Stay invested despite downgrades, say analysts

Cape Town – South African investors should not make emotional investment choices and sell off assets in the wake of the recent credit rating downgrade to junk status. 

This is the message from Leigh Köhler, head of research, and Francis Marais, senior research and investment analyst, at Glacier by Sanlam. 

Speaking to Fin24, Köhler and Marais pointed out that unless investors’ willingness and ability to absorb risk has changed, they should not make any rash decisions. 

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“This is not the environment in which you should liquidate all your investments and move into cash, especially if you expect inflation to increase, in which case you’d be virtually guaranteed a negative yield.” 

Markets and investors have become increasingly skittish since President Jacob Zuma reshuffled his Cabinet on March 31, which resulted in among others the removal of Pravin Gordhan and Mcebisi Jonas as finance minister and deputy finance minister, respectively. 

The Cabinet reshuffle was followed by two credit rating downgrades when Standard & Poor’s and Fitch cut South Africa’s sovereign credit rating to sub-investment grade. 

Opportunities on the horizon 

Köhler and Marais said it’s prudent to leave investment decisions to a professional money manager, who is in a better position to manage risks professionally and has a long-term view.

Recent events, such as the Cabinet reshuffle and credit rating downgrades, do however lead to “indiscriminate selling” of assets as investors start panicking. 

“And that’s when new buying opportunities arise. Assets become cheaper when there are more sellers in the market and then prices are adjusted downwards. The opportunities we talk about are high quality companies that can be bought at a discount when investors start selling assets.” 

Köhler and Marais said from the most recent statistics they have noticed a considerable inflow into money market funds and bank guaranteed products, and outflows from general discretionary savings vehicles. 

“But this is the time people often find good opportunities in the market,” they added. 

Offshore exposure

Köhler and Marais believe South African asset managers are in the fortunate position of being able to invest not only in South African companies, but also in firms that have international exposure. 

“On our own stock exchange (the JSE) there are companies that earn most of their money offshore. So you don’t necessarily have to ‘externalise’ your assets to get offshore exposure, even if you think that everything is doom and gloom,” they said. 

On the other hand, markets have started to realise events can’t be predicted and when they do take place, the outcome is different from what was expected. 

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“Take Brexit, for example. First of all, nobody expected it and when it did happen, people expected the UK economy to go to pieces. It certainly didn’t happen,” Köhler and Marais said. 

In South Africa specifically, asset managers have started to build in a risk premium when making investment decisions, especially after Nenegate (when former finance minister Nhlanhla Nene was fired on December 9 2015).

“Before Nene this wasn’t top of mind,” the analysts said. 

Asset managers currently “price in” risks when making investment choices and make sure investment portfolios are diversified. 

“If you look at the performances of collective investment schemes last year, many asset managers invested the full 25% in Regulation 28 portfolios and some of these investments have been quite exposed to rand hedge stocks. 

“If recent events lead to depreciation in the rand, it’s going to be a tailwind for rand hedge stocks,” they said.

(Regulation 28 is a provision in the Pension Fund Act which limits the extent to which retirement funds may invest in particular assets or asset classes, for example 25% in property, 25% in offshore assets and 75% in equities.)

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Rand hedge stocks are not the only way South Africans can increase their offshore exposure. Investors wanting to explore routes of obtaining offshore exposure other than rand hedge stocks listed on our local exchange are encouraged to speak to their financial adviser, Köhler and Marais said.