Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
111. Insights into South Africa's Emerging Economic Landscape
Ian Jones from Fundhouse joins us for a compelling conversation that challenges the gloomy perspectives often associated with South Africa's economy. Discover an optimistic outlook as Ian shares his insights on how advancements in mitigating load shedding and strategic partnerships by Transnet could pave the way for promising economic opportunities. With an eye on the future, we also discuss the potential for economic growth and foreign investment that hinges on the stability of the government of national unity.
Shifting gears, we explore the strategic considerations for South African companies contemplating the deployment of their cash reserves, as we weigh the benefits of local versus offshore investments. Ian provides a nuanced analysis of South Africa's role within the BRICS alliance, shedding light on the possibilities and limitations inherent in this international partnership. The conversation paints a picture of optimism, grounded in realism, for those looking to understand the complex dynamics of investing in South Africa during times of political and economic transformation.
From the speculative nature of cryptocurrencies to the dominant role of the U.S. dollar amidst global uncertainties, our discussion expands to a global economic perspective. We cover the geopolitical tensions impacting financial markets and highlight the importance of strategic thinking in navigating today’s volatile landscape. Whether you’re pondering the future of global currencies or considering the risks of crypto, this episode offers valuable insights into the complexities of the current economic environment and provides guidance for cautious yet confident investing.
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www.growthfp.co.za
Hello everybody, welcome to Know your Money. I'm Bronwyn Wehner.
Speaker 2:And I'm Craig Finch and we are from Growth Financial Planning. We hope you enjoy our podcast. Welcome viewers to another episode of Know your Money, and we've got Ian back in the studio Ian Jones from Fundhouse. And Ian, I'd like to ask you your business has a footprint internationally and our funds and our products that are invested offshore. You've got an office in London and you've got your South African office and when I've heard you speak, you're very positive about South Africa generally and we'd just like to ask you do you still feel positive about South Africa? And I know that you look at the world as a whole because of the footprint you do have overseas as well. So what is your views about? Maybe a bit of South Africa and what the year holds for us?
Speaker 3:Sure. Thanks, craig, and thanks for having me Good question. I mean just to kick off on the positivity around South Africa. I think my view is that as South Africans, we tend to we say dwell on the negative a lot. Our media tend to spend a lot of time focusing and writing about the negatives, and there are lots of negatives. And those negatives aren't made up, they're not manufactured, they're not even necessarily embellished upon. They exist, they are real. But the one thing that I find, I suppose, exhausting is the fact that we as a, a collective, don't spend any time celebrating the positives.
Speaker 4:Except when we win the Rugby World Cup. Then we're very happy. Yes, we celebrate sports success.
Speaker 3:When you have a success story around our economy, or when the government actually does implement something that's good, or there's an actually does implement something that's good, or there's an optimistic outlook on something we a the press barely reports it and b we we almost adopt this view of oh, it's not gonna last, they'll mess something else up. You know the government, yeah, I agree, and, and you know so, load shedding is a great example. Um, I mean, probably from about march, april last year, I was of view that load shedding was sort of going to come to an end. We were near the end and Eskom were doing a lot of the right things by making it worse for us, because then they could do the maintenance on plants and the like. And most people just said you know, something else will break, something else will go bad. There was this constant negativity and even last week, when we had this little two-day window, yeah, the the view was are we just going to go back into another years of load shedding as opposed to? This isn't ideal, this isn't great. Um, let's see what's what's caused it and whether it will actually be a long thing. So that's one example. I mean I remember you know they've now announced that Transnet's going to enable private partnerships or private businesses to, I suppose, lease out the train lines going forward. I mean, that's a very simplistic way of looking at it and the response I had from a number of people when it was first announced or that I spoke to about it, was oh well, they'll just steal the tracks or they'll just steal the engines. And that's a very negative way of looking at what is an incredibly positive announcement. Because if a group of minds get together and basically put together a running train line between Yaron Maputo and Yaron Richards Bay, it is very materially positive for our economy. Train line between Yeren Maputo and Yeren Richards Bay, it is very materially positive for our economy. So we just end up the whole time as South Africans forget about those sort of silver linings, the slight positives, because we're so inundated with negatives. So that's why I push back on people.
