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Home country bias is a real danger for investors. We tend to buy the brands we know, rather than taking an objective view on a global opportunity set. Global context is beyond important, particularly when you’ve had the benefit of engaging with investors and professionals in deep pools of capital like Europe and North America.

In this episode, Mohammed Nalla and The Finance Ghost take advantage of recent travels to discuss how the South African market differs from global markets like the UK and America. For any investor serious about global wealth creation, this is a valuable discussion.

This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.

Full transcript:

The Finance Ghost: Welcome to episode 180 of Magic Markets. This is now a truly international episode because Moe, as usual, you are all the way in Toronto and I’m not in Cape Town for this one. I’m in fact in the little village of Radlett in North London, which has certainly been an incredibly interesting trip for me. I had some really good meetings in the city today and just exploring a little bit of London. I’ve never visited London before. I think it might become an annual trip for me, to be honest, in the summertime here because I think it’s quite a wonderful place, actually. I’ve been nothing but impressed with what I’ve seen in the UK, but then again, I haven’t been here when it’s been raining. Anyway. But welcome to the show, Moe. It’s always lovely to do these with you, of course, and especially to bring that international flavour, which I think on this show we’ll be doing perhaps more than ever.

Mohammed Nalla: Indeed, Ghost. I mean, I have to chuckle a little bit at your optimism around the UK because you’re literally picking like the best weeks in the year and you’re basing your entire thesis on that summer thesis.

The Finance Ghost: I want to chase the sun. I want to live that international dream that people aim for, of being swallows and just never leaving summer.

Mohammed Nalla: I’m not going to take that from you. It’s a good strategy. Ghost, I think what we want to discuss this week is really, really important because when you travel abroad and if you do it often enough, or if you live abroad like myself, you get to see the world through a very different lens. And we want to try and bring that lens to our South African audience, to South African investors, because there’s this very important bias that is not uniquely South African, but it’s called home country bias. Now, I just want to maybe jump in there, if you let me, is that home country bias is basically where investors disproportionately allocate their portfolio to domestic equities and assets. And this is despite the potential benefits of international diversification. Now, like I said, this is not a uniquely South African phenomenon. If you have a look at Canada, for example, some Canadian investors and even institutional investors seem to consider the United States as an offshore market, which just blows my mind to this day. It’s something that I keep on banging on about to a lot of the people I speak to up here. But this then effectively narrows down the lens that you’re applying to what effectively should be a very global lens when considering investments. And the reason for that is quite simple, is that not only can this bias lead to limiting your potential returns, and then also increasing your risks of these disjointed events happening, whether that’s in South Africa or any particular geography, but it also really limits your growth opportunities. Because quite often the best companies globally are located in other markets. Unless maybe you’re sitting in the United States. And even then, I would say it would be foolish to just consider the United States, because sometimes the best of breed in a particular industry might be sitting in China or it might be sitting in Europe.

Then there are a couple of other dynamics that really talk to taking a long, hard look at this home country bias. Because quite often, if you’re sitting in emerging markets, the financial disclosures are not as robust as you would find in some of the international markets, specifically the developed markets. Now, yes, obviously with more financial disclosure, you could argue that the informational asymmetries that exist in smaller markets that can effectively generate higher returns if you’re really on the ball, don’t exist. However, for the average investor, more information, I would argue, is generally a good thing, because more information also assists in better price discovery. And then a last point I just want to note on this home country bias to set the tone, is that international markets tend to have significantly more liquidity, and they also give you the ability to access both a very broad exposure, but then also very niche exposures. And what I mean when I say that is, if you’re buying a multinational in the US, for example, you’re pretty much getting a global stock with exposures across multiple geographies. However, if you want a stock that is focused – and we can talk about really niche focus, like specialist retail in the United States or some of the REITS we’ve discussed, that focus just on data centers for example – you tend to get those in the international and more developed markets. So I think that sets enough of the tone, Ghost. I’m really keen to jump in and hear what is your on-the-ground experience in the UK. What stood out for you on this trip?

The Finance Ghost: Tell you what Moe, before I answer that question, there’s one other point I want to make, actually, which is that people often make the arguments on equities, that they need to have an edge and they have the edge in their home market because they know these brands, etcetera. And there is an element of truth to that, absolutely. I think especially on your sort of small caps. I mean, I don’t personally dabble in off-the-beaten-track kind of equities overseas because then it is that much more difficult. I tend to agree that to do that correctly, you really do need a bit of an edge, and there’s a whole sort of group of investors who chase those returns from small caps. It’s a lot of fun and I have genuinely a lot of respect for people who do that. But what I would say is you don’t need to be in-country to have an edge on, for example, tilting your portfolio towards some of the world’s most important trends and then looking for the companies within that trend that are offering up decent valuations.

