Category Archives: Finance

  • 1

Investment boycott is perverse

Following the halting of lending to six state-owned enterprises (SOEs) by Futuregrowth, there has been increasing calls for an investment boycott or even a tax strike in SA. I believe such steps would be perverse, considering the fact that even during the worst days of Apartheid, no such steps were implemented by SA firms or taxpayers. An investment boycott or tax strike would be very damaging to the SA economy and risks fuelling the flames of division within our country even further.

The aim of an investment boycott or tax strike would be to force the government to take a number of steps supported by some opposition parties and some sections within big business. These steps would likely include the cessation of the actions against Pravin Gordhan, the halt of the nuclear project, increased oversight of SOEs, seriously addressing corruption and probably the resignation of President Jacob Zuma.

In my opinion, an investment boycott or tax strike would represent the nuclear option for SA, which would be very damaging to our economy and to our most vulnerable citizens. It could limit the government’s ability to deliver on its promises: including the National Development Plan; it could put pressure on infrastructural spend; and could even limit its ability to fund budget increases, which could put pressure on areas such as education, health, etc. In addition, it could damage the country’s reputation if it were to lead to a reduced ability by the country to finance its debt. If we are looking for a credit rating downgrade, an investment boycott or tax strike would go a long way to achieving it.

In addition to the damage that such actions could cause to our economy and reputation, it also is not guaranteed to succeed. Even overwhelming participation in such actions (which would be needed, but is unlikely, in my opinion), may lead to the opposite reaction from the ruling party than is desired. It is much more likely to unify the ANC and cause it to close ranks. If this were to occur, the pain experienced by our country would be extensive and long-term.

In addition to the economic and reputational damage that an investment boycott or tax strike could cause, it could also be very harmful to the social fabric and our desire for unity and equity. It would serve to flame the fires of the “white capital” narrative that is increasingly being bandied around in our country and is creating increasing divisiveness. And it would be correct to do so. The plain truth is that the same people and institutions who are calling for an investment boycott or a tax strike, were silent on these topics during Apartheid.

There is no doubt that international sanctions against the National Party played a meaningful role in leading to the demise of Apartheid. However, it was never supported by SA business or by SA opposition parties. Not even the Progressive Federal Party (PFP) who was the precursor to the DA supported these actions. No large SA corporates became involved in sanctions and none of them came even close to an investment boycott. This was despite significant human rights abuses and disenfranchisement perpetrated by the Nationalist government. There was also no real talk of a tax strike by South Africans.

We can see the lack of action by SA big business, opposition parties and white citizens in the 1980s and before as complicity. We can choose to believe that they were happy to live under Apartheid and for many, I am sure this is true. However, we must not under-estimate the impact that fear could have had on inaction. An investment boycott or tax strike by SA big business and white citizens would likely have led to a substantial crackdown by the NP government, which was too ghastly to contemplate by many. And here is the rub. We lived in a police state during the 1980s, under an almost constant state of emergency. We lived in a country that was not free, even for the beneficiaries of the system. That has changed.

Say what you will about recent actions by the ruling party, about corruption, about lack of accountability, about our President being seemingly untouchable, we still live in a free and democratic country. If you have any doubts about this, go and have a look at what newspapers write every single day about the government and the ANC, without fear or serious reprisal. Go and have a look at what people have to say on social media and how many of them are arrested for it. Gone are the days when you had to watch what you say, who you interact with, who you gather with, who you protest against. Gone are the late night knocks on your front door, the arrests, the detention without trial, the “suicides” of those in custody. If you are still not convinced, go and have a look at who governs Tshwane, Johannesburg and Nelson Mandela Bay metros. If we were not substantially free in this country, if we did not have a vibrant democracy, this would never ever have happened.

In addition, go and have a look at what ANC loyalists and previous leaders have to say about the SARS wars, about Nkandla, about the constitutional court ruling and about electoral losses. The vast majority of South Africans and leaders on both sides of the aisle can see what is going wrong with our country and are adamant to make it better. The majority of people are on the right side of history and we will see positive changes in the near term. I am confident and optimistic.

However, if you want to divide people, if you want the racism card to be played more often, if you want the “white capital” narrative to grow, if you want to devastate the economy, if you want to hurt the most vulnerable and if you want to damage the country’s reputation, then you must support an investment boycott or a tax strike. I seriously hope that this is not what you want.

I therefore call on opposition parties to speak out against these voices looking to damage our country. Refer back to your and your predecessors’ arguments against sanctions in the 1980s. I call on big business to distance themselves from these moves. Remember what side of the argument you were on during Apartheid and consider what this could do to the economy. I call on ordinary South Africans to be patient. We are moving in the right direction and forces for change are gathering momentum. Trust that the hard-won democratic process allows for your voice to be heard.

Are you a supporter of an investment boycott or tax strike and why? Are you not concerned about the negative impact this could have on the economy and ordinary South Africans? Would this risk the hard-won unity that is developing in SA? Would it not add fuel to the “white capital” narrative and racism allegations? Should you not have the same approach as when you were against sanctions in the 1980s? I would love to hear your feedback.

In the mean time, keep your talking straight!

#InvestmentBoycott #TaxStrike #Futuregrowth #SARSWars #Sanctions


Marius Strydom is the CEO of MLAX Consulting

Photo by twicepix

  • 1

Don’t lose your money in one of these schemes

If you are invested in a scheme that offers you a 30% return per month (or are thinking about it), you are in dangerous waters. You run the risk of losing all of your money. If you are one of the lucky ones, you may be getting your returns from the poor souls that invest after you. When it comes to such a pyramid scheme, someone is going to lose. Do you want to be one of them? Do you want to make money because someone else is losing?

People in SA are feeling the pinch of tough economic conditions due to rising prices, rising interest rates, higher unemployment and drought. They are getting desperate and will do what it takes to make ends meet. Their options are usually limited. If they have savings in traditional bank accounts, they can expect maybe 6% growth per year, which is not enough to make up for rising prices. They can borrow from micro lenders, but the interest rates are high (around 30% per year) and it is becoming more and more difficult to gain approval (because people are already very indebted). They can join stokvels, but that only helps if their payout is early in the year and even then, they are still not getting out more than they put in over a year. So what must they do?

