It is fair to say, that investors who added offshore diversification to their portfolios are today considerably better off than those who did not.
Despite the relative strengthening of the rand versus the US dollar and other major currencies during 2016, this was not seen as a major turning point in the fortunes of the local currency. It was rather seen as a temporary reprieve from further currency weaknesses and most investment companies will be using this period of relative strength to add to their offshore portfolios on behalf of clients.
There are substantial headwinds building up, which under certain circumstances, could in the near future again put severe download pressure on the rand-exchange rate versus major currencies. These include (but are not limited to):
- A potential downgrade to SA’s international credit rating by the major credit agencies in June 2017
- Sharper-than-expected increases in US interest rates during 2017 and beyond.
- A slowdown in the mild upward turn in the global commodity cycle.
- Political events
“Over the past five years the average investment on the Johannesburg Stock Exchange (JSE) has produced virtually no growth when measured in US dollars. Probably the major reason for