I mean, a perfect example was Next Era Energy, which we covered in Magic Markets Premium. I bought it shortly thereafter. That was a very nice trade for me. I’m not in America. I’ve never used a kilowatt of power from Next Era Energy. But if you understand how to look at stocks and you are sensible and all these things, you can do really well from it. So I think that’s the way I look at it, is the home bias, particularly on the smaller companies, I get it, I really do. But I think that on some of the bigger stuff, you’re doing yourself a great disservice by not looking internationally. And my trip to London, to answer your question, has only confirmed that for me.

I think I’ve been exposed to now a level of wealth, genuinely, that I’ve never seen before. I think the London summer wealth is a very good reminder of how small the South African market actually is. It’s like anecdotal stuff, but in South Africa, if someone’s got a really high-end car, that’s like quite a flamboyant show of wealth, and it’s often quite a big proportion of their wealth actually sitting in that car. And you come to London and on every street corner there’s a Bentley. And then you think to yourself, wow, people here really spend on cars. No, actually they don’t. They are worth 200, 300, 400 million pounds. And frankly, the Bentley or the Rolls Royce or whatever they’re driving as a percentage of their wealth is a speck. It is tiny. I mean, you will literally walk through Knightsbridge and there will be a Rolls Royce Cullinan parked on the street outside someone’s apartment. I had a great meet up today with someone who I’ve met through my Finance Ghost stuff, actually. He’s based here in London. He works in capital markets. He was telling me just about the number of people here who are worth literally hundreds of millions of dollars, and they’re invisible. If you’re worth that kind of money in South Africa, a lot of people know who you are. We do have obviously quite a number of billionaires in South Africa, but there’s not that many. That’s rand billionaires, obviously. If you’re worth 50 million pounds, you are basically in that bracket and you are effectively invisible in London. You’re not even really on the radar of the big guys. So I think that for me, it’s not that I had no idea about this, obviously, but I think you need to see it. You almost need to see it to believe it and understand. And it really helps with perspective on stuff like luxury brands, etcetera. I finally walked past a Lululemon store today. Lululemon is not a luxury brand per se, but it was really nice to be able to say like, hey, that’s a company I own shares in. Here it is. That was really nice.

Mohammed Nalla: I love that example because it’s really great to resonate with some of the brands that we’ve covered on Magic Markets Premium, to see that firsthand, to kick the tires, some due diligence. So I’m glad you’re getting that on-the-ground perspective. And speaking of perspective, it’s a point we mentioned in maybe a show a week or two ago where we said, for example, if you look at the average house price – and I’ll use my hometown at the moment, Toronto – if you have a look at the average house price in Toronto, it’s around a million dollars. And, I mean, that’s not going to get you a lot. It’s probably going to get you something small that you can barely swing a cat around in. But let that sink in for a little bit, because even with the rand doing as well as it’s doing today at the time of this recording, a million dollars is close on 13, 14 million rands. And that’s the average house. So the point I wanted to land on here is whenever we speak about international stocks and we talk about the potential for growth in emerging markets, remember that your disposable income in emerging markets is substantially lower. And so in order to move the needle, it’s almost as though you’ve got to go and find ten consumers, for example, in an emerging market, to offset a single consumer in a developed market. And that perspective is important whether you’re looking at real estate, it’s important whether you’re looking at stocks, retail stocks, whatever it might be. Ghost, what was your sense in terms of just the general activity levels that you’re seeing there from on the ground, consumers walking around – you arguably went to a couple of high-end retail stores. What does that look like? Does that activity level look fairly robust? Or would you say you came away thinking there’s a little bit of a concern there?