An option that more and more people are taking is to invest in schemes that offer huge returns. One of these schemes offers the possibility of earning a 30% return every month. That means that you can double your money every three months. Wow. It sounds too good to be true. That is because it is too good to be true. It is impossible for any organisation to provide their investors with a 30% monthly return on a sustainable basis. Not unlikely. Impossible. What you are looking at is a typical pyramid scheme.

It is true that sometimes assets can appreciate greatly in value over a short period. This happens when you invest in something that is extremely under-priced (because people don’t know enough about it at the time) or when you invest in something before very positive news about it emerges (profits rise significantly or they literally strike gold or oil unexpectedly). The thing is that good news spreads fast. Once the news is out there and once people find out about it, the price goes up significantly, but after that the pace of increase slows down. For something to go up significantly month after month, year after year, continued fresh good news has to emerge. This is very unlikely, because people love a great story and will look extremely closely at a fast-rising asset, which makes it increasingly difficult for good news to remain hidden. What is more likely to happen is that the hype around such an asset will cause it to rise too fast. It will become more expensive than what the underlying news implies and a bubble is created. More often than not, the news can’t keep up with the price, the bubble bursts, the price collapses and people lose their money.

That is if you’re investing in an asset. But what if there is no underlying asset? What if the scheme you are investing in relies on you transferring money directly to people that joined before you and the money that you hope to get out will come from people that join after you? Such a scheme is just like a stokvel, but a stokvel without a bank account (that at least earns an interest rate). Imagine you join a stokvel in January and put in R1000. What would have to happen for you to get out R23000 in December (which is what you would get if you earned 30% per month)? Well, either the stokvel must win the lottery or the number of members in the stokvel must increase 20 times and every R1000 put in by those 20 people must come to you. Of course these 20 people will also expect to get 30% per month, so at the end of year 2, the stokvel needs to find R500000 to pay these people. Where will this money come from? Eventually people are going to lose their money and for every one person that wins, there has to be 20 losers!

Schemes such as this can’t be sustained without rapid growth in membership. They depend on people going out and recruiting more people. Those that have put in money tell their friends and family and encourage them to invest. They post testimonials online, sharing their success stories. They organise large community meetings all over, sharing their stories of quick riches and encouraging more people to join. The hype continues to increase and the pyramid scheme continues to grow.

The problem is that because you need to grow membership by at least 20 times per year, you are going to run out of people at some point and once that happens, at least 20 out of 21 people are going to lose their money. Let me explain the difficulty. If a scheme starts with one investor in year 1, by year 7, you will need 64 million people to keep the scheme going. The next year, you will need 1.3 billion people (almost 20% of the world population). By year 9 you will need 26 billion people. Do you see the problem?

So why do people invest in these pyramid schemes? They do so because they are desperate, uninformed or greedy. It doesn’t matter what your motivation is, the outcome is not going to be good. You will most likely be one of the unlucky ones, the 20 out of 21 people who will lose their money. If you are very lucky, if you get in early enough, if you make your returns and if you take your money out soon enough, you will only achieve this because you are hurting other people. Your actions will mean that many people who invest after you will lose their money. It may not be next month, it may not be next year, but it will happen eventually. How would you feel about that? How would you feel if you get rich because of many other poor and vulnerable people losing their money? Will you claim ignorance? Will you say, “it’s not my fault”, “the company lied to me”, “I didn’t know”? If you read this piece or others like it, please know that you have been warned.

I have seen schemes promoting themselves and people on social media defending these schemes, choosing to vilify the banks, to discourage people to use normal banks and to encourage them to invest in schemes instead. Comments include: “Why do the people bring their money to the banks at the exorbitant interests? Because they have no other choice. Banks are monopolists”; “Why should banks worry if citizens choose to be ripped off? Banks the thieves”; “Today’s banks are faithful servants of the Federal Reserve; they are greedy and avid bloodsuckers, small ghouls in the service of a giant and evil monster, modern earl Dracula”; and “free yourself from financial slavery”.

Whether or not banks are offering you a good deal is a different debate. I have written about this before. There is certainly more that can and should be done by banks to help the most vulnerable in society. However, please do not allow yourself to be sucked into a dangerous and unsustainable pyramid scheme that is likely to cost you dearly or cause you to hurt others, simply because you are unhappy with ordinary banks. Please remember, if something looks to good to be true, it probably is.


Are you invested with a high-return scheme or are you thinking about it? Where do you think these high returns are coming from? Does it make sense to you? If it doesn’t make sense to you, do you care? Are you aware that you could lose your money? Did you know that if you make money, it is likely because other people are going to lose their money and be hurt? Would you still invest if you knew you were going to hurt others? I would love to see your opinion.

In the mean time, keep your talking straight!


#PyramidScheme #PonziScheme #Stokvel


Marius Strydom is the CEO of MLAX Consulting

  • 0

Give us cheaper access to credit

Times are tough in SA and people need access to credit. The problem is that for the most vulnerable, interest rates and fees on microloans are very high, which leads to expensive instalments and high bad debt levels. Using a house as security can lead to much lower instalments, can save the borrower a great deal of money and can increase the comfort level of the lender. Many people own houses that are not properly registered, that do not have title deeds and therefore cannot be used as security. Many others do, but are underserviced by lenders. If we could increase the proportion of registered properties in SA (that can be used as security) and better service low-income home owners, it would increase the accessibility of credit at lower interest rates.

There are broadly two types of credit that people in SA have access to, namely secured credit (which includes bonds and vehicle finance) and unsecured credit (which includes microloans). The interest rate that institutions charge on unsecured credit is much higher than on secured credit, because defaults (bad loans) are typically higher (more people do not pay back unsecured loans than people who do not pay back their bonds) and in the case of an unsecured loan default, there is no property or goods to repossess, so the institutions do not recover any of the unpaid loan.

Interest rates on unsecured credit are currently above 27% per year for most unsecured lenders. Under the new Draft Regulations, which will likely come into play this year, the maximum allowable interest rate will be 26.5% (repo rate TIMES 1.7 PLUS 15%) for unsecured loans. For bonds (or home mortgages), the maximum interest rate under the Draft Regulations will be 18.75% (repo rate PLUS 12%), although most people are able to access much lower interest rates on their bonds (13% and below, which is less than half of what unsecured borrowers pay).

