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South Africa’s growth prospects are indeed dire, says Urvesh Desai, global equity manager of Old Mutual Investment Group’s Macro Solutions Division.
“If you look around the world there are other countries with better prospects – for both economies and markets.
“However, the biggest factor influencing returns of offshore assets for South African investors is the rand,” says Desai.
“The moves of the rand have the ability to spectacularly enhance or seriously detract from the returns of offshore investments. So it has to be a serious consideration in the decision to invest money offshore.”
Desai argues that the rand in real terms looks oversold and cheap.
“This is arguably deservedly so. We have a big current account deficit and the risk of a downgrade has caused significant capital outflows when we actually need inflows. We also lack competitiveness, despite a weak currency, which does not help.”
Going global
Investment managers, however, caution that people should be careful about taking money offshore now.
Tamryn Lamb, head of Orbis Client Servicing in SA, says investors shouldn’t position their investment portfolios based on what they hear and read in the news, or expect will happen in future.
“Rather than trying to time a weak rand, we suggest that you instead approach the question of how to diversify your savings and investments by taking a long-term view and balancing the benefits of diversification with your own investment objectives and risk tolerance.”
Paul Hutchinson, sales manager at Investec Asset Management, says astute investors as a rule will realise the importance of investing offshore and not follow a strategy that exposes them only to South African assets.
“There are compelling reasons for investing offshore: diversification of your assets which, is a key investment principle for reducing risk; and reducing your emerging-market risk. By world standards we are a small economy with a relatively illiquid and volatile stock market.”
Desai, however, warns that at the rand’s current levels against the dollar and other denominations people shouldn’t have all their investments offshore.
“Most multi-asset class funds are at their 25% limit, or more,” he says. (Regulation 28 of South Africa’s Pension Fund Act pegs the allocation of offshore investments at 25%, which limits investors’ ability to hedge their money against rand weakness.)
According to Desai, some investors already have indirect exposure internationally from some of SA’s listed equity. “You need to ask yourself what your liabilities are and match those with what is appropriate.
“For example, if you’re thinking of sending your children to study overseas, matching it with offshore investments isn’t a bad idea. Most of us, though, will have to pay our bills in rands. That means we want to diversify our risk with a bit of offshore investments, but we don’t want to mismatch currencies too much,” Desai says.
Rate hikes and ?the rand
The South African Reserve Bank’s (SARB’s) decision late January to increase interest rates with 50 basis points may help to stabilise the rand, which in turn could control inflation.
The SARB’s mandate is to keep consumer price inflation between 3% and 6%. In December, however, inflation climbed to a one-year high of 5.2%, up from 4.8% the month before.
“The rate hike will definitely put more pressure on consumers and borrowers,” says Desai, “and we have seen warnings about bank earnings because of higher rates. Although this is bad for consumers, and especially small businesses which are the most vulnerable, it creates a better environment for investing in local bonds.”
Orbis’s Lamb adds that the recent rate hike in itself does not increase the risk of local investments, but investors should consider all the factors that have led to the decision to hike rates to get a good sense of the local investment environment.
Offshore options
There are three ways to invest money offshore:
- Use rands to invest in rand-denominated offshore unit trusts.
- Use foreign currency to invest in foreign unit trusts through an offshore investment platform, which is operated in SA.
- Use a foreign fund manager using foreign currency.
“The first choice to make when investing offshore,” says Lamb, “is whether you want to use a fund manager’s offshore allowance, or your own. Your choice depends mainly on whether you want to invest in rand or foreign currency and how much you want to invest.”
Investors who want a simple solution and don’t want to expatriate their assets may want to opt for rand-denominated offshore unit trusts that are available in SA. This route has a number of advantages: you don’t need to buy currency, nor do you need tax clearance from the South African Revenue Service (Sars).
“However, these funds may close from time to time, as they are subject to the local manager’s foreign capacity constraints,” says Lamb. (Business Day reported that the current rand weakness means offshore investments have grown disproportionately in rand terms, which has led to local fund managers exceeding the foreign exposure limits.)
Another way to invest offshore is to expatriate your assets if you prefer not to be restricted to the funds available in SA. “The simplest route is to invest in foreign currency offshore funds through an offshore platform that is operated locally,” says Lamb.
The third option is to directly approach individual investment offshore companies using your offshore allowance, although this can be complex. It is subject to the SARB’s exchange controls, which allows South African investors to invest up to R10m annually offshore, as long as it is accompanied by a tax clearance certificate.
Offshore destinations
Emerging-market currencies have come to lose their appeal over the past year and as a result suffer capital outflows due to higher interest rates in the US.
But Chris Botha, director of fund management at Imara, says the US isn’t the preferred destination currently. “European stocks are attractive currently – especially in the consumer discretionary space, as the lower oil price is feeding into consumer demand. We also see an uptick in credit demand in Europe,” he adds.
Old Mutual Investment’s largest equity exposure is in European markets, says Desai. “Valuations based on normalised earnings are reasonable and there is monetary policy support from the European Central Bank. There is also pent up demand, and earnings and profitability are starting to turn around after the introduction of austerity measures.”
Orbis’s Lamb says investors have been pulling money out of emerging-market equities and allocating funds towards developed markets. “This trend has been in place for a few years and the more people herd into the same stocks, the more the price is pushed up, which in turn depresses future returns.
“Conversely, as flows continue out of emerging markets, and fear remains high, this can result in selected opportunities. Orbis believes there are increasingly such opportunities in certain emerging markets, such as Korea, Brazil and Russia.”
Investing in these markets is not without risk, she says, but neither are developed-market companies at high valuations. “That’s not to say that Orbis is not finding selected opportunities in developed markets, such as the US and UK,” she adds.
This is an excerpt from an article that originally appeared in the 18 February 2016 edition of finweek. Buy and download the magazine here.