Speaker 3:I don't think South Africa is as sort of, I suppose, bad as people say.
Speaker 3:On an outlook basis, I'm relatively positive about South Africa over the next two, three year cycle.
Speaker 3:I think that while the government of national unity is not going to be without its disagreements or its arguments or its fights and sort of trying to position themselves for the next election and all of that.
Speaker 3:I think the base case is that both the ANC and the DA have too much to lose if one of them were to pull out of the GNU. So if the ANC pulled out and went anywhere near certain other parties, the likelihood of Cyril remaining in power is very, very small. If the DA pulls out, I think the outcome, what we will see coming out of that, would be very negative for South Africa and I don't think their voting would forgive them. So the base case, in my view, is that the GNU would hold and if the GNU holds, I think there's a positive outlook that from this fairly low point in terms of economic growth, from this fairly low point in terms of economic growth, from this fairly low point in terms of foreign investment, in terms of local companies using cash on their balance sheet to grow, I'm fairly positive over the next two, three years.
Speaker 4:Do you feel that what happened with the US pulling aid to South Africa? Do you think that will have a big impact in a negative or positive way at all?
Speaker 3:So it depends on where it lands, is the answer. It's never good to answer a question, depends, but in this case I think that's apt. So the way Trump operates and the way he operates in his first and his president and his track record is he goes out with a big statement, he goes out with something big and he threatens with this big and then there's a negotiated outcome.
Speaker 4:So he leverages that big statement for negotiation Exactly.
Speaker 3:So I'll use a quick example and come back to the is that he opposed. He said when he was made president last year that he was going to impose tariffs on Canada and Mexico. Yes, yeah, but that was what was reported. But his full sentence was he's going to impose tariffs on Canada and Mexico if they don't sort out their borders and stop fentanyl and illegal immigrants coming into the country. Yes, People kind of forgot about that part.
Speaker 4:Well, that's not the big part of the statement, is it? Yeah?
Speaker 3:So he came out and because Canada and Mexico, there was something, some law that was passed in Canada or regulation in Canada, but it wasn't implemented. Nothing happened. So they almost were just ignoring what Trump had said. So what did Trump do? He said I'm imposing 25 tariffs, 25 tariffs. And everyone went and suddenly Canada's sending Canada, sending the army to the border and putting a whole bunch of things in place, and now he's put those tariffs on hold. So it's a great example of how he behaves. The Colombian plane where they took Colombian illegal immigrants back to Colombia and the Colombian president said we're not accepting any of them. So Trump said well, we're going to put 100% tariffs onto Colombia. So the Colombian president said we're not accepting any of them. So Trump said well, we're going to put 100% tariffs onto Colombia. So the Colombian president said okay, well, we'll fly a plane and fetch our legal immigrants. It's not that he's going to do the 100%.
Speaker 4:It's a way of I understand.
Speaker 3:And it's similar with the aid. So he's looking around the world and saying that there's all this aid going out and he doesn't feel it's well controlled, and that there's all this aid going out and he doesn't feel as well controlled, and that there's been a lot of aid agreed in the past that maybe shouldn't apply and he's put a hold on it. If the hold is two, three weeks and then it's like sort of someone doesn't order it and we get it back, then no impact, yes, okay. But to say I mean I've heard some people say it doesn't matter, it's not that much. I mean I think you need aid and if there's aid coming from America that helps us with our HIV treatments, it helps us. To say we don't need it, I think is quite short-sighted.
Speaker 2:In the past you've also spoken about the companies SA companies having a lot of cash on their balance sheets. Do you think they're going to deploy that cash into the market if the government is a bit more stable, as it seems to be?