What this means is that the most vulnerable people in SA who are taking out loans are paying twice or more for the privilege than people who can offer security. The very high instalments that unsecured lenders have to pay, reduces the affordability of loans and increases default levels. You are more likely to run into financial difficulties if you have to pay twice as much back on your loan every month.

According to the National Credit Regulator (NCR), unsecured credit in SA as at September 2015 amounted to R162 billion (up 10% from the previous year). This was about 10% of the total consumer credit at that time. That is a lot of money owed by people. It also implies large repayments required. Based on the new Draft Regulations, this implies an annual interest bill of a staggering R43 billion. If these borrowers were able to provide security on their loans, in the form of a house, they could theoretically save a massive R21 billion in interest payments every year. Imagine the positive impact that this could have on their pockets and on the economy as a whole.

So why are so many people in SA unable to access secured credit? Is it because they do not own property? The answer is a definitive no. According to the NCR Consumer Credit Market Report for the Third Quarter of 2015, 75% of new mortgages (bond loans) that were issued were larger than R700000 in size and a massive 95% of mortgages were for sizes above R350000 and above. By number, only 25% of new mortgages granted in 2014 were for R350000 or less according to the Centre for Affordable Housing Finance in Africa 2015 Yearbook. Because almost no bank is offering 100% mortgages (you typically have to pay a large deposit), the R350000 mortgage mentioned above probably relates to a property worth R450000 or more.

According to the Centre for Affordable Housing Finance in Africa, only 3% of mortgages in number (during 2014) were granted to people earning less than R15000 per month, which is needed to finance a house valued at R370000. This means that the majority of people who own houses worth less than R370000 are not getting mortgages. The same report noted that over 40% of registered properties in SA are worth R300000 and below, which means that an even higher proportion of SA properties fall into the group above, those that are not receiving mortgages.

In addition to the 40% plus of registered home-owners who are not receiving mortgages there are a further 1.5 million (estimated) home owners who are not even registered as home owners. The Centre for Affordable Housing Finance in Africa estimates that “just over half of the 3 million subsidised houses delivered by the state since 1994 are formally registered in the deeds registry”. The rest of these houses are not registered. If we take both registered houses worth below R300000 and the unregistered houses, it implies that well over half of SA home owners have no access to mortgage finance.

What does this mean? It means that over half of South African home owners are not using their homes as security for the loans that they take out. It means that over half of South African home owners are paying interest rates that are twice as high as the interest rates they would have paid if they had been taking our mortgages, using their homes as security. It means that there is a huge untapped opportunity to provide South Africans with cheaper credit and potentially larger levels of credit.

What is the downside of using your home as security on a mortgage loan? We have discussed the upside of such an arrangement, but there is a downside. If you default on a mortgage loan, your home may be repossessed! The question is whether this is worth the risk? If your loan instalment is half of what it normally is (with your home as security), will it not be much more affordable and will you not be much less likely to default? If you know that your home is at risk, will you not be much more careful in the amount that you borrow and much more diligent in making sure you keep up your instalments?

So what can be done to tap into this huge opportunity of cheaper credit for the most vulnerable in our society? There are two things. Firstly, there must be an aggressive drive by Government to ensure that all properties are properly registered and that the owners have legitimate title deeds to their properties. Secondly, banks and other lenders must be encouraged and even subsidised (to some extent) to offer mortgages to the half of South African home owners who currently have no access.

There is no shortage of money in SA to fund the potential increase (or reclassification) of debt that these steps above would imply. According to the latest banking statistics from the SA Reserve Bank (SARB), the total rand-denominated deposits in the system amount to R3.1 trillion. In addition, according to the SARB Quarterly Bulletin, there was R264 billion of assets lying in money market unit trusts. It would take a fraction of the huge cash balances in the SA economy to provide mortgage funding to the 50% of South Africans that do not currently have access to it.

What is holding the lending industry back from offering these much-needed loans on better terms to the most vulnerable in our society? There are three main reasons, in my opinion. Firstly, lenders are extremely conscious of risk. They cannot and will not give a mortgage loan to someone who does not have a title deed. They are also wary of providing loans to groups that they consider more risky. To address this concern, there should be the push discussed above to ensure that all properties are properly registered; Government should provide some level of subsidy to encourage such loans and to mitigate risk (whether it be through tax relief, higher BEE scores, concessions on future BEE requirements, etc.); and lenders should price for these risks (i.e. offering average interest rates of say 18% vs. the 13% typically charged on existing mortgage book, but still well below the 26.5% on unsecured credit).

Secondly, credit providers are often wary of entering markets where they do not have sufficient data and systems (to price with comfort). To address this concern, it is important to start putting toes in the water. These markets can only be better understood and priced for over time. And the time is now. In addition, there are many unsecured credit providers that have large client databases and could conceivably use these data to better price alternative products (mortgages vs. unsecured debt). It would take a decision from shareholders and management, possibly driven by encouragement from the wider SA populace, including Government, to take the leap into this market segment.

Thirdly, credit providers make more money from unsecured lending than they do from mortgage lending. This may be a more difficult concern to address, but it is not impossible. As long as mortgage lending in the under-serviced market is properly priced for, there is no reason why it should not be profitable to lenders. It may not be as profitable as unsecured lending, but it may well be more profitable than current mortgage lending. In addition, it should be considered good for the economy and for long-term growth within the banking sector. It is therefore necessary to take a leap, which may involve a gradual transfer of products. Such a leap may affect the bottom line in the short-term, but over the long-term, it could be very positive for the country. It is important that shareholders and management consider the greater good and act in a socially responsible manner in this regard. I am hopeful.

I challenge Government and credit providers to sharpen their pencils, to be innovative, to think of the greater good, to be compassionate to the most vulnerable people in our society and to come up with solutions. Use your skills, your infrastructure and your commitment to our country to help unlock the huge potential sitting in underutilised property as a form of security. History will judge you.


Did you know that interest rates are so much higher for people that cannot offer security? Did you know that over half of South African home owners are not currently using their homes as security for loans? Do you think that this offers a meaningful opportunity? Do you think that credit providers and banks will grab this opportunity or will we just keep talking about it? I would love to hear your feedback.

In the mean time, keep your talking straight!


