While inward investment in South Africa has previously been attractive to those whom reside there, of late there have been mounting issues that make it less encouraging. Dealing with construction permits, which can be a long-winded exercise, getting utilities supplied to a property can be fraught, trading across borders is less than simple and tax payments are increasingly complex.
While these kinds of problems aren’t either confined to South Africa, tensions and uncertainty in the region doesn’t help at all, and they are both factors that make investors nervous of leaving wealth within the country. South Africa has a lot of mineral wealth – so much so that the companies extracting and distributing those commodities rely for the greater part of equities rather than the materials themselves as an income-generating means. That makes the share capitalisation one of the major driving forces behind the economy, and that isn’t necessarily a good thing. But there are also other barriers in South Africa, including;
Legal Changes in South Africa
Implementation of the Financial Sector Regulation Act (FSRA) in 2017 has led to adoption of the so-called “Twin Peaks” model of financial sector regulation for South Africa, thus aiming to de-fragment and consolidate legislation in the banking sector, and linking the Prudential Authority and the Financial Sector Conduct Authority (FSCA). The Prudential Authority is tasked with overseeing the system-wide safety and soundness of financial institutions and the FSCA is tasked with overseeing system-wide efficiency and integrity of financial markets, and their caution approach to the economy threatens to strangle it.
The turbulent political and social issues in south Africa only serve to put jitters in the market and that is always bad for investment. The political situation has now got so bad, that the economy is now rated as ‘junk’ by all the major ratings agencies, and that is leading to a drain on resources as people try to pull out of the mess, and the inevitable Government crackdown to prevent such asset movement.
Moving Money Offshore
Now the desire of many, getting assets out of South Africa has become a major goal for many, and the reaction of the Government has been to prevent this where possible. South Africa’s equity market capitalisation equates to more than 200% of the country’s gross domestic product (GDP), the highest proportion in the world and a level that is simply not sustainable. Put simply, South Africans investors need to embrace different asset classes rather than constantly relying on the underperforming stocks and shares.
The main problem is that the whole of the South African Economy is performing more akin to an emerging economy rather than a well established one. Economic growth in South Africa declined from an average rate of 4.2% between 2000 and 2008 to a mere 1.9% from 2010 to 2018. In comparison, growth in Nigeria it has more than halved from an average of 8.3% to just 4% while in Brazil, it has slipped from an average of 3.8% to 1.4% over the same time periods. Proof indeed that South Africa is now languishing alongside the economies of emerging nations.
Why Choose the US?
So, where does that leave the investor? Well, looking further afield, of course but to where? Obviously, investors are concerned about volatility, and calm markets always do well, and there are few calmer than the markets of the US, and that is where many South African investors are looking to make long term gains. GDP Growth Rate in the United States averaged 3.21% between 1947 and 2019. That is a stable market – not exciting, for sure, but a market that offers a good, solid return on investment.
South African investors are thirsty for strong investments but also yearn for a positive return on their money. Over several decades, they have become almost addicted to equities, driven down that road by an economy that likes to show its wares rather than sell them. If they cannot bear the thought of moving away from stocks and shares as investments, then the very least that they can do is look for stock in stronger economies, and that is exactly what the US is offering.