A notable milestone in SA’s financial history was passed in the second half of 2015. For the very first time, the value of South Africans’ foreign assets has come to exceed the value of the South African assets and debt held by foreign investors. At year end, our holdings of foreign assets, worth over R6 trillion, exceeded our foreign liabilities by as much as R714bn.
The buildup in offshore assets legally owned and managed by South African businesses, pension and retirement funds as well as directly by wealthy individuals, began from very modest levels in 1994, when South Africans became acceptable participants in global financial markets.
The growth in foreign assets and liabilities has served South Africans particularly well in recent years as the SA economy has been severely buffeted by a damaging combination of weak growth and higher inflation. Stagflation has accompanied a collapse in the currency, higher charges for utilities a severe drought and, to top all these economic body blows, we have seen (avoidably) higher borrowing costs imposed by the Reserve Bank.
The increasingly large foreign component in SA portfolios of assets therefore has helped significantly to mitigate the shocks to their incomes and balance sheets caused by specifically negative South African events, both political and economic. The protection against their exposure to SA risks has come in large measure from the shares they own in JSE-listed industrial companies whose major sources of revenues and earnings (as well as the costs they incur) are generated outside SA.
The successful industrial companies that began life in SA and have prospered abroad include Naspers (NPN), SAB, British American Tobacco (BTI), Mediclinic (MEI), Richemont (CFR), MTN, Steinhoff (SNH), Brait (BAT) and Aspen (APN) . They have come to dominate the JSE when measured by market value. Up to 50% of the value of the JSE is accounted for by these large firms, that we can describe as Global Consumer Plays (GCPs). Before the rise of these now global companies, investors on the JSE would have been much more exposed to the highly variable fortunes of Resource companies that used to dominate the JSE. Without these opportunities to invest in these world class companies on the JSE, as well as the investments made abroad by these companies and other SA based companies outside of SA, the value of SA pensions and retirement plans might have looked very sad indeed.
An equally weighted Index of 14 of these GCPs on the JSE (including recent underperformers MTN, ASP and CFR) has performed as well as the leading global index, the S&P 500, over the past two years or so, adding about 30% to its rand value of January 2015.
Well-developed liquid capital markets not only provide companies and governments with access to capital. They provide wealth owners, and their fund and business managers, with the opportunity to diversify away firm or country specific risks. A well-diversified portfolio with a full variety of investment opportunities, none of which will dominate the balance sheet and whose individual returns are somewhat independent of each other, makes for a much less risky portfolio, that is a portfolio whose value, while expected to rise over time, will do so more predictably than most of its separate components (especially individual shares) included in the portfolio. The well diversified portfolio provides positive returns with significantly less risk – that is smaller value movements in both directions.
Less risk moreover translates into lower required returns of the investor or wealth owner. Lower required returns also mean lower costs of capital for the firms hoping to raise capital to expand their businesses. Lower required returns in turn will mean more capital invested, a larger capital stock and a stronger economy. This is one of the benefits of a well-developed capital market that can attract capital from savers everywhere and not only domestic ones- as has the SA capital market – where capital inflows have more or less matched capital outflows over the years – as we have shown in figure 1 above.
Human capital effect
But the less risky returns that the opportunity to invest globally provided to South Africans benefits not only the owners of tangible capital but also the owners of intangible human capital committed to the SA economy.
There is always a global shortage of skilled professionals, including managers of businesses, for which competition is intense. By enabling skilled South Africans to invest abroad and diversify away SA risk, their required returns from SA sources have also declined. That is, they are more willing to apply their skills in SA – and therefore are more willing to sacrifice returns, that is employment benefits – because their wealth is better insured against SA risks to their wealth. This now more favourable exchange of less risk for lower returns by owners of a crucial resource- the human capital of skilled professionals- helps to make the SA economy more globally competitive
It has been wise of the SA government to relax exchange control over the years – it has helped the economy retain its skills and so better ride out economic misfortunes.
Were the economy to grow faster over the next few years, the outward flow of capital would be more than matched by inward flows of fixed direct investment (FDI) and portfolio capital. Also, foreign controlled companies would be more inclined to reinvest profits than pay them out as dividends. Growth leads investment by companies in additional capacity and stimulates the flow of funds to support growth. Without faster growth, the flows through the net flows through the SA balance of payments will continue to be more out than in.
The economy would grow faster were global market forces to become more favourable to our emerging, metal price-dependent economy. The rand would then strengthen (as it has lately) and the inflation and interest rates would come down rather than rise to help the economy along. Faster growth over the longer term would respond to more business, employment and wealth friendly policy reforms, of which exchange control reform is a very good and helpful example.
Some details about capital flows
FDI is defined as an investment by a foreign company with a more than 10% shareholding. Portfolio investment is defined as a less than 10% share. As may be seen below, outward FDI has recently come to exceed inward FDI, while inward portfolio investments continue to exceed outward flows – that have become significantly larger.