#UnsecuredCredit #Mortgages #Credit


Marius Strydom is the CEO of MLAX Consulting

  • 0

Too much cash in medical schemes

I attended the Actuarial Society of South Africa Health Seminar in Cape Town last week. While much of the agenda focused on developments surrounding benefits being offered (low cost benefits attracting a great deal of attention), one topic stood out to me and that was how medical schemes invest their assets. This led me to do some digging and I have come to the conclusion that medical schemes in SA hold too much cash. By the end of 2014, I estimate that these schemes were sitting on cash piles of c.R36bn. Including other fixed investments (government and company bonds), I estimate that more than 80% of medical scheme assets were invested in low-risk assets.

Why is this a problem? The two main reasons are that 1) it disadvantages scheme members, who are the ultimate owners of these assets and 2) that this money is lying fallow and is not available for investment in the SA economy, which suffers from a low savings rate to start off with.

Medical schemes in SA are required to have solvency equal to at least 25% of their annual medical scheme contributions. As a result, these schemes have had to build up substantial capital bases. The latest disclosed numbers were R46bn at the end of 2013 (R52.5bn including medical savings accounts).  This could have grown to R60bn by the end of 2014. This capital ultimately belongs to the medical scheme members, although they will never be able to extract it. However, if the capital is invested wisely, it can earn a healthy return for members who can then benefit from lower medical scheme contribution increases in the future.

The problem with investing such a large proportion of assets in cash and bonds is that it becomes really difficult for assets to earn an inflation-beating return. This means that the return on assets, instead of contributing to the health of the scheme (by generating returns in excess of inflation) is instead a drain on the health of the average scheme. The medical scheme contributions grow every year in line with medical inflation and for solvency as a percentage of contributions to be maintained, the assets also have to grow in line with medical inflation. If they do not, then solvency has to be boosted every year from contributions, via a higher annual increase. If medical schemes had a more aggressive investment philosophy, higher returns would be earned over the long-term, which could well exceed medical inflation and help to reduce the necessary annual increases. This would certainly have been the case over the past decade.

South Africa suffers from a low savings rate and could benefit from increased investment. The medical schemes in SA could contribute to this if they were to adopt a more balanced approach to their asset investment. If these schemes had a balanced fund backing their assets, they could increase their investment in equities and properties by c.R20bn.

What stands in the way of more aggressive investment by medical schemes? There are a number of factors, including:

  • The conservatism of trustees;
  • The short-term focus of what is in essence a very long-term business; and
  • The rigidity of the Council for Medical Schemes on solvency.

Medical scheme trustees in SA take their fiduciary responsibility very seriously. Their primary focus is to make sure that the schemes are conservatively run, that solvency is maintained, that appropriate benefits are offered to members and that contribution increases are kept low. There is also a meaningful focus on keeping non-health expenses low, with the most important being administration and managed care fees. This desire to limit non-health expenses is also sometimes put forward as a reason for not employing asset consultants to invest their assets. Trustees appear averse to have to pay excessive asset fees to consultants.

It is my opinion that trustees may be doing their members a disservice by being overly conservative in asset allocations. I think it is time for increasing discussion on this issue, especially for schemes that have solvency levels in excess of 30% (as most have). Trustees should also not under-estimate the potential return benefit of a balanced portfolio and should not shy away from paying asset fees to achieve this. It is important though to negotiate and make sure that asset fees are not excessive.

The business of medical schemes is managed with a very short-term focus. There is annual negotiation with service providers, benefits are redesigned if needed on an annual basis, administration fees are negotiated annually and contribution rates are set on an annual basis. Although it makes sense to run the operations of the scheme in this fashion, it does not necessarily make sense to manage the assets on the balance sheet with a similar short-term focus. The revenues within the typical scheme from contributions are generally sufficient to deal with the expenses as and when they become due. There is a limited need for some cash in the bank to facilitate these transactions, but the vast majority of the assets of a medical scheme will not be called upon in a year of operation. As such, cash flow requirements do not demand large cash balances and operationally, it would be totally acceptable for the bulk of assets to be tied up in longer-term investments.

A concern that is sometimes put forward surrounding increased investment in riskier assets such as equities and property is that asset values can fluctuate. Although this is true in the short-term, such assets tend to consistently outperform cash over the long term. As long as there is not an operational call to liquidate such assets in the short-term, fluctuations in asset values can be negotiated by an investor. They could ride out any asset value fluctuations to achieve a superior return over the long term.

An area where asset fluctuations can become a concern is if it pushes solvency levels below the 25% mark at the end of the year. This would cause the Council for Medical Schemes (CMS) to become involved. If the CMS adopted a longer-term approach and started to introduce risk based capital (RBC) measurements for medical schemes, it may free schemes up to invest more aggressively without having to worry about falling shy of the 25% level in a given year.

In conclusion, it is time for medical scheme trustees and the CMS to start thinking and talking about a different approach to investing medical scheme assets. The CMS should come up with new solvency guidelines that are more long-term focused and encourage schemes to invest their assets to match their long-term need to beat inflation. Trustees should recognise that managing the assets of medical schemes is also a very important part of their role and one that should attract more attention. The right changes to asset mix can help medical scheme assets beat inflation and can help to limit medical contribution increases going forward.

What do you think of my assessment? Were you aware of the large assets that medical schemes hold in SA? Did you know that they were so heavily weighted towards cash? Do you believe that it is necessary to invest more long-term to beat inflation? Do you think trustees and the CMS will change the way they think about medical scheme assets? I would love to read your feedback.

In the mean time, keep your talking straight!


Marius Strydom is the owner of MLAX Consulting

  • 1

The economy, stupid

In 1992, Bill Clinton’s campaign strategist coined the phrase “the economy, stupid” to highlight that many of the issues facing America at the time really boiled down to the economic pressures felt by the country. Similarly, many of the issues in SA currently, including xenophobia, the removal of statues, the increasing polarisation and despondency are being exacerbated by economic pressures. These issues can be better addressed in an environment of economic growth, job creation and improved outlook. It is therefore so important that we deal with the issues hampering our economic growth, including the Eskom electricity supply, the delays in the National Development Plan (NDP), education and the development of and promotion of new industries.

Over the 9 years from 2000 to 2008, SA’s real gross domestic product (GDP) grew on average by 4.2% per year. Since then it has slowed to an average yearly growth of only 1.7% with the latest growth rate for the final quarter of 2014 only being 1.3%. The International Monetary Fund (IMF) is forecasting growth of only 2% and 2.1% in 2015 and 2016, less than half of what was achieved during the first part of the 2000s.

