‘Don’t trap our money’, say South Africa’s money managers

It was the attack from within that South Africa’s asset managers hadn’t seen coming.

This week, Duarte da Silva, a veteran asset manager whose CV includes stints at Merrill Lynch, Macquarie and Credit Suisse, wrote an impassioned open letter with a plan designed to halt what he calls the “death” of South Africa’s capital market, the JSE.

Da Silva traces much of this problem to National Treasury’s decision in 2022 to allow retirement funds to lift their offshore exposure from 30% to 45% which, he said, “created scope for a further R800bn to move abroad” and slashed demand for local stocks.

His solution is radical: the government needs to do a U-turn, and pare back the offshore allowance to 30%. “If South Africans are not investing in South Africa, why would the world,” he asked in that letter.

A 12-slide presentation on his plan framed this as a “national choice”: either “continue exporting patient capital” or “rebuild savings as recovery capital” to fund national priorities.

Predictably, Da Silva faced a firestorm of criticism.

“Misguided”, said PSG Financial Services CEO Francois Gouws; “bullshit” said another, less charitably. For many, the response was visceral: Da Silva’s plan reeked of a new form of exchange control, curbing the ability of asset managers to shift assets to the pockets of the world where they can get the best return, like the US.

Paul Theron, who founded investment company Vestact, says Da Silva may have diagnosed the problem of a dwindling local market, but his solution is simply wrong.

“The last thing you want are more regulations on where capital can move. Ideally, we’d want all exchange controls set on fire, incinerated, and never to be seen again. So going in the opposite direction is clearly not smart,” he tells Currency.

Theron concedes that Da Silva isn’t the first to make this suggestion. But he says that reducing the offshore limit isn’t the big salve that Da Silva thinks it is.

“What you need are attractive investment opportunities. And what has stopped this from happening are years of bad economic regulations, which have prevented good companies from coming to the fore and incentivised them to set up shop in other countries,” he says.

Hendrik du Toit, the CEO of Africa’s largest asset manager, Ninety One, says that either way, the ship has sailed in terms of allowing funds to invest offshore.

“Should we have hiked the offshore allowance from 30% to 45% a few years ago? Perhaps not – but now that we have, it would be hugely difficult to undo,” he says.

Capital, he says, would always prefer fewer controls. “It’s like a teenager; the greater the restrictions you put on it, the more it rebels. So you can’t lock capital in jail.”

Du Toit says Da Silva’s proposal isn’t so out of kilter with the sentiment elsewhere, where some countries are trying to reassert control over their capital. Donald Trump, for instance, is trying to coerce Americans to build plants in the US, and others are following.

But South Africa, as a small economy, doesn’t have that sort of leverage. Given that limitation, Du Toit says, the country has little option but to make itself more alluring to investors, and to create bankable projects that would provide compelling returns.

“Reducing the offshore limit, at this point, won’t save the JSE, because the UK has no such controls, and the London Stock Exchange is going through the same pain. The only way to ‘save’ your market is to make it more attractive, and easier to do business,” he says.

The country’s economic history demonstrates this, he says. In the late 19^th century, for instance, South Africa attracted investment because of its gold and diamond reserves.

Equally, South Korea is thriving as an economy today because of the growth provided by its domestic battery technology and its chip production ability – not because of capital controls.

The valuation dilemma

Da Silva tells Currency that the reason he published his letter now is that he is looking to list a business on one or other exchange, and has been examining the merits of doing this

“I met with the JSE, and they put forward a case for why I should list it here, instead of London. And I really do want to support the JSE, but I’m really frustrated by the lack of liquidity and the lack of support that businesses get in South Africa,” he tells Currency.

While many public responses have been critical of his idea, Da Silva says he has been “overwhelmed” by the number of people who contacted him supporting the plan. “Many of the fund managers told me they absolutely agree with me, but said that no-one has been brave enough to say it until now,” he says.

Indeed, some of the fund managers contacted by Currency do appear to sympathise with his view, even if they disagree with his remedy.

Peter Armitage, the CEO of Anchor Capital, says he sees where this argument comes from, even if he doesn’t agree with the solution.

“It was quite a big shock in 2022 when that offshore limit was lifted to 45%, and that did have a significant impact on the appetite for South African-listed shares. Before that, if you wanted oil exposure, you bought Sasol – all of a sudden, you could buy BP and Shell too.”

Valuations of mid-sized South African companies suffered because pension funds and local funds had far more choice. Armitage also agrees that if the market for capital raising in South Africa dies, the country’s entire economic system risks stalling.