Speaker 3:The short answer is that's the hope. Okay, that's the hope. So, historically, over the last 10 years or so, south African companies have either declared dividends to get cash off or they've bought foreign businesses to try and and that doesn't work for many companies, but they try to buy foreign businesses. In some cases they bought their shares back, so they've done share buybacks so, but a lot of them have built up cash on their balance sheet and not spend it because of uncertainty around SA. And the hope is that if they can see a level of economic growth or a future that it's in their best interest to then deploy their capital to grow to generate more returns for shareholders. So that's the hope, but there are certain things that it's a little bit like.
Speaker 3:While foreign investors haven't piled money into the essay stock exchange, most of the run-up last year was through South Africa's South Africans buying SA shares, and the reason foreigners is that they had ramiforia, as you call it. So when Roboposa was made president, everyone went everything's going to be great, let's buy SA stocks, including foreigners, and then that didn't really work out so great. So foreigners are a little bit once bitten, twice shy and they were waiting for certain, I suppose, things to become reality rather than talk about it. And so, if they can improve the rail, if the ports can get a bit better, if we start seeing a little bit of economic growth, if you know all those sorts of things that need to happen in order, I think we would see foreigners investing in South Africa and I think we'd see South African business starting to deploy that cash, and that's the optimistic scenario.
Speaker 1:I also feel like sometimes our clients don't want to invest in South Africa and they want to do everything offshore. And what would your opinion be on that? And I think it's a two-part question. For someone that's going to remain in South Africa forever, do you say offshore for everything and someone that is maybe looking at immigrating and that sort of yeah.
Speaker 3:So I think the first thing to be very, very clear on is this is totally dependent on the individuals, like their circumstances, their requirements, their needs and all those sorts of things. Um, I do think that over the very, very long term, if you've got long-term investment capital, that global portfolios do make more sense. Um, and within a global portfolio, you can have an allocation to south africa as part of the globe. But if you look at the number of businesses in the world and the number of investment opportunities around the world to be able to pick from, to pick the best companies from the entire world, as opposed to saying, well, I'm gonna just buy companies from South Africa to to me, over the longterm, investing globally makes a lot of sense. Okay, to me, over the long term, investing globally makes a lot of sense.
Speaker 3:But if you are a South African living in South Africa, to ignore the link between our inflation rates and what is required to live in South Africa and put all your money offshore not only the link to our inflation rate but also to our currency, so everyone thinks the rand is going to just keep on depreciating forever.
Speaker 3:But if you take every single cent, let's let's use the example that you know. Say the rand now is it about 18 rand 50, let's use random and you put every single cent you have offshore and it stays at 1850 or drifts out or whatever, until you retire. And then you need money to live in South Africa and the rand appreciates to what is regarded by many as a fair value of 16 rand 50, you lose the equivalent of you can do the numbers 15% of your capital. So instead of you being able to withdraw 10,000 rand a month, you can now withdraw only 8,500. So to just ignore the currency and ignore the inflation differentials between the two countries when you have a financial need in South Africa can cause people great distress. So I believe for someone who lives here to have a blend in terms of the money that's been put aside for retirement, for living here. I'm of the view that you need to have a certain amount of South African assets, but for long-term growth capital you should look at the whole world.
Speaker 1:Yeah.
Speaker 4:What do you think about the BRICS Alliance and how that could affect South Africa's economy going forward, if it was to well, as they are aiming to become the economic superpower of the world?
Speaker 3:So I think I mean a little bit of a sort of a side joke. Is the fact that Trump thought the S stood for Spain tells you how sort of the globe views BRICS? As you know, the S is not that significant in it. We by far are the smallest economy out of the globe views BRICS. As you know, the S is not that significant in it. We by far the smallest economy out of the others. It could be Saudi Arabia. Eventually it could be anything. So we are a very small part of it and we do not hold sway in it. So we will be takers of what, basically what China and India do. Russia has a big political say, but their economy and their growth mean that they're also probably less influential on the financial side of things. So the point is that we don't have a big say in it. But do you?