Unemployment in SA declined from a high of 26.6% on the narrow definition in 2002 to 21% in 2007. However, since then it has picked up and during 2014 was at 25%. That implies an additional 800 000 people that want to work that are unable to find work in 2014 relative to 2007. In addition, food inflation has averaged 7% over the past 5 years, petrol prices have increased by over 75% since the start of 2008 and since the start of 2014, interest rates have risen by 0.75% with more hikes likely to come.

Many South Africans are suffering at the moment, have seen their situations deteriorating over recent years and have a bleak outlook of the future. It is no wonder that they are lashing out in frustration. They are lashing out at foreigners in xenophobic attacks, they are lashing out at government in service delivery protests, they are lashing out at statues and they are lashing out at each other. I am not making light of the issues at which people are lashing out or the often violent and unacceptable way in which they are lashing out. However, I believe that if we were not facing the economic hardships that we are, we would have seen less lashing out. It is therefore imperative that we do not simply try and address the symptoms, but that we focus on the root causes of unhappiness in our communities.

Electricity supply

The electricity supply disruption that has become a daily part of our lives is the first issue that needs to be addressed. It is a daily reminder to our communities of the failings of government. It is a distraction from productive behaviour, it creates unhappiness and it leads to people having a bleak outlook. In addition, it is starting to hamper economic growth and limiting foreign investment, exactly the things that we need to improve the lives of our communities. I have suggested two key steps that government and Eskom could take to aggressively and promptly deal with the situation. Firstly, Eskom needs to find a way of ceasing the sale of below cost electricity to BHP’s aluminium smelters which suck up 5% of our electricity supply. My suggestion is that Eskom (or government) buys these smelters (which are housed in BHP Billiton’s spin-off company South 32) and mothballs them. This would save a great deal of money that can be reinvested in the economy (more than offsetting the economic cost of the mothballing) and it would end load shedding immediately.

Secondly, Eskom should do a Telkom. I have suggested that Eskom forms a 50:50 joint venture (JV) with a private partner and house all new electricity generation projects in this JV. This would bring in capital and technical know-how and allow Eskom to focus on maintaining and repairing its existing infrastructure.

Job creation

Unemployment in SA is becoming a national crisis and needs immediate and concerted attention. It is undeniable that the collapse in global commodity prices has had a very detrimental impact on the SA economy and that this is something outside of our control. However, there are other contributing factors that are within our control, including protracted strikes, rigid employment regulations and delays in launching the NDP.

Government should as a matter of urgency fast track the roll-out of the NDP. This plan has the potential to be a meaningful job creator in SA through high public sector infrastructure investment; boosting private investment in labour-intensive areas; professionalising the public service to strengthen accountability, improve coordination and prosecuting corruption; etc. However, since this plan was initially mooted in May 2010, 5 years have passed and we are still waiting for implementation. The plan was strongly supported by the National Assembly in January of this year, which is a positive step. Now we need action. Government, please give us action.

Labour unions need to come to the party and recognise that protracted strikes are not just hurting their own members, but damaging the SA economy and the wider SA population at exactly the time that we cannot afford it. It is important that they act in a responsible and pragmatic fashion during the current difficult times.

It is also vital that government and unions recognise that the current rigid labour regulations could be a serious hurdle to effective job creation. It is too difficult to hire and fire employees and this is causing companies to err on the side of not hiring. A more liberalised labour regime could help to reduce unemployment markedly. In addition, we also need a strong focus on youth unemployment. We need more vocational training, we need more apprenticeships, we need more internships, we need a youth subsidy.


The poor standard of our education in SA is arguably the most meaningful hurdle to long-term economic growth and job creation. This is an issue that needs to be addressed with urgency, even if we will only reap the benefits in years to come. In my opinion, it is not necessary to spend more money on our education, but instead to spend the money better. We deserve much better outcomes for the investment we are making.

I have suggested that the key steps that we need to take to fix our education system are to lift standards and to empower principals. We need students to attend school, arrive on time and stay until the school day is over, we need teachers to be present, we need students to have text books (even if they get it from the previous years’ pupils) and we need students to aim to achieve 100%, not just scrape by with a 40%.

I have spoken about Mbilwi Secondary School in previous blogs, but I would like to share the story again. This township school in Limpopo is a beacon to other schools faced with the same challenges all over the country. This school achieves an almost 100% pass rate with almost 80% of pupils achieving matric exemption. It has more than 2500 learners and has become a very attractive destination for pupils who are searching for excellence. What makes Mbilwi different from many underperforming township schools is excellent management, dedicated teachers and very high standards. At Mbilwi, the target is not to achieve a pass (typically 40%) – instead, the target is to achieve 100%. If Mbilwi can do it with limited funds, so can so many other schools.

Building world-leading industries

Another step that we should be taking in SA, even if it will only pay off in the future, is to build, promote and support world-leading industries. In a previous blog I spoke to the need to identify and aggressively support new generation industries where SA can become competitive in the global market over time, including renewable energy generation, biotech, software development, mobile telephony, etc. I suggested that we change our thinking in two ways to allow this to occur.

Firstly, I suggested that certain industries be protected (using tariffs) and promoted through tax concessions, less rigorous labour laws and government tenders. Secondly, I suggested that we throw our doors open to skilled immigrants. To build world-leading industries, we need many more engineers and scientists than our country produces. We should use the substantial assets that we have as a country, including our space, our weather, our freedom, our infrastructure and the aggressive support of leading-edge industries (in this scenario) to attract large amounts of scientists and engineers from other countries. Not just will these immigrants help to build new industries, they will help to create jobs and help to impart skills to our own people.

Our economy cannot simply remain dependent on taking raw materials out of the ground and exporting them with limited beneficiation. We need to add value to our product and we need to start today.


South Africans are suffering and this is making them unhappy and fearful. Let us see the lashing out of various communities in SA in various ways for what it truly is, a cry for help. Let us not just deal with the issues raised by different communities, but let us also look at the root cause of the suffering. People don’t have jobs, the economy is not growing and the cost of living is rising. Let us address issues such as the electricity supply and the roll-out of the NDP with the utmost urgency, while at the same time investing in our future through improving education and building industry. Let us stop fighting each other and start tackling our challenges. Together, we can do so much better.


