s look at a chart:South Africa index chart from 2003What we’re looking at here is the value of a fund that tracks the South African stock market in US Dollar terms. What’s pretty clear is that apart from the good run up to the start of 2006, and the short climb to 2008, the market has gone nowhere. No that’s a lie, it’s slowly devalued. No that’s also a lie, it’s mostly slowly devalued, and took a rapid nosedive following Nenegate in December 2015, and only attempted a half hearted recovery before the night of the long knives dragged it down again.

Amazingly, the price for a piece of South Africa today, is almost exactly the same as it was 11 and a half years ago. If you were a foreign investor way back in January 2006 and saw the great returns that had been made in the previous three years and put all your money here, all you’d have gained was a heart condition from all the stress you’ve been through.

That’s why there’s always that little warning on the bottom of fund fact sheets “Past performance is no indicator to future performance”. They should have added “especially when you have a useless and/or corrupt government in place”.

On the street things are the same. My dad is in car sales. He’s noticed a trend lately where people are trading in big expensive cars for economical runarounds. One of his clients has recently moved from an R1 million+ Jeep SRT to a R200k Ford Fiesta. In SA that’s almost unheard of. People I know are having their companies close up and retrench all the staff.

Last month I had a mini 21st high school reunion of sorts. I was in London for the week which coincided with the sevens Rugby tournament. We managed to get together a group of nearly a dozen friends from my not-so-big matric group. Two of those had emigrated just two weeks before, and like the rest were all fairly high earners when they were in South Africa. More tax money being removed from our economy, remember the death spiral I spoke about earlier…

So let me be blunt. There are now only two reasons I can give as to why you should invest some of your money in South Africa.

  1. You have a tax free savings account (TFSA) and you load it all up every year with an ETF based on an economy that isn’t South Africa. This is the only way you can keep your money inside South Africa, and not risk losing most of it to an inept government, or ever increasing taxes.
  2. You have a retirement annuity (RA) – These magic accounts can save you a fortune in tax. This fortune in tax should (hopefully) be larger than the fortune you’re losing when the government screws up. And boy have they screwed up lately. There is a risk here though. A large portion of the money in an RA needs to be invested in South Africa, and needs South African companies to do well for it to grow. Fortunately many of these companies also work outside SA. The largest, Naspers, is practically 100% based on the Chinese market! If you’re curious, the RA my family uses, which not so co-incidently is also the cheapest RA in the country, is the Sygnia Skeleton Balanced 70 Fund (NOT the Sygnia Skeleton 70 Fund which sounds similar but is much more expensive). That’s not financial advice, as I’m not licensed to give it, it’s merely an interesting fact.

That’s it, there is literally no other reason to invest in this country right now. Not one. Not even half a reason. You might try and argue that you can also buy those foreign based ETFs listed on the JSE with the rest of your money but you’re wrong, because as we saw in this blog post, if you do try and invest offshore using Rand outside of your TFSA, you’ll end up paying way more in capital gains tax to the Guptas government than if you took it offshore.

Want more info on why investing in SA is bad for your wealth? Okay, lets take a look at another graph:South Africa vs World indexThis time I’ve compared a fund that tracks the whole world with a fund that just tracks South Africa. This one goes back to early 2013. It was when I first started investing in the market. Before that I was purely in property. During almost all that time, I was exclusively invested in South Africa, it was the easier option, felt like the right thing to do, and all the experts said it was what I should do with most of my money. Their reason was that you should always invest in your own currency to protect yourself from currency fluctuation. One even asked me “What would you do if you invested in Dollars and the rand suddenly strengthened. You’d end up losing money”. Funny man that one.

I listened to them, I remained optimistic, and I kept pouring money into the local market. That changed for me on the 9th of December 2015 at around 8pm. I remember the time well. In just a few days during that massive crash of the rand and stock market, my paper losses in US$ terms amounted to multiple years worth of my salary.

Had I not listened to them way back in 2013, and instead put my money into the ETF I now do, the Vanguard All World ETF (VWRD) marked in blue on the chart above, I would have over 40% more than I do today. That would mean I wouldn’t be sitting under the covers trying to escape the Joburg winter while writing this as I’d be retired and traveling the world today.

