Regarding… Vol 4 no 16 – Investment Heaven

Dear Fellow Investors and Friends,

Welcome to my newsletter, where I share my efforts to understand markets and the world around me.

I do appreciate you taking the time to read this. I love getting feedback; feel free to drop me a line. It’s great to start conversations.

Today is Thursday, May 14th, the 134th day of the year. There are 231 days left until the end of the year. On this day in 1952, David Byrne was born. He was the frontman of one of my favourite bands of all time, “Talking Heads”.

One of their hits was Road to Nowhere. Here are some pertinent lyrics from the song:

There’s a city in my mind
Come along and take that ride
It’s alright, baby, it’s alright
And it’s very far away

But it’s growing day by day
And it’s alright, baby, it’s alright
Would you like to come along?
And you could help me sing this song

And it’s alright, baby, it’s alright
They can tell you what to do
But they’ll make a fool of you
And it’s alright, baby, it’s alright

We’re on a road to nowhere (hey, hey)
We’re on a road to nowhere (hey, hey)
We’re on a road to nowhere (hey, hey)

Last week, I alluded to a deeply embedded belief in the South African psyche: that the local market is “uninvestable” and it’s much safer and more rewarding to invest offshore. As a result, South African investors are inordinately drawn to faraway investment cities, comforted by the soothing sounds of their “helpers” saying “it’s alright, baby, it’s alright”.

The scary soundbites about how bad it is here in SA, and the comforting lullabies on how good it is in the offshore “cities” are normally accompanied by a lot of handwaving in the direction of “high tax rates”, “a weak currency”, “low growth” and “a limited stock market, with much better returns available elsewhere”.

Numbers and facts do not enter these fuzzy arguments; an example of which can be found here. It’s all sentiment, hindsight and handwaving. These emotional arguments are extensively used by the “helpers” who, for a handsome fee, advise understandably receptive South Africans on the externalisation of their assets.

I call these people the “Handwaving Helpers.”

Let’s examine each of the boogeymen the helpers use to motivate their clients, using real numbers and facts rather than handwaving.

Over the past 30 years (1994–2024), South Africa’s standard corporate income tax rate has followed a steady downward trajectory, reducing from 40% in 1994 to a low of 27% by 2023.

This 27% rate is higher than the OECD average of roughly 23.2%, but lower than the average of African countries.

Our top marginal personal tax rate is amongst the highest in the world, but average tax rates are more reasonable. Across all taxpayers, South Africa’s average tax rate is roughly 22.4%. This is lower than the OECD average of 24.5%.

South Africa’s VAT rate is 15%, lower than the global average of 18% – 20%.

Fact: our tax rates are highish, but far from unreasonable.

The table below shows that the Rand consistently depreciates. But the rate of depreciation is much less than the Handwaving Helpers would have you believe. The rand has strengthened over the last three years against all four major currencies. Over 10 years, it has been stable, with almost no depreciation. Over 20 years, however, the structural picture is clear: the ZAR has depreciated by roughly 3% – 5% per year against these major currencies, with the worst long-run depreciation against the US dollar and euro:

The annual depreciation rate is one thing, but what about inflation differentials?

Here is a table showing the relative inflation numbers:

Comparing the second table with the first shows that, for most periods, the rand has strengthened in real terms – it has depreciated by less than the inflation differential. Over the past 20 years, it has shown only a bit of weakness in real terms. But not enough to get all hand-wavy about.

Fact: The rand has generally maintained its purchasing power over long periods.

But wait, there’s more!

For roughly 30 years, South Africa has maintained a restrictive monetary policy. Real interest rates have remained high to curb inflation and preserve the currency’s real value, and the figures above show that this approach has been effective.

This means that if you had kept your cash on deposit in South Africa, you would have been much better off than taking your money offshore and keeping it on deposit in a low-yielding developed market.

The following chart shows a comparison between leaving R100 on deposit in South Africa against the alternative of taking it offshore at the prevailing exchange rate in 2001, putting it on deposit in the USA (the country with the strongest currency in the world over the past 20 years) and then converting it back into rand at the end of the period:

Fact: By keeping your money in South Africa over the past 30 years, you would have ended up with almost 50% more money. That is a lot of money, which you cannot handwave away.

I’ll keep the argument short on this one. The go-to source for global stock market returns – the work of Dimson, Marsh and Staunton – proves there is no correlation between GDP growth rates and stock-market returns. For example, China has been a disastrous investment destination, despite their high growth rates

Our poor economic growth rates have been bad for the people of this country, which helps explain much of the negative sentiment towards investment prospects here. But low GDP growth and the resulting negative sentiment have no predictive power for investment returns.

Returns are based on simple math – low P/E’s equal high prospective returns. So, one must untangle understandably negative sentiment – driven by a lack of economic progress – from investment prospects. They are very different things.