What do you think of my assessment? Do you think that our main problem is “the economy, stupid”? What do you think of the solutions I have put forward? Do you have solutions of you own that you can share? Do you think we can do it? I would love to read your feedback.

In the mean time, keep your talking straight!


Marius Strydom is the owner of MLAX Consulting

  • 0

Why foreigners love SA financial stocks

Amid the rampant negativity that many South Africans exhibit towards the state of the country, our financial markets continue to rise to new record levels. The marginal buyer, pushing up SA stocks, especially financial and industrial stocks is more often than not emerging market fund managers, i.e. foreigners. Why is it that these investors are so positive about SA stocks when so many South Africans are negative about the country?

During my 14 years as a stock broking analyst, focusing on financial stocks, I spent a great deal of my time dealing with emerging market (EM) fund managers and as a result, I have a very good idea of what makes them tick. As with all investment decisions, there is always a trade-off between risk and reward. In the case of SA financial stocks, EM investors consider them low risk (much lower risk than what they can find in Russia, Turkey and other emerging markets), offering moderate returns but with a possible kicker from African growth opportunities. EM fund managers are less fond of SA resource stocks because of the risk of labour unrest, falling commodity prices and further black economic empowerment (BEE) dilution.

Over the past 5 years, the JSE All Share Index has risen by 75% in rand terms and 16% in dollar terms. This compares very favourably with the MSCI Emerging Market index that declined by 6% over the same period. Specifically, the Russian MICEX index fell by almost half in dollar terms in the period, while the MSCI Turkey index fell by 2%. If we consider general retailers (like Shoprite and Pick ‘n Pay), Banks (like Standard Bank and FirstRand) and life assurers (like Old Mutual and Sanlam), the outperformance is even more extreme. In dollar terms, these indices went up 39%, 19% and 34% respectively over the 5-year period.

If we drill down further, at current levels, investors are willing to pay much more for SA banks than there other EM counterparts. A globally acceptable metric for measuring the valuations of banks is to look at their market capitalisation (what investors are willing to pay for the entire company) divided by their levels of capital (excess of assets over liabilities), also known as their book value. The metric used is also called price to book or P/B.

At current levels, SA banks trade on an average P/B (based on the latest disclosed book values) of 2.3 times. The higher this multiple is, the more valuable a bank stock or index is. The 2.3X multiple for SA banks compares to an average multiple for all global emerging markets of 1.8X, which makes the SA banks 27% more valuable. Compared with Turkish banks, the SA banks are 60% more valuable, while they are more than twice as valuable as Nigerian banks and 3 times more valuable than Russian banks. The premium to developed market banks (still recovering from the global credit crisis) is even more extreme with most American, UK and European banks trading at large discounts to book. It is clear from these comparisons that foreigners love SA financial stocks relative to other options. The question is why? Let’s now look at the risk and growth considerations that help investors arrive at this point of view.

Risk considerations

The main reasons why SA financial companies are considered lower risk than other EM financial companies by EM investors are: 1) solid balance sheets post the global credit crisis; 2) strong management teams; 3) excellent corporate governance; 4) world-leading auditing and accounting standards; 5) a highly regulated equity market; 6) low BEE risk and 7) low labour and electricity risk.

Post the 2008 global financial crisis, developed market banks and insurers lost a great deal of value because of the toxic assets on their balance sheets, pressure on their capital levels and an increase in the perceived risk associated with them. Unlike the developed market financial companies and some of emerging market financial companies, SA banks and life assurers had very little exposure to these toxic assets and emerged from the crisis with very strong balance sheets. This meant a very low risk of failure or having to raise additional capital. The only exception to this trend over the past 5 years has been the failure of African Bank, but this was due a set of circumstances unique to that company. The rest of the SA financial sector remains in very healthy shape and investors recognise this strong position.

The SA banking and life assurance industry attracts high quality people and have very strong, proven management teams. Management teams are open and available to their investors and provide detailed and clear information about their companies that investors can use to make decisions. Investors are highly appreciative of SA management quality and openness.

The financial sector in SA has been very diligent in adopting the highest corporate governance standards in the world, including King III which sets clear guidelines on the way in which company boards should be constituted and should operate. This increases the faith of investors that company boards will protect their interest.

SA ranks tops according to the World Economic Forum when it comes to auditing and accounting standards and have done so for 3 years running. SA has been an early adopter of the International Financial Reporting Standards (IFRS), which is still being introduced in other countries world-wide. Because of these high standards, investors are very comfortable with the information that is disclosed by SA financial companies. They can believe in the truthfulness of the information that is disclosed.

The JSE is a highly regulated equity market that ensures protection for investors that buy and sell shares on the platform. Investors can be confident that when they pay for shares, they will receive the shares and when they sell them, they will receive the money (high settlement standards). Investors also feel comfortable that the playing field in SA is level and that they do not have to compete with insiders that have more information than they do (insider trading regulations).

The SA financial sector has been extremely successful in implementing black economic empowerment (BEE) with almost all large companies recording a BEE score of 85 and above out of a possible 100. All companies have successfully increased BEE ownership; increased employment equity at management level and in general; improved skills development, procurement and empowerment financing; done a great deal to improve enterprise development and socio economic development; and increased access to financial services. As a result, there is reduced risk to investors that their future returns may be diluted by more onerous BEE requirements.

Finally, the financial sector in SA has not been negatively impacted by labour unrest, while any risk due to load shedding is limited for this sector of the economy. These risks are more prevalent for the resources sector in SA, including platinum and gold mines.

Reward considerations

EM investors have an appetite for investing in countries where they can expect healthy returns. The returns that investors can expect from a sector such as the financial sector, is a product of the prospects of the country as a whole (economic growth) and the prospects of the industry that the sector operates in. Although the SA economy does not have the same growth prospects as many other emerging markets (like China and countries in Africa), it has superior growth prospects to most of the developed world and has more stable growth prospects than many other emerging markets (e.g. Russia and Turkey).