So what are you to do then?

1) If you haven’t already, open a tax free savings account that let’s you buy ETFs on the stock market.

There are really only two I could recommend at the moment, Easy Equities, and ABSA stockbrokers. These two are cheap to run, and give you access to all the ETFs available, so when a new better (that generally means cheaper) ETF comes out, you can switch. I’ll be doing this soon as I currently use rather expensive Deutsche Bank international ETFs and Satrix is about to launch much cheaper competing funds. Put R33 000 into it every year, and if they increase the amount you should too. Start one for each of your kids too while you’re at it.

2) Start taking money offshore

If you’re not convinced yet you might want to learn more about the efficient market hypothesis. Would you put all your money into one share? No that’s crazy, every adviser will tell you that’s financial suicide, but then is putting it all into one economy any more sane?

Getting money offshore used to be something really difficult. I remember stories of people being paid to go on holiday so they could help a relative take money offshore. Families used to buy yachts and sail them overseas to sell at foreign ports. At times woman used to wear really expensive jewellery and sell it at their destinations. This isn’t a joke, eventually a law was passed limiting people to carrying “an appropriate amount of jewellery” for their holiday travel.

Nowadays this is far simpler. You’re allowed to take R1 million offshore a year with practically no questions asked. You can take another R10 million a year as long as your taxes are in order. Last year I moved a fair amount offshore, and the procedure wasn’t actually that bad.

If there’s interest in the topic, I could put together a dummies guide to offshore investing. Let me know.

*Of course I may be completely wrong in all of this and the corrupt will be arrested, charged and put away and be replaced by honest, intelligent hardworking politicians, sending our currency and economy skyrocketing for years.

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  • grahamcr

    Patrick – I think your piece is a bit skewed. The JSE has had many unhappy periods which have made the market tank quite considerably – 1968-9 when a number of property operations went to the wall Glen Anil and Retco (I still made modest profits on both), we have had the debt standstill in the mid 1980’s, the Asian contagion (think it was around 1987), there were scary issues around 1992 – 1993, the mutual bank problems in Britain and then the wonders of the American prime loans in 2007/8. Prior to these aberrations which I have lived through there was the 1939 Wall Street collapse and also the wars – so history has many lesson and your learning are based on how many you have lived through.
    Maybe what you need to consider is a piece on how you established your overseas set up, however I recall you are being paid by an international company so your path may have been simpler to set up. There are number of local broker whom I have approached to try and set up a trading account with an international broker and in most cases I can’t replicate what I have with my SA brokers who are merely a conduit for my buying and selling orders in the SA market. I also want to be able to buy on not only the LSE but NY and the DAX via a single trading account and that seems to be a problem. I thought IT guys were clever but then maybe not

  • In 2016 I moved to Beijing and started working in China. My allowance is paid in HKD, so I opened a bank account with HSBC in Hong Kong and now I use that to invest on the Hong Kong Stock Exchange. There is value in the big money earners from China like Tencent. My plan is to keep the money in Hong Kong because I can easily move money in and out. Just find a way to explore this on a short business trip to Hong Kong.

    p.s. I am not clear about the tax implications in South Africa but once I’ve found an accountant with knowledge of this, I will take that into consideration.

  • grahamcr

    Thanks for you input

  • Dylan Govender

    @Patrick

    Speaking of off-shore…

    I want to buy Tesla stock. Easiest and most cost efficient way to do this? I asked on MyBB… No one got back to me.

  • There have been many unhappy periods, part of the message I wanted to get across was that it was dangerous to only be exposed to 0.76% of the investing world.

    I’ll do a piece on offshore investing. The only difference I had was my employer helped me get an offshore bank account, but most local banks can help you with that now provided you can leave funds in there.

    For your broker issues take a look at interactive brokers. I can invest on dozens of markets including all that you mentioned. Here’s the full list: https://www.interactivebrokers.com/en/index.php?f=1562

    There are also no monthly costs if you have $100k, otherwise you need to have $10 in fees for the month and pay in the difference if you don’t meet that.

