South Africans building an entire “new economy” overseas 

South African investors have more than doubled their offshore allocation over the past decade, making these investments almost the size of the country’s entire GDP.

The South African Reserve Bank revealed this in its first Financial Stability Review for the year, which said that one of the major risks to the local financial sector is money flowing out of the country. 

The steady selling of local assets by foreign investors and South Africans has greatly reduced the liquidity in South Africa’s capital markets.

This poses a risk to the local financial sector as institutions are increasingly exposed to common risks, and the system cannot withstand external shocks. 

A financial system is made resilient by distributing risk across companies, sectors, and geographies. 

This is a key principle of banking, where a financial institution is not exposed too heavily to one sector of the economy and can thus be wiped out by a single external shock. 

The same applies in the investing landscape, with large institutional investors spreading their risk across companies and sectors.

However, in South Africa, the opportunity to spread this risk is increasingly being limited by the delisting of companies and the rapid growth of government debt. 

This has resulted in local investors increasingly looking offshore for better returns and access to sectors unavailable on the JSE, such as AI and Big Tech. 

Large financial institutions have noted this trend for a while, increasing their offshore offerings and making it easier for South Africans to invest globally. 

This, coupled with regulatory changes, has resulted in the average Regulation 28-compliant fund now investing just 39% of its assets in South African equities, compared to nearly 70% eighteen years ago.

Over the past decade, asset managers’ offshore allocation has doubled. Local investors have invested nearly an entire GDP’s worth of assets outside of South Africa. The graph below shows this trend. 

For the past few years, foreign investors have signalled their unwillingness to invest in South African assets, dumping local stocks and bonds. 

It is estimated that foreign investors have sold R710 billion worth of South African equities in the past seven years.

This has accelerated recently, with foreigners being net sellers of South African shares for 25 days straight until last Friday, JSE data showed. This is the longest daily streak of outflows in three years. 

In the company’s latest annual report, Old Mutual chairman Trevor Manuel said investors had withdrawn over R1 trillion from the local economy in the past decade. 

He attributed most of this to an uncertain regulatory environment and policy instability, saying the government’s reform programme has taken too long to implement. 

“This money is being redirected to competing markets that appear to have a more sound governance and regulatory foundation.” 

“This is a stark reminder that Africa, particularly South Africa, has to compete to attract and retain investment,” Manuel said. 

However, some investment managers have said investors are taking their money out of South Africa because of the poor performance of local assets compared to their global counterparts. 

Ninety-One’s John Biccard said the JSE had experienced a “lost decade”, with their returns being relatively flat and unattractive to asset managers. 

The JSE All Share Index has returned just 2% in US dollars per annum over the last ten years – a far cry from the S&P 500’s 12% annual return. 

“These numbers reinforce the mantra of US ‘exceptionalism’ versus South Africa as a failed state,” Biccard said. 

“With respect to the valuation of South African shares, it is clear that the market expects the next ten years to be at least as bad as the last.”

Local equities currently trade at the largest valuation discount ever relative to both the MSCI Emerging Markets Index and the MSCI World Index.