The financial sector in SA generally has higher growth potential than the country as a whole. The main reason for this is that SA financial companies are increasingly investing and generating strong growth from other African countries and other emerging markets. EM fund managers are looking at Africa with fresh eyes and see meaningful potential for the continent to become the next global growth area. As it stands, sub-Sahara African countries have delivered superior growth rates over the past decade and are expected to continue delivering this, helped by increasing foreign investment (including from SA companies) and a rapidly developing retail market.

Although EM investors can invest directly in African stocks, they are often limited by the liquidity in local equity markets and by the perceived risks in these companies. Many investors therefore opt to gain their African exposure through SA companies that are traded on a very liquid JSE and are well run and highly regulated.

What could change the positive situation?

Although the perception of the SA financial sector in the eyes of foreign investors is very positive at the moment, there are potential developments that could change this view. The main one of these is potential downgrades to SA’s sovereign credit rating. At the moment SA has a stable credit rating with two of the rating agencies having a stable outlook and one having a negative outlook, driven by a weaker economic growth outlook, labour concerns and concerns over electricity supply. If the SA economic situation declines further going forward, it is possible that credit downgrades may occur over the next few years, which may make SA a less attractive investment destination.

Another development that could reduce the attraction of SA financial stocks is a continued weakening of the rand, which erodes dollar returns for investors. Over the past year the rand has lost 7% against the dollar. The SA currency is arguably undervalued at current levels and could see a recovery in 2015.

A reduction in growth prospects of SA financial companies may also impact the positive view that investors currently have of the sector. This would occur if the SA economy deteriorates further or if African growth starts to taper off. In the current environment, low oil prices could have a negative impact on exports from African countries such as Nigeria. However, lower petrol prices should offer a boost to the SA and other African economies. SA interest rates are currently in a rising cycle, which could put pressure on the economy. However, the lower petrol prices could result in lower inflation, which could delay further interest rate hikes, therefore limiting the economic impact.

Finally, negative developments on the corporate governance, regulatory or management front could also change views negatively, although this does not appear to be on the cards at the moment.


South Africans should be very proud of our private sector and of our financial sector in particular. We should take note of the positive view that foreigners have of our private sector and realise that everything is not doom and gloom. I often hear negative views being expressed about sub-Saharan Africa, but what readers should start to accept is that the future of this region is looking very positive and this is increasingly being recognised by foreigners. Our SA companies are very well positioned to take advantage of this trend.

At the same time, we should protect what we have here in SA. We must protect our high professional standards, our regulations, our rule of law, etc. We must not allow for these assets to decline in value going forward.

Furthermore, we must address the issues where we are struggling. We need to address the current electricity concerns, we need to successfully deal with our education, we need to address corruption concerns and most importantly, we need to reduce unemployment. If these issues can be dealt with, our private sector could perform even more strongly and attract even more foreign investment. In addition, if we can address labour unrest in the resource sector and reduce BEE uncertainty, this sector could also attract more interest from investors over the long-term (in the short-term, falling commodity prices are likely to dominate).


What do you think of our private sector and our financial companies in particular? Do you see the potential in Africa? Do you think we can address our problems and improve our outlook? Please let me know what you think.

In the mean time, keep your talk straight!


  • 0

Let me take you back to 1995

It is January 2015! Our future lies ahead of us, but is there anything we can learn from our past? In this blog, let me take you back to 1995 and let’s reflect on what happened then and what this could mean for us now. In 1995, we were in a honeymoon period in SA post the first democratic election in 1994. Globally, we were facing a brave new post-cold war world. So much has changed and so much has stayed the same.

Global demographics and economics
In 1995, the world population was 5.7bn vs. the more than 7bn we have today. However, over the past 20 years, we also saw a marked reduction in extreme poverty (more than halved from 43% in 1990 to 17% in 2011) and in hunger (805m people suffered from hunger in 2014, 209m fewer than in 1992). More needs to be done, especially in the Indian subcontinent and Africa, but it is hoped that superior economic growth will help to narrow the gaps.
The success in reducing global poverty over the past 20 years has been helped by very healthy global economic growth. The global economy has expanded by an estimated 180% over the past 20 years, which makes this the second highest 2-decade growth period in the past century (with only 1955-1975 being higher). What makes this period different is the increasing contribution to the global economy from developing countries.
Unfortunately, the World has been much less successful on the violent conflict front.Prior to 1995, we saw a large spike in deaths from violent conflicts due to the genocide in Rwanda. During the remainder of 1990s violent deaths were much lower despite the conflict in the Balkans. This picked up again during 1999 and 2000 due to the conflict between Ethiopia and Eritrea. Despite the Afghanistan and Iraq wars, violent deaths declined during the first part of the 2000s compared with the 1990s. However, the Syrian conflict has again caused a spike. We can only hope that the long-term trend in reduced conflict deaths will continue going forward.

Global politics
In 1995, the European Union (EU) started expanding with the addition of Austria, Finland and Sweden. In the wake of the Balkan conflict, which reached a crescendo with the Srebrenica massacre during the same year, the EU continued to increase membership. Prior to 1995 there were 12 members and today there are 28. The expansion of the EU has led to increasing tensions between the West and Russia, which escalated in 2014 with pro-Russian Ukrainian rebels coming into conflict with the pro-EU Ukrainian government. This could be a major feature in our lives over coming years.
In March 1995, the United Nations (UN) peacekeeping mission in Somalia ended. The mission was a failure and was followed by the Somalian conflict with Eritrea, the failed state that Somalia is now and the rise of piracy in the Indian Ocean. Despite some successes during the past 20 years, the UN notably failed to prevent or decrease conflict in many parts of the world such as Iraq, Libya, Syria, Ukraine, Gaza, etc. Can we expect the UN to become a more effective force for peace going forward? I really hope so.
March 1995 was the first time in 26 years when no British soldiers patrolled the streets of Belfast, Northern Ireland. The peaceful transition in Northern Ireland which followed is one of the success stories of the past 20 years.
During the course of 1995, the Sri Lankan civil war was escalating and the situation deteriorated during the late 1990s. However, this is another success story with peace breaking out in 2002.
Unfortunately, the same cannot be said of Israel and Palestine. The assassination of Israeli President Yitzhak Rabin in November 1995 largely spelled an end to a peace process that had gained meaningful momentum. The Gaza conflict in 2014 highlights the ongoing strife in the region with no clear end in sight. We can only hope that the future holds the same prospects for peace in this region as was seen in Northern Ireland and Sri Lanka in the past 20 years.
In November 1995, the Nigerian playwright and environmental activist Ken Saro-Wiwa and 8 others were hanged by government forces. This event and the global reaction to it arguably represented a turning point in Nigeria, which was ruled by military juntas from 1970. The country finally democratised in 1999, which ushered in a period of healthy economic growth (with the help of rising oil prices). In 2011, Nigeria’s GDP surpassed that of South Africa for the first time. Despite declining oil prices and increasing violence from Boko Haram, Nigeria has meaningful potential to remain one of the most important drivers of African economic growth.