The Finance Ghost: Yeah, just to your point, Moe, we see it on that average revenue per user on businesses like Netflix, for example, how much less they make per subscriber in an emerging market versus a developed market. And now I can see it in that level of wealth here. But also, there have been a lot of people who have said to me, don’t make the mistake of scaling London and thinking that’s the UK. London is almost a country unto itself. It’s this pocket of extreme wealth, frankly, of people all over the world want property in London. I can now see why. I think I might now be in that class. I can only dream. It really has been a great trip. But the consumer on the ground is not necessarily having that experience. And the cost of living has gone through the roof in the UK. I’m sure you’ve had exactly the same experience in Canada. It’s not that it hasn’t done that as well in South Africa, but I think with my South African lens, it’s the combination of the depreciating rand plus inflation in the developed world and then what that means for your buying power. And I think you brought up property – that, for me, has been the biggest thing. I think South Africa has completely, completely missed wealth creation through residential property since the global financial crisis, because the country has unfortunately gone through this really tough time economically and really poor sentiment in general. And we just haven’t gotten wealthy through property ownership in South Africa. Whereas if you had property in one of the world’s developed markets, in one of the best cities, yes, sure, your entry price was more, absolutely. But you’re sitting with a real asset. Now I can understand why people come and actually buy properties in places like these, because you can do it with certainty. London is always going to be London. It just is what it is. Unfortunately, in South Africa, that’s not the case. There are pockets of it in Cape Town, for example, but it’s exactly that. It’s pockets. If you just had a house in Johannesburg, or wherever the case may be, you’ve been completely left behind on the wealth creation journey versus the developed market. And you actually can’t, it sounds terrible, but you actually can’t catch it up. If someone’s house price has gone up a million pounds over, whatever, ten years, where are you catching that up in South Africa? You can’t.

Mohammed Nalla: Yeah, a friend of mine who’s living in the US now, South African as well, always laments that fact. He said maybe 10, 15 years ago, he bought a really swanky property down in Johannesburg, and he said he could, at that stage, probably have taken the money out, bought something, let’s call it middle class in the United States. And over that time period, you’ve had the double whammy of the currency depreciation arguably, you’ve also had this massive growth in developed market property prices. And interestingly enough, a quirk in Canada at the moment is the debate around inflation actually now centers on the concentration risk of real estate and how much it makes up in terms of Canadian GDP. Because we’re saying you’re not getting productivity growth. Real estate’s just way too big in Canada, it’s almost like a little bit of a cult. But to your point, if someone has gone and built up a million dollars worth of equity in their home, in their house price, effectively over the course of the last ten years, versus someone in an emerging market, you don’t catch that up. And whether you ever catch that up, even if there’s an income differential, is really questionable.

It’s important to also highlight the differences in cost of living. You touched on something, and I’ve seen this because prior to Covid, we actually had fairly muted inflation up in the developed world. You’re talking 2% and thereabouts, and subsequent to Covid, we actually saw lots of stimulus, as you know, and that resulted in inflation running super hot. We’re talking like 6%, 7%, 9% at one stage in the US. And those are the rates you generally pick up in emerging markets. So I think the struggles you’re finding here is that the cost of living has escalated at the same kind of rate you traditionally pick up in emerging markets. Wages don’t catch up at that rate. And so when you say London is a microcosm, I think the same applies to any of the big urban metros in the developed world, whether that’s Los Angeles, New York, Toronto, London, you’re just looking at a bubble. But if you look at the rest of the economy, unfortunately, those price increases filter through to the rest of them. And that’s why I was asking the question around the consumer’s health. And the reason is that it’s so important when considering what happens with interest rates as we potentially go into what is a cutting cycle. But if that cutting cycle is not as deep as people expect.

The Finance Ghost: Absolutely. And the other thing that’s really interesting here, that’s been one of the learnings that I’ve enjoyed, is just the effect of Brexit. If you speak to people working in banking in London or that sort of environment, they have absolutely nothing good to say about Brexit whatsoever. Absolutely nothing. It really has hurt the London-based financial markets. And that’s what I also find fascinating. If you look at the equity index here, it feels like people have a huge amount of money, but it’s relatively stagnant. It’s not really growing if it’s locked up in pound-based assets. And real estate has maybe been the one exception, and that’s maybe slightly anecdotal, I’d want to go and see those stats to know for sure, but it feels like it’s just a lot of generational wealth. It’s a lot of money that has come to the UK, actually, some of it’s been made here. Not all of it. A lot of it’s been handed down. And it’s very much that European, hundreds of years worth of wealth. Just layers and layers and layers, but they’re not sitting with, like a US situation where the markets have been driven so hard by technology. What is driving the UK equity index, for example? No one really talks about it as an exciting place to actually come in and invest your money, despite the fact that all those same people would be quite happy to have an apartment in Knightsbridge or Kensington or Chelsea or take your pick. So it’s quite interesting from that perspective. I think Brexit has hurt that story and made London just a less exciting destination for capital. Despite all the wealth on the ground.

