For decades, the country was an outcast on the international stage because of apartheid. The sanctions against the country cramped wealth creation, but since it opened up in the early 1990s, it has grown massively.

“In 2004, the index level of the South African stock exchange was about 6,000. In May 2008, it peaked at 33,000. So in the space of four years, the wealth of individuals had it been invested in markets went up by five times,” Graham Baillie, head of investment services at Standard Bank Private Clients, told this publication.

Standard Bank is one of the country’s four big banks, which are also the biggest players in bespoke wealth management. The others are FirstRand Bank, Absa Group and Nedbank.

At half-throttle

The pace of South Africa’s wealth creation between 2004 and 2008 was higher than anywhere else in the world, other than some other unique emerging markets stock exchanges, Baillie told WealthBriefing. “The amount of wealth created in such a short time, I think was a once in a lifetime opportunity, which is behind us and not in front of us,” he said.

However, there is plenty of untapped potential in the country, as the official unemployment rate stands at almost 25 per cent, and the actual unemployment figure is believed to be much higher.

“Despite having performed so well over recent history, the South African economy still has a lot of room for improvement,” said Philip Bradford, head of products at Absa Wealth. “We have a very high unemployment rate which means that a large part of our human capital is either unskilled or underutilised. Like any emerging market we have our unique challenges. However experience tells us that wherever there are challenges there is opportunity.”

“The majority of our wealthy clients tend to be entrepreneurs, which is typical of an emerging market,” Bradford said. “This means the potential influx of investment capital into South Africa is likely to create further wealth for high net worth clients.”

New kid on the block

The potential of South Africa, the largest economy in Africa, with a GDP of $364 billion according to the World Bank, was recognised when it was invited to join the BRIC (Brazil, Russia, India and China) bloc at the end of last year. In April, President Jacob Zuma attended his first BRICS conference in China.

“I think South Africa has a lot of what they are looking for in its natural resources, and that has been the attraction,” Baillie said. “But relative to the size of the other components, South Africa is much smaller and its growth prospects look well behind what may or may not be achieved out of the original BRICs. I’m still confused why it was included alongside the BRICS.”

“With South Africa now part of the BRICS nations we are seeing a lot of foreign interest,” Bradford said. “We have first world banking and corporate sectors a number of multinationals are looking to use South Africa as their springboard into Africa, which is seen as the last unexplored frontier market. Barclays in particular have signalled their intention to grow significantly in Africa.”

Barclays acquired a majority shareholding in Absa, which is the South Africa’s largest retail bank, in 2005. Bob Diamond, the chief executive of Barclays, told the UK media earlier this year that about 15 per cent of the financial giant’s revenue and profits come from Africa, and, perhaps more surprisingly, that he expects it to jump to between 20 and 25 per cent in the next couple of years. 

Rainbow nation: a pipe dream?  

Baillie believes that government policy and its business-friendly will be crucial for the continuation of wealth creation in the country. “Doing business in South Africa is problematic,” he said. “We have a number of headwinds which we have to contend with, so it’s not the easiest of places.”

However, taxes are slightly lower than most western economies. The top marginal rate of income is 40 per cent of tax for those earning more than R525,000 (about $74,000) a year, according to the South African Revenue Service. The other tax rates worth noting are corporation tax at 28 per cent, capital gains tax at 10 per cent for individuals and 14 per cent for corporations and VAT (sales tax) at 14 per cent. There is neither a wealth tax nor a property tax.

One unquestionable hurdle for the country’s development is violence. The murder rate has fallen sharply since the end of apartheid in 1994, but it still seven times higher than in the US, the Economist reported recently. And the country’s police force is also one of the most violent in the world; 566 South Africans were killed as a result of police action last year.

Corruption is another major problem and some even say that it threatens the democracy in the country. The political stage is dominated by one party, the African National Congress, which not only forms the national government but is also in power in all provinces apart from the Western Cape. About two-thirds of the population vote for the party, even though many of them are critical of the absence of progress. The ANC is the party that fought apartheid and saw Nelson Mandela become the country’s first truly democratically elected president.

Investing in your backyard

Despite the less flattering aspects of the South African society, there are plenty of reasons to be upbeat. It remains one of the most unequal countries in the world, despite affirmative action by the government, but the middle class is growing rapidly and the economy is becoming increasingly consumer-driven.

“Historically, wealthy South Africans were very keen to invest offshore because of political instability and the long-term depreciation of our currency versus the US dollar,” Bradford said. “They typically viewed this as their ‘safe money’. However many investors were burnt when the rand unexpectedly appreciated and are now more reluctant to invest offshore when they can get good returns in their own backyard. As an example a South African investing in global equities from 2000 to 2010 would have received a total return of less than 20 per cent in rand, when even in local cash they would have seen a return of over 150 per cent.”

In the near-term, Baillie highlights that the country has been well protected from the turmoil on world stock markets in August.

“Our view for the next 12 months is that we should get double-digit returns from investing in South African shares,” Baillie said. “Bonds in South Africa look expensive, notwithstanding rise in inflation (the consumer price index in July was 5.3 per cent). The returns will be higher than inflation, but not too much higher. But cash is flatlined at the moment, alongside the rest of the world.”

 “Over the past decade, the private banking industry in South Africa has seen the large majority of their earnings coming from helping their clients become wealthy by lending money,” Bradford said. “Our challenge now is to assist those same clients to invest their wealth.”