Global financial markets
In 1995, the Dow Jones Industrial Index (a measure of the US stock market) passed 4000 for the first time. Over the following 20 years, it increased by 4.5 times to almost 18000 today, despite the bursting of the tech bubble in the early 2000s and the global credit crisis in the late 2000s. Are we likely to see the same expansion over the next 20 years? Considering the substantial liquidity created by central banks since the credit crisis and the positive impact this has had on the recovery in equity markets subsequently, this may be difficult. However, we don’t know what unexpected technological advances may occur and the positive impact this may have on industries, economies and stock markets.
In February 1995, Barings Bank collapsed after one of its employees (Nick Leeson) lost $1.4bn speculating on the Tokyo stock exchange. This was but a small taste of what was to follow in the next 20 years. There was the Asian financial crisis in 1997, the collapse of Long-Term Capital Management in 1998, the Russian financial crisis in 1998, the Argentine economic crisis from 1998-2002, the Ecuador banking crisis, the Uruguay banking crisis, the Venezuelan banking crisis and then the big one, the sub-prime mortgage crisis starting in 2007 and the spill-over effects this has had. The latter led to the collapse, near collapse and fire sale of many longstanding banks in the US and the rest of the world. It is not yet clear whether the increased regulation following these crises will help to avert recurrences going forward. I am betting no!

Two meaningful terrorism events occurred in 1995, namely the Sarin gas attack on the Tokyo subway in March and the Oklahoma bombing in April. Both were domestic terrorism events. How the world has changed over the past 20 years with most of the terrorism we see now being ideological, based on a narrow interpretation of Islam and fuelled by Middle East conflicts far away from the countries where the attacks are perpetrated. We cannot be satisfied with the way that governments have dealt with terrorist threats, dealing with the symptoms rather than the causes and in many cases exacerbating the causes through their actions in far-flung countries. We can only hope that they have learnt from their past mistakes and find better solutions. Brute force has not worked!

South Africa
In 1994, SA had its first democratic election and during 1995 the country was firmly in its honeymoon period. Nelson Mandela was our president, we had a government of national unity and we were hopeful.
In January 1995, SA signed a number of historic agreements with India, setting the stage for our eventual inclusion in the BRICS (Brazil, Russia, India, China and SA) group in 2010. Our membership in BRICS could mean a great deal for this country going forward, although progress has been somewhat muted (as can be seen with the delays in launching a BRICS Development Bank).
In June 1995, SA won the Rugby World Cup which went a long way in unifying the country. During the following 20 years, sport continued to play a significant role in SA in uniting people from different backgrounds, with the 2010 World Cup being a clear highlight. May we continue to find sporting success and may it continue to bring us together.
In November, Desmond Tutu was appointed as chairperson of the Truth and Reconciliation Commission. This body was instrumental in helping this country heal the wounds of the past. We must be sure not to forget what we went through to be where we are today and be grateful of the miracle that is SA, despite the concerns we may still have about our country.
In 1995, the JSE All Share Index (a measure of our stock market) starts the year at 5000. Today, it is almost 50000, a 10-fold increase. This, together with a rampant property market, healthy economic growth and falling inflation has made South Africans much wealthier than they were 20 years ago (in constant dollar prices GDP per capita in SA increased by almost 30% over the period). But, this is a topic to be explored in more detail in another blog.

Other events of 1995
A 6.8 earthquake occurred in January 1995 near Kobe, Japan and the busiest hurricane season in 62 years began in June. Over the next 20 years, we hadnumerous devastating natural disasters, including the Indonesian and Japanese tsunamis and the earthquake in Haiti. Specifically, the 1995 hurricane season record was equalled 3 times and exceeded once in 2005 when there were 28 storms (19 in 1995). Global warming certainly appears to be having an impact on our climate and the response by governments appears to be totally inadequate. We can only hope that our scientists can find a way to reverse the trends or to help us deal better with them.
In February hacker Kevin Mitnick was arrested by the FBI and charged with penetrating some of the US’s most secure systems. During the following 20 years, hacking as grown exponentially globally in line with the expansion of the internet. Electronic warfare is likely to be a large feature in our future.
In March 1995, the first Internet search engine, Yahoo! was founded, in August Microsoft launched Windows 95, in September the DVD was announced and in November the first full-length computer animated feature film, Toy Story was released. The next 20 years offered the most amazing technological advances, including the explosion of the internet, smart phones, social media, data storage, computing power and so many more. One thing I am confident of is that there is much more in stall for us going forward. Hats off to our scientists!
In October, OJ Simpson was found not guilty of the murder of his former wife Nicole Simpson and Ronald Goldman. In 2014, Oscar Pistorius was found guilty of culpable homicide of his girlfriend Reeva Steenkamp and Shrien Dewani was found not guilty of the murder of his bride Anni Dewani. Not much has changed, especially for the wealthy.
Also in October 1995, the first extra-solar planet was identified. By 2014, more than 1800 exoplanets have been identified and scientists have executed a successful landing on a comet. I cannot wait for more discoveries about our universe.
Another event in October was the Quebec independence referendum where the no’s prevailed. In 2014, Scottish voters similarly decided to remain a part of the UK. In my opinion, we are likely to have fewer countries in the world in 20 years than we have now, rather than more.
And finally, in November 1995 a budget standoff between Democrats and Republicansforced the federal government to temporarily close national parks and museums, and run most government offices with skeleton staff. Once again, so little has changed, but we can only hope that the US’s democratic system improves over the next 20 years. I remain hopeful and a strong supporter of democracy as the best system to improve the lives of citizens.

To my readers, what are your memories of 1995? Do you think we live in a better world? What are the main areas you think we need to address? Please let me know what you think.
In the mean time, keep your talk straight!