“I’ve seen this up close. Our business, Anchor, was listed on the JSE, but the valuation was at rock bottom. So we bought it out and delisted it, and we’ve since multiplied our earnings. The truth is, you only want to be listed if you get a fair value,” he says.

But while Armitage agrees that the increase in the offshore limit was one factor in this trajectory, he doesn’t believe this is the main factor for the dwindling capital market.

“The far bigger factor in deciding where to invest is the growth rate of companies. Even locally, you see those businesses that are growing fast – like Capitec or Dis-Chem – do trade at higher values,” he says. “This shows you that what you need is a better environment that allows companies to flourish. Then you will be able to see this value come through,” he says.

He is not wrong. Capitec’s stock trades on a price-earnings multiple of about 30, while Dis-Chem trades on a multiple of 26, reflecting the expectation of higher growth.

Da Silva concedes Armitage’s point, but he says these are isolated cases.

“This is the exception. If technology company Dimension Data were to list on the JSE today, as it did in 1987, I can tell you it would get zero support, there would be zero liquidity in its shares, and it would probably fade away as a failed company in a year’s time,” he says.

Of course, implementing rational economic reforms, and reducing the hurdles for business systematically, is a slow-burn solution. It isn’t sexy. And it lacks the immediacy of a silver-bullet proposal, like lowering offshore limits, which seems beguilingly simple.

But, experts say, it really is the only real answer.

Stuart Theobald, the chair of research consultancy Krutham, says the dwindling capital market predates the 2022 decision to lift the offshore limit to 45%. There are now only 280 companies on the JSE, for example, but this number exceeded 800 in the 1990s.

He argues that if capital is leaving South Africa, the question to ask is not how to trap it, but why it isn’t finding a home. “A pension fund with a 45% offshore allowance that cannot find sufficient domestic opportunities at acceptable risk-adjusted returns is not being liberated by that allowance – it is being relieved of the fiction that a lower limit was doing useful work,” he says.

In any event, he says, the offshore exposure of many pension funds is well below 45%, so this is probably not the definitive reason why the local market is battling.

Instead of building a wall around domestic money, Theobald argues, more creative policy changes are needed, like allowing tax-free savings accounts to hold individual stocks, rather than just exchange traded funds (ETFs).

The focus, he says, should be on generating a pipeline of projects that would “make domestic investment the rational choice even when global alternatives are available”.

The real opportunity

Da Silva, responding to the criticism, concedes that structural reform is vital – but he argues that this cannot realistically happen if you allow domestic capital to flee.

“Look, I do agree that the capital market is an ecosystem, but if we throw up our hands and say: ‘We won’t invest till everything is perfect,’ then we’re damned. We must do what we can to prevent capital leaving, otherwise there won’t be anything left with which to rebuild,” he says.

As it is, he says, local fund managers are able to remain below that 45% limit even though they are almost fully exposed to companies whose fortunes are determined in London, Geneva, Shanghai and New York, since the majority of the JSE’s top 40 stocks in which they invest are global enterprises. He cites the examples of Naspers, Glencore, Richemont, British American Tobacco and Anglo American.

Asked about the feasibility of reverting to the 30% offshore limit, Da Silva admits he is not sure the genie can be put back in the bottle at this point.

“But that doesn’t mean there aren’t other things we can do. For instance, we can stipulate that if you invest in a company on the JSE’s top 40 that is domiciled overseas, this should count towards your foreign allocation,” he says.

Da Silva says unless the private sector intervenes to protect domestic capital, South Africa’s politicians will likely, at some point, insist on a policy of prescribed assets – forcing investment firms to invest in state-owned assets or projects.

His critics argue, however, that ringfencing local assets is only one part of the task; securing new global investment is another – and South Africa will struggle to do this if it sends a message that it wants to lock up, rather than release, investment flows.

As Theobald argues: “Voluntary domestic investment, made in competition with global options, is the signal that attracts foreign capital. Captive domestic investment is not.”

Du Toit agrees, arguing that South Africa has an opportunity right now to put itself back on the scoresheet of global investors in a way that would be far more catalytic than simply lowering offshore investment limits.

“This is a moment to attract global entrepreneurs and business owners who have a bad deal in Europe and may have concerns about security in the Middle East. If South Africa can sort out its crime and security issues, this offers a golden opportunity,” he says.

“We need to bring new investors to this country, not trap what we have here.”

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_{Top image: Rawpixel; Currency.}