Speaker 4:think we'll benefit from it?
Speaker 3:um, I don't think that there is a clarity yet on what bricks is going to do. Okay, and at the moment, up until now, they haven't done anything. Is it all talk? It is a. So far it's been a meeting of people trying to figure each other out and meet each other. But there's been talk of a BRICS bank. There's been talk of a BRICS currency. There's been talk of, you know, collaboration, but every single trade deal, every single export, import, has been between the individual countries oh, so it hasn't been as like a union there's no union yet.
Speaker 3:Yeah, okay, and there's talk of it and there's sort of it could happen, but at the moment there's no clarity on it. I find it quite funny Trump came out and said you know, anyone who's supporting a BRICS currency will get 100% tariffs. Trump is not going to put 100% tariffs on anyone. It's like, again, it's a bit of an negotiation point, but someone was telling me that one of the south african ministers then then retraced their steps a little bit and said we're not definitely going to do the currency, we'll see. So so could bricks end up being the new world order and with the us going down the sort of isolationist route of kind of you know, trying to dominate other countries and tariffs and go on their own, make America great again? Possibly, but there's no clarity of that. The dollar is still. You don't see a de-dollarization. I don't. Long term there could be, but at the moment there's too much trade. There's too much trade. There's too much priced in dollars.
Speaker 4:There's a lot of hype around the de-dollarization isn't there in the media. It seems like it's more of a buzz talk now.
Speaker 3:Yeah, and if you were to ask most players, if you were to go to the big trading organizations and say, okay, we're going to do all our trade in Rimnumbi, and you were to ask them whether they have trust in the Chinese government that the Chinese government won't change their mind, I think a few of them would say that makes us nervous Because it's not a sort of democratically elected China. It's very much. They can change the rules at any point in time and then if you go through the other currencies sort of if you come up with a BRICS currency on their own yeah, so at the moment there's no real credible alternative to the dollar.
Speaker 3:So I don't see deep dollarization in the future and if you think globally, at the moment moment we're in a massively uncertain place. It's really and investors need to be quite careful at the moment, in my opinion. I suppose our buzzword at the moment is a little bit of a conservative approach to things, is Do you think that's what's led to the gold rally?
Speaker 3:Absolutely, there's concern about the level of debt in the world.
Speaker 3:So, through but first the global financial crisis and then through COVID, governments around the world issued huge amounts of debt, and if you have huge amounts of debt, it puts a currency or a country at risk of not growing because you're spending your… Well, the interest payments alone are… yeah, you're spending a significant amount of your productive capital on servicing debt and not on growing things. Yeah, and then, second to that, is the fact that the world is experiencing an uptick in wars, in conflicts, and through history, gold has been seen as a safe haven when conflict arises. We sit here and I don't think anyone can say, hand on heart, definitely, that there won't be an escalation in war, that there won't be an invasion of Taiwan, that the US won't get involved in any way across Europe or across Ukraine and in the Middle East. So that concern around war, combined with the state of global economies, around debt and what that means for currencies, means that gold is being favoured by many governments as well as institutions as a safe haven.
Speaker 4:Can I ask one last question? I know it's not Craig's favourite, but what's your opinion on cryptocurrency?
Speaker 2:Oh boy.
Speaker 3:It's a good question. It's quite important. It's quite an important one to talk about because I think that there are a lot of people who've made a lot of money out of cryptocurrency. But there are also a lot of people who've made a lot of money out of cryptocurrency. But there are also a lot of people who have lost a lot of money out of cryptocurrency. And the one part I disagree with is anyone talking about crypto as an investment. So cryptocurrency is not an investment. Cryptocurrency you don't buy anything. There's no like. The only value that crypto has is that another individual will pay you the money, pay you some money for this digital token.
Speaker 4:Is that not the same with most fiat currencies now?
