JSE’s lost decade

The JSE All Share has significantly underperformed global stock markets over the past decade, as South Africa’s stagnant economy has limited the growth of local companies. 

However, this may change, with the country experiencing its longest streak without load-shedding since 2020 and forming a new government seen as market-friendly. 

The poor performance of the JSE over the past decade has resulted in many local investors taking a growing portion of their savings offshore to capitalise from tremendous growth in global equities. 

Sanlam’s Thobile Ngcobo and Matimu Ngobeni recently outlined how retirement funds have benefitted from a change in regulation, allowing them to invest more of their assets offshore. 

They also revealed just how significantly the JSE has underperformed its global peers in the past decade, which will lead to asset managers increasing their offshore exposure in the coming years. 

Following an amendment to Regulation 28 of the Pension Funds Act in 2022, South African retirement funds swiftly invested billions of rands outside of the country. 

For example, Sanlam’s balanced fund increased its offshore allocation from 24.8% at the beginning of 2022 to 38.3% less than two years later. 

This has resulted in better outcomes for South African investors as they managed to capture the strong appreciation in global equities since 2022, Ngcobo and Ngobeni said. 

Portfolios consisting solely of local assets have underperformed those with an allocation to offshore assets, as offshore assets have outperformed local assets over the past decade. 

For instance, Sanlam’s global balanced fund outperformed its local counterpart by nearly 2% in the past ten years. 

When the performance of local equities versus their global counterparts is isolated, this differential is markedly worse. 

Offshore equities have outperformed South African equities over this period, with the disparity widening notably in 2023. 

Managers who swiftly increased their offshore allocations have capitalised on this outperformance in offshore assets over the past two years.

The difference in the growth of R100 invested in the JSE All Share over the past decade and the MSCI All Countries World Index is shown in the graph below. 

While the regulatory change allowing retirement funds to increase their offshore exposure has benefitted local investors, it has weakened the local financial system. 

Reserve Bank data shows that South African investors have more than doubled their offshore allocation over the past decade. 

The continuous sale of local assets by both foreign investors and South Africans has significantly diminished liquidity in South Africa’s capital markets.

This trend poses a risk to the local financial sector, as institutions are becoming increasingly exposed to common risks, making the system vulnerable to external shocks.

A resilient financial system distributes risk across companies, sectors, and geographies. This principle is essential in banking, where a financial institution should not be overly exposed to a single sector, which could be devastated by an external shock.

Similarly, in the investment landscape, large institutional investors diversify their risk across various companies and sectors.

However, in South Africa, the ability to spread this risk is becoming more limited due to the delisting of companies and the rapid increase in government debt.

As a result, local investors are increasingly seeking better returns offshore and access to sectors not available on the JSE, such as AI and Big Tech.

Large financial institutions have observed this trend and have expanded their offshore offerings, facilitating global investments for South Africans.

Additionally, regulatory changes have led to the average Regulation 28-compliant fund now investing just 39% of its assets in South African equities, down from nearly 70% eighteen years ago.

Over the past decade, asset managers’ offshore allocation has doubled, with local investors placing nearly an entire GDP’s worth of assets outside South Africa. The graph below illustrates this trend.