  • The easiest is through a local offshore broker, Saxo markets hosts most of the local providers. I can’t recommend them though as they have a custody fee of 0.1% a year. If you had an offshore bank account then it’s easy, go with interactive brokers or degiro brokers which have no custody fees. Otherwise wait a while for easy equities to launch their offshore offering. It’s bound to be cheap and easy.

    A forum member jaDEB owns some Tesla (and tencent). Pop him a question here and he’ll tell you how he did it: http://shareforum.co.za/shares/tencents-tesla/

  • Devon Ricardo Reynolds

    Quite the sobering read. But informative all the same! Would love to read a piece on offshore investing.

  • Berghaan Botha

    Thanks for another informative post. If you open TFSAs for the kids, I assume SARS don’t require tax return being filed by them? I know it’s not required if you don’t earn anything, but I recall there was a section last year were you had to fill in you deposits. Anybody here knows?

  • Gerlu de Bruin

    Just adding my voice… would be super interested in your dummies guide to offshore investing.

  • Arno Kotze

    Hi Patrick,
    Thanks for the great post. Based on the current state of affairs in SA, and the way that some ETFs have been performing (i.e. DivTrax), can a case be made for selling them and rather buying an offshore ETF? I know that you won’t ever be able to ‘re-invest’ the amount that you are selling, but maybe the growth would offset this ‘loss’.

  • Geordin Hill-Lewis

    Thanks. Would love a dummies guide on off shore. You mention you put your cash into the Vanguard All World. Is that in your TFSA? Or do you buy this with the cash you keep abroad? Look forward to the follow up article.

  • Jman

    Would EasyEquities upcoming USA stocks offering not provide a good solution to investing offshore?

  • Jman

    You’ll be able to pretty soon on easyequities

  • Hi Jman, the answer is maybe and with conditions. We don’t really know how Easy equities will operate. All the other foreign brokers in SA charge a custody fee, usually around 0.1-0.2% per year. This is unacceptable to me. If EE does the same I’d simply avoid them. Similarly we need to see what the costs will be for getting Rand into a $ based account with them. I can get money to my foreign account with +- a 1% fee. Hopefully EE will be as cheap or cheaper. The last cost is the account fee. I know EE doesn’t have any monthly fees, so hopefully this will stay the same.

    Then to the conditions. If you hold shares on a US stock market and die, anything over $60 000 will be taxed very heavily, so if your health is failing and you have a million dollars you’d better sell up and move the money back home as they tax cash too! Oh and try avoid accidents!

  • Okay, the offshore investing for dummies guide is in the works. The first hurdle is a foreign bank account that doesn’t require you to leave thousands of pounds in cash earning no interest.

  • Hi Arno, as long as you sell and buy within your ETF wrapper, the non ability to reinvest is not an issue. If you have an EE or ABSA TFSA you can buy or sell as much as you like as long as you don’t withdraw the cash. I’ll be selling all my DBX world and buying Satrix world when they launch. As for moving out of purely local investing into global investing now? I always say there’s never a bad time to do the right thing.

  • Hi Geordin, that was in my offshore brokerage account with interactive brokers. At the moment the only world fund in TFSAs is DBX world, but at month end Satrix world launches and will be much cheaper so I’ll be switching to that.

  • Arno Kotze

    Hi Patrick, thanks for the reply. That is great news. So even though I have fully contributed my R33k for the year into my ABSA TFSA, I can sell all of the shares and buy the Satrix ones, for example, as long as I don’t withdraw the cash? For interest sake, did you see that Sygnia is taking over the DBX ETFs?

  • Yes, you can buy and sell all day long without penalty. I know some people even use them as trading accounts!

    I did see Sygnia bought DBX, but they seem to have made a complete hash of it. They’ve only dropped the expense ratio if you use their platform, but then if you use their platform and have less than R2mil invested they charge a 0.2% platform fee so you end up paying more! Magda is a smart lady though, let’s see what happens with it in future. It’ll be tough to get lower than the 0.35% satrix is aiming for though.