Speaker 3:The difference is that you have a backing of a government and you have a backing of a government and you have a backing of a central bank and, as a general rule, you can earn interest on a currency Okay, whereas if you buy crypto, you get no income. There is no backing by anything. It is purely based on what someone else is willing to pay for that, and the reason it has been so volatile is that people have bought and sold crypto based on speculation, based on I can make money out of it, not based on this is a good store of wealth, so do I think people can make money out of crypto? Absolutely can you, but yes, but it's different to buying a company.
Speaker 3:Someone said it's exactly as buying company. If you buy microsoft, yes, the amount you can sell the share for is linked to that, but if, if microsoft were to delist, then you own a share in Microsoft. Microsoft produces something which produces earnings, which produces profit, and that profit allows you to pay dividends and you, as a shareholder, will get an income.
Speaker 4:I understand what you're saying, whereas crypto is different. I think crypto is great if you have a little bit of cash lying around and you want to take a punt, If you want to be speculative over a 10-year period and just go cool, let's see what a thousand pounds will get me in 10 years.
Speaker 1:You also got to look at the taxes, because people don't factor that in you know, um as long as you understand that you could you.
Speaker 3:It's a very high risk.
Speaker 4:Yeah, you've got to be willing to lose it all. That's what I'm saying.
Speaker 3:It's like it's like a casino, but it could could go really well, and that's why, I'm saying it's like it's like a casino, but it could could go really well, and that's why I said to stop it, provided someone doesn't see it as an investment. I'm investing in bitcoin because I'm my pension's going to grow in bitcoin, like I think that is, oh, you can, no, no, I would never do that.
Speaker 4:I just I. The reason I ask that is because, you see, well, I mean obviously since the event of Bitcoin as a currency. But my friend, when I was an apprentice at the sound company I worked at, he bought Bitcoin at I think at the time it was five pound a coin. He still has them. Yeah, he would have done it right and it's just funny because he goes, yeah, I'm just going to do it, I'm just going to see what happens, and he just kept them.
Speaker 3:Yeah, and one of the tricky things with something like crypto is, for every story, like the individual you mentioned, I know a number of people when Bitcoin went up to 70,000, I think, and then dropped down to 16,000. That's correct. Yeah, and I'm aware of a number of people who bought in at 70 and then panicked at 25 and sold out and now it's back at 195 or something like that and they're looking to buy again, because now it's the future.
Speaker 4:I just think it's an interesting punt and punt being the operative word.
Speaker 3:Look, I don't, it's not like a judgment thing. It's more, I get worried when people look at it as their way of investing where creating long-term wealth, where it could be short-term wealth or short-term bust, and that's the way you've got to think about it, in my view.
Speaker 2:That's the way we do think about it, and we don't.
Speaker 4:At least he's willing to talk about it, Craig.
Speaker 2:Yeah.
Speaker 3:I think what would be useful.
Speaker 2:And he's talking about nothing, as he just told you up front.
Speaker 3:I think what would be useful is maybe just to for the listeners is to just chat through quickly where we sit in markets in the year ahead, because I know we've spoken about various things. Yeah, sort of politics. But we are sitting at a moment of great uncertainty, not only because of Trump. I mean Trump adds uncertainty because, even though we're aware of some of his tactics and what he does, trump and the people he has chosen to partner with him in this journey they are really being very active in making change, and change leads to uncertainty.
Speaker 3:I should be clear I'm not a Donald Trump fan. I do not like him. I didn't really like what the democratic government were doing in the previous regime either. But it's not a Trump positive or negative. It's a change thing and change leads to uncertainty. And in investing, uncertainty makes investing difficult, because trump is talking about changing the entire financial model of the us. He's talking about that. He's going to tariff everyone, put tariffs on everything and then get rid of taxes. Yeah, and he won't tariff everyone and he won't get rid of taxes completely. But there's going to be a middle ground where both the tax revenue in the us as well as tariffs are going to change and to invest into that environment is really, really difficult. And when you add to that uncertainty the fact that we have two very material conflicts still ongoing no one talks about Ukraine anymore, but it's still ongoing every single day and then the Middle East is still uncertain, despite this apparent ceasefire.