Mohammed Nalla: I think that’s a very interesting perspective and something we were actually discussing just before coming on air for this recording was the fact that the perception from a South African living in South Africa, when you see all of those really fancy houses being sold in Clifton and Camps Bay, you think you’re getting the crème de la crème of European society coming in and buying that. Rich Germans, rich Brits coming in, buying up, effectively, properties that you can only dream of in South Africa on the coastline. And the simple reality is that it’s probably the mass affluent European investor that’s buying in Cape Town, whereas the really affluent person from London or anywhere in Europe really is probably buying in the south of France or they’re buying in more exotic locations. So I found that to be an interesting perspective because it also speaks to South Africa’s positioning on the global stage as both a tourist destination, but then specifically in this context as an investment destination. Because if you really want to attract that upper echelon of society, guess what? There’s a lot of bells and whistles you got to get right in order to try and attract that kind of money. Now, we do know that there are some very wealthy Middle Eastern royals that own up large tracts of land in South Africa, private game farms. So maybe we’re missing a beat if we’re just looking at the Atlantic Seaboard down in Cape Town. But maybe you’ll comment on that in terms of, what is South Africa’s positioning in terms of just perceptions based on the discussions you’ve had in London over the course of the last week or so?

The Finance Ghost: Yeah, so not great, to be honest with you. I mean, unfortunately, I think brand SA has been dealt a lot of damage in the last ten years. You kind of get – you actually get one of two responses. You either get people who are friends with expats and then they have like an intelligent conversation with you or you just get the eyes of pity, that’s the other response you get. It’s like, oh, shame. South Africa, that’s hard. The reality is that outside of the Springboks, we’re not competing very well on the international stage right now. And that is unfortunately just, it’s very tongue in cheek, but it’s also very true. And I think coming here has made me realise, why? Why would you come and live in South Africa if you’re worth hundreds of millions of dollars or pounds and put yourself at personal risk? In London, you can be fabulously wealthy in safety, in absolute safety. There are people driving around in town in drop head coupe Rolls Royces without a care in the world. You cannot do that in South Africa consistently with zero worries.

Unfortunately, the safety and security, I think, is just such an issue. It doesn’t matter how beautiful your country is, people want to feel safe, their families want to feel safe, and therefore they’re going to take their capital where they can feel safe. So I think that the safety and security remains just a huge challenge for South Africa to overcome. And it’s going to forever affect our status as an investment destination for people who are wanting to kind of follow where their money is going, either buying property or whatever the case may be. And to your point, it’s not the wealthy Europeans who are buying up the places in Clifton or in Camps Bay or in Newlands or in wherever else you want. It is actually that mass affluent, as you say. So they’re kind of looking at it and saying, okay, well, I can either live in a very average place in London for x amount, or I can go down to Cape Town and go and spend a third of the money and live in a bigger, better, prettier property. Yes, I need to take a little bit of risk, but look at the lifestyle. That’s the reality for South Africa at the moment. And until we sort out the safety and security, it’s not going to get better.

Mohammed Nalla: And going back to that point I was making around the average house price in Toronto, I would argue the average house price in London is probably a bit higher than that. And so when you’re comparing a 15 million rand place down in Camps Bay, or even if it’s 20 or 35 million, whatever the number might be, put that into that perspective. If someone’s mass affluent in Europe, they probably got a lot of disposable income. It doesn’t really move the needle buying a 30 or 40 million rand place. And that’s just the sad reality. I’ve got a friend who lives in the UK, and he was looking at doing a transaction down in South Africa and he did his currency conversion, let’s call it not the way we usually do it. So he flipped it around. Instead of saying, how many rands do I get per pound? He basically said, how many pounds do I get per rand? And it worked out to literally a few pennies. And he called me and he was laughing and he said, Moe, I did this, this is hilarious. And I said, it’s not hilarious, it’s actually very depressing.

