Being patriotic is good when it comes to sports teams, but not necessarily for investments.
Samuel Johnson’s quotation about patriotism being “the last refuge of a scoundrel” may well have represented the 18th-century poet and playwright’s disdain for contemporary British politics, but when it comes to being patriotic, it might be good when it comes to supporting one’s local sports teams, but not necessarily for one’s investments.
Why local is not always lekker
While South Africans are certainly known for ‘punching above our weight’ in a number of areas—especially sports, where our beloved Springboks have shown that we can compete with the best in the world and end up on top—when it comes to investment markets, we are minnows.
According to the Visual Capitalist website, the combined market capitalisation of the world’s stock exchanges in 2023 was a staggering US$109 trillion (R1,985 trillion—that’s one thousand nine hundred and twenty-five trillion of our South African rands), or four thousand times the size of South Africa’s entire Gross Domestic Product!
In terms of the combined size of the stock markets in developed countries, the Top 10—comprising 90.7% of the total world market capitalisation—are as follows:
- United States: 5%
- European Union: 1%
- China: 6%
- Other developed markets*: 4%
- Japan: 4%
- Hong Kong: 0%
- United Kingdom: 9%
- Canada: 7%
- Australia: 5%
- Singapore: 6%
* Israel, Norway, South Korea, Switzerland
Emerging markets (effectively, everyone else), comprises 9.3% of the total world market capitalisation—this includes South Africa, which comes in at a mere USD 1.4 trillion (R19 trillion) or 1.28% of the world total.
Granted, R19 trillion is a fair chunk of change, but when comparing this to the world’s total, an Ox Nché it certainly isn’t!
Investing with a global citizen mindset
There are many complicated reasons put forward by experts in favour of investing offshore, but the simplest reason is the one that South Africans often find somewhat painful to acknowledge—our market is simply far too small for it to be the sole focus of our investments.
Think about this logically for a moment. When Fernando Duarte and Robert Brozin bought Chickenland in Rosettenville (south of Johannesburg) back in 1987, this nondescript little Portuguese restaurant probably didn’t even have 1.28% of Rosettenville’s market share at the time.
Now imagine if the partners had asked you to invest your life’s savings in their venture. You probably wouldn’t have done so, as the risk of losing your investment would have been far too great.
Of course, history tells us that this little restaurant became the first Nando’s, which went on to become a South African restaurant success story. However, the overwhelming majority of the restaurants that operated in the Rosettenville area at the time are no longer in existence.
It’s also important to note that despite Nando’s now being a household name in South Africa, most of its success has come from its international expansion. For instance, Nando’s now has 465 restaurants in the UK, while Australia has 243 outlets. Of the 1,186 Nando’s worldwide, only 22% of these (259 outlets) are here in South Africa.
Expanding this example to the whole of the Johannesburg Stock Exchange, it’s interesting to note that 71% of the earnings of the companies that comprise the Top 40 index come from outside of SA.
If our country’s top companies are investing worldwide, shouldn’t we be following suit?
Looking before you leap
Does this mean that you should cash in all your local investments, convert the proceeds into US dollars, and start spraying your greenbacks towards anything listed on Wall Street or NASDAQ? This approach would make as little sense as taking your entire portfolio and putting it on red at one of Sun City’s roulette tables—and would probably have a similar result.
Warren Buffet, arguably the world’s most successful investor, is well-known for his stance not to invest in anything that he doesn’t fully understand. This doesn’t mean that you need to spend endless hours poring over reams of financial statements, but you need to have at least some idea of how a particular company makes its money.
And if you think that trying to understand the mere 275 companies listed on the JSE is difficult, try getting your head around the approximately 2,400 companies listed on the NYSE, 3,400 on NASDAQ, or over 5,000 on China’s two exchanges!
For this reason, your best option is probably to look at exchange-traded funds based on major world indices such as the S&P 500, FTSE 100, Nikkei 225, or one of the composite indices made up of top international shares, both in developed and emerging markets.
What’s more, while most of these indices will need to be accessed via direct foreign investments, exposure to international markets can also be obtained locally.
WRITTEN BY STEVEN JONES
Steven Jones is a registered SARS tax practitioner.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.