Speaker 4:I saw the drone footage over Palestine recently. Yow yeah.
Speaker 3:I mean it's frightening. And then you can go into. You know what's happening in the middle, in in the east, around taiwan, and the military exercises around the philippines and threats of the chinese going into taiwan. Yeah, yes, so you can look around the world and there's there's significant amount of uncertainty and escalation. Yeah, but then if you go to markets and you look at where markets are at the moment, global, global markets are expensive On a relative basis. If you take just the entire global equity market and look at where it is at the moment, we are at a point where, particularly the US, and particularly the 13, 14 stocks that have driven the S&P 500 to these very high levels, you're at expensive prices to buy shares at a point where margins are close to all-time highs. Your price to sales are at all-time highs. All these measurements that are used to see where companies are, it's all what we would say in the industry is price to perfection. It's price to perfection. We had that deep-sea AI that came out and Nvidia on that day dropped 18%, 18, sorry.
Speaker 3:And so what that tells me is that built into the valuation of something like Nvidia is this almost perfection.
Speaker 3:And when that perfection is rattled, it doesn't fall 3%, 4%, it tumbles, it tumbles and, yes, it's made a bit of that back because people aren't too sure what's going on. My point is just at the moment you've got a world where there's quite a lot of uncertainty, quite a lot of risk, and you've got global equity markets at a holistic level at quite expensive levels. Equity markets at a holistic level at quite expensive levels, so got to be quite careful. To be very aggressive right now is, in our view, you could come and stack a little bit and to look for sort of cheaper pockets in the world makes sense. And then in South Africa, we think that South African equity market is still still offers a bit of value, and so to invest in SAEquities at the point in your RA or in your pension fund or in your investment is, we think, makes sense as part of the portfolio. And so, yeah, that is a little bit of a summary of how we see markets around the world and your models are poised for the same outcome.
Speaker 2:You've done a little bit of buyback on the offshore markets as well, yeah, so you've balanced the models and that's why you have models.
Speaker 3:Yeah, so you've got added to all of that. What I've said is you've got an incredibly strong dollar. You've got to add it to all of that. What I've said is you've got an incredibly strong dollar and so if all your investments are in dollars in the S&P 500, as we mentioned in a previous conversation we just look at it and say that the risks, the sort of balance of probability is almost against you. Where is the dollar going to stay as strong as it is and are the same shares going to be the winners for the next five, ten years?
Speaker 4:So often you see people like Ray Dalio saying it's coming, the crash is coming, the crash is coming, and I don't know how much of that is just fear-mongering to get views on YouTube or whether it's genuine or.
Speaker 3:And it's a very important point is to distinguish between a crash and future returns. So if nvidia, meta, tesla, all these companies that have had such a wonderful ride I'm not sitting here and saying they're gonna crash, but they could go sideways very easily, go sideways for five years your return could be zero, not crash. So they could just sit in a Absolutely, because they're already pricing in a lot of future upside, whereas some of the other companies around the world are priced at a point where they might deliver your inflation plus.
Speaker 4:And so if we go back to that S&P index, if it goes sideways for the next 10 years and you don't actually make anything back on your original investment, you've actually made a loss by not using a fund manager who can help you make a return.
Speaker 3:I guess that's right.
Speaker 4:We're brass tacks.
Speaker 2:Thank you so much. I think for me, the big takeout is at a dinner party or maybe with your friends. Be more positive about what's happening in South Africa and look at the positive sides of all the noise that we get.
Speaker 1:Thank, you, thank you and pleasure.
Speaker 4:Thanks you guys. Very interesting, thank you thanks, guys.
Speaker 2:Thank you for listening. If you have enjoyed this podcast and would like to subscribe, please visit our website, wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.