This show is not about beating up on South Africa, though. But I mean, the sense I get Ghost is really that it was a great trip. You had some interesting perspectives. That perspective is so important to the work that we do in Magic Markets Premium as well, because it’s on the ground. We’re looking at these companies, these stocks, with an international eye on the ground and then bringing that back to our South African audiences. I mean, we’re probably out of time now. I wanted to just do some comparatives between global stocks and South African stocks. We’ll maybe save that for another day. What I am going to do, Ghost, is I am going to say, we’ve spoken about the UK, we’ve spoken about North America, and we’ve spoken about South Africa and Europe. Of course, I said, let’s look at five years worth of performance and let’s do all of this in US dollar terms because we know at the top of that list, you’re going to end up with the S&P 500 because of that heavy tech weighting. And over five years, that’s up over 85%. In dollar terms, that’s a solid return. But that’s not the point. The point I wanted to raise is Europe with their very lackluster economic growth, you read all the data prints, it’s always skirting a recession. Hey, we’re concerned around Germany. Hey, we’re concerned around France and the politics there. Over five years, Europe has given you around a 34% return in dollar terms. Then you’ve got, and I’m going to let you guess here, right, you’ve got South Africa and you’ve got the UK, which kind of come through a lot closer than I would have expected. But which one between those two do you think wins out and how much?

The Finance Ghost: I mean, in dollars, it’s hard to believe that the South African index would win it. So I like to think it’s probably still a FTSE, but I doubt it’s by a huge margin because I think Brexit really has hurt them.

Mohammed Nalla: You’re 100% on the money. So, I mean, taking today’s very strong move on the JSE out of the mix, because again, I haven’t updated the numbers, if you have a look at it, you’ve got the FTSE over the last five years up only around 12%. That is literally stagnant, pre-developed market, and then South Africa up in the low single digits. So a fairly comparative performance, ironically, between the UK and South Africa in constant currency USD terms. And this goes all the way back to that home country bias point we’re talking. Getting an international perspective and lens is super important. Even if you’re not doing the stock picking. Diversification is important because we’re not saying the US is going to outperform forever. We are saying that try and spread that, don’t put all your eggs in one basket, simply because diversification tends to help you when you consider your portfolio in global wealth terms. And that’s really the point I’d like to land on, is investors in South Africa should consider their wealth in global wealth terms.

The Finance Ghost: And that’s actually exactly the point I wanted to end on. And you said it earlier, this is not a bash South Africa show, and it’s really not. I’m going home to Cape Town and happy to be going home to Cape Town, but I think the lesson that I’ve taken from this and what I’ve learned from speaking to people in London and everything else, the cost of living in South Africa is minute in comparison to coming to London. So if you can hustle, if you can build a business, or if you can build a career in South Africa where you are earning in rands, similar to what you would be earning if you were working in somewhere like London, which remember, is a way more competitive market, way more competitive in every single way. If you are then converting that salary that you would make in the UK to what you are making in rands, and if it looks almost the same or even close, you’re actually doing really well, provided you invest your excess money that you are earning in South Africa wisely.

So it’s one thing to take advantage of, what I’ve now realised is actually an incredibly cheap cost of property. I mean, so the friend I’m staying with, his housekeeper earns per hour what a housekeeper in South Africa would typically earn in a day. She rocks up here in an Audi. I mean, just the mind boggles, they just do not have the level of poverty that we have in South Africa at all. But you’ve got to then take advantage of that cost of living in South Africa and invest it wisely. So I think what I’m going to start doing from now on, when I go home is actually start thinking about my sort of wealth creation journey. Just actually take the rands off the table. I’m not even thinking about it in rands anymore. I’m rather going to look at it and say, okay, per month, my net asset value is going up by x, dollars or pounds, doesn’t matter, take your pick. Or euros, whatever. And, that’s the goal. And if I was living in London with a London income but London expenses, what would it be going up by? And I think that is then the best way to actually look at it, because then it doesn’t matter where you live in the world, your money is growing in a sensible currency. What does not help is to go and just buy the names you know and love on the JSE and watch them go gently sideways for five years in rands. You are taking your hard work and all the risk you carry for living in South Africa and you’re just wasting it.

Mohammed Nalla: Yeah, Ghost, I mean, I really like the show because quite a personal show, I guess, sharing your, your lived experience on this trip up to the UK. That’s unfortunately where we’ve got to leave it. But we hope that some of these insights have really added to our listeners’ journeys and how they contextualise their investments on a global scale. Even if you’re living in South Africa, you’re a South African, you just really need to take a long, hard look at what am I doing with my investments. Does it make sense? How should I diversify? What do you think of what we’ve covered on the show? Let us know. Hit us up on social media. It’s @financeghost, @mohammednalla and @magicmarketspod, all one word, or go and find us on LinkedIn and pop us a note on there. We hope we’ve enjoyed this. Until next week, same time, same place. Thanks and cheers.

The Finance Ghost: Ciao.

This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.

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