  • Joe

    Yes I asked Sygnia for clarification and it makes no sense to switch to their platform for it rather than leaving it in brokerage. Also will switch to Satrix world, just need to do the long-run cost benefit on the CGT vs lower fees…

  • Joe

    who are good for fx transfers at your 1% fee that you’ve used?

  • lindab

    I’m looking to invest offshore, but after some reading up, it feels like I need a degree to be able to understand the tax implications, estate duty and offshore will issues/requirements. I was hoping for a more DIY way, but it seems that I’ll need professional help. It would be good to get some insight on those issues, and how you’ve dealt with them.

  • rdv_investor

    Hi Patrick,

    I totally hear you and I really want to invest offshore and opened an account, but with valuations sky-high globally I just cannot bring myself to buy anything. The money is just sitting there in my trading account which is bad and I know timing the market is just not possible. On the other hand I cannot imagine things can stay this expensive forever. If a lump sum made itself available to you right now, would you feel any inclination to wait things out a bit?

  • Hi rdv. You basically have three options:
    1) Go all in right now.
    2) Dollar cost average so you spread the risk.
    3) Wait for a crash then invest.

    If it was my money it would be an easy decision, I’d go all in. Have you read my timing article? http://investorchallenge.co.za/all-about-timing/ Even if you invested on the worst day in human history, it’s probably not going to end up too bad if you’ve got time on your side.

    I’ve also written before about why I don’t like dollar cost averaging here: http://investorchallenge.co.za/all-about-timing/

    In terms of waiting for a crash, I see that as pretty much the same as speculation. It might happen and you’d be smiling, but it also might never happen and the market could just run away from you. Most measurements say that the market is expensive now, so to come back to average prices one of two things needs to happen. Share prices need to drop, or earnings need to rise. Nobody really knows. Maybe AI and robots will give the market the same boost that the industrial revolution did and markets will soar, or maybe they’ll attack the humans and try take over the world and markets will crash. If the second case was to happen I don’t know if losing some money will be much of a worry in the grand scheme of things!

    Jim Collins wrote a stock series I consider a masterpiece in personal finance, this post should also be able to help you:
    http://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/

    Good luck!

  • Hi Linda, as I’ve already done an article on CGT I can tell you it’s cheaper. I’m also researching dividend tax offshore and it looks cheaper too. I’ll have a blog on that soon to show how that is 🙂

  • Matthew Woods

    Hi Patrick, thanks for your articles, they always make for a great read! I can’t wait to see your “offshore investing for dummies” article. I have managed to open a GBP account with Standard Bank Isle of Man at no extra cost on Standard Bank private banking. De Giro and Interactive Brokers don’t allow Isle of Man accounts but after a lot of Googling I’ve found SVS XO, who do accept Isle of Man accounts.The fees seem reasonable but for higher value trades only (7.95 pounds per online trade, no management fees) although transferring out is 15 pounds. They seem reputable, not sure if you have heard of them? One thing I did notice is that they don’t have “fixed spreads”? Is that an issue? Please excuse my ignorance I have only just entered the world of ETF’s!

  • I’ve used exchange4free and clickfx

  • Hey Matthew, I’m having the same problem with Degiro and it’s what’s holding up my dummies guide at the moment. I’ve got two EU accounts now, and they don’t like either of them. No idea why. Interactive seem happy with those accounts, though I first opened using a US account with them.

    The only issue I have with interactive for new offshore investors is that they charge $10 a month if you have less than $100k invested. That does cover all transaction fees, so it’s not too bad, but not what I’d like.

    I’ve never heard of SVS XO but will do some reading on them.

  • Matthew Woods

    Thanks for the reply, interested to hear what you think of SVS. They require certified copies of bank statement, ID and proof of address to open an account which I’ve posted to them, so lets see what happens! Although I’d be surprised if SAPO don’t loose it…

  • Matthew Woods

    Update: I have managed to open the account and they do offer ETFs (including the VWRL) but I’m still hoping to find a different platform with lower fees!