Fact: South Africa’s low growth rate is a weak argument for avoiding local investments.

Let’s deal with the last boogeyman – a stock market perceived to offer inferior returns compared with other global alternatives. This is the argument most often invoked by all those Handwaving Helpers to justify moving funds offshore. But let’s have a look at some real numbers.

First, the very long term. Over the past 125 years, Dimson Marsh and Staunton show that the South African market has been the best-performing stock market in the world (for those interested, you’ll find the chart in their 2026 annual review).

Here’s what counts: South Africa is the best-performing equity market in the world from 1900 – 2025. The bad news is that our bond market is only the second-best-performing one in the world, after Sweden.

This is what the Handwaving Helpers will never tell you: the real returns available from the SA market have been astoundingly good.

But what about the short term? Over the past 20 years, the South African stock market has shown a similar pattern:

That’s all very well and good, the Helpers might say as they wave their hands in the air: it’s all academic. What about real money?

Well, it just so happens that almost 5 years ago, a member of the BizNews community put up R1mn to test this hypothesis. He allocated half to me and half to a vocal member of the handwaving fraternity, whose firm has profited from helping many people move their money offshore.

I chose a fund I co-manage with my colleague Rudi van Niekerk, the MWI Value Fund, which is a 100% South African equity fund. The offshore advocate chose different offshore funds. I don’t know which funds he chose, but I would be shocked if he chose funds different from those in which he placed his clients’ money.

Here are the actual real money results after 4 and a half years of the competition:

A couple of comments:

• The (local) Value fund outperformed the offshore choices by a lot.
• The local fund also outperformed the All-Share Index and the MSCI World.
• It did not outperform the gold and platinum-heavy Top 40 index. But then again, not much else did, either!
• The local fund narrowly underperformed one of the best stock markets in the World over the past 5 years, the US-based S&P 500.

I would bet that, on average, if South Africans audited their offshore returns properly, they would find that they have performed poorly compared with the alternatives available right here in South Africa. Of course, the Handwaving Helpers would never encourage such calculations and comparisons.

Final Fact: Contrary to popular belief, South African assets perform very well over the short, medium and long term.

Owning South African assets can even be life-changing in some cases. If you had bought any of Capitec, PSG, Naspers, Advtech, Clicks, CMH, FirstRand, HCI or Sabvest Capital 25 years ago, you would have over 100 times your money today. And that’s just in the listed market, where I’m 100% sure I’ve missed a few names.

In private markets, there have been many wonderful business success stories, too. South Africa is well-endowed with great entrepreneurs who have built great businesses.

If we are so negative about South Africa and its many problems, why has the stock market performed so consistently well? The answer is valuation.

Because sentiment toward the country is so poor, local assets trade at materially higher risk premiums than offshore assets. That persistent risk premium drives stronger returns. Put simply, South African assets are priced cheaply. Capital is scarce in the local market, which raises the returns available on the remaining capital. As long as capital stays scarce, returns will continue to outperform global peers.

Today, capital remains scarce in the SA economy.

Why would you ignore these opportunities?

These businesses are right here, growing up in front of your eyes. Within 3 degrees of separation, you probably know someone high up in them. Information is a phone call away. Replicating that type of knowledge and network offshore is hard. Ask any of the South African businesses that were sold a steaming pile of you-know-what by the investment bankers in London and New York, assisted and egged on by their local Handwaving Helpers. For a fee, of course.

There are naturally valid reasons to invest offshore:

• It’s like an insurance policy against our stupid government doing what they do best, stupid things. But like any insurance policy, it costs money. In the case of investments, the cost is worse returns.
• Diversification. It’s always sensible not to have all your eggs in the same basket. But then again, don’t put them all in the same offshore basket.
• Unique opportunities. The world is a big place and offers a wider range of investment opportunities than those available in South Africa. It’s just not as easy as the Handwaving Helpers make it out to be.

The biggest risk we face here in South Africa is an overreaching government. But some organisations are pushing back, hard. Rather than paying the exorbitant fees to your friendly Handwaving Helper, invest more locally, and use your savings to support the local non-profits who hold the government to account – Sake-Liga, OUTA, IRR, etc.

That way, you get good returns and a better government, which might even improve your returns further. A real win-win and a true investment heaven. Not a road to nowhere.

You can watch a video of the recent interview with Alec Hogg of Biznews on this competition here.  My counterpart’s main defence of the poor offshore performance is “I am merely doing what the clients want.”

But those clients are making decisions and requests based on the barrage of negative information that they have been fed for many years.

A self-fulfilling prophecy is a flimsy veil for underperformance and a lack of willingness to adapt to what’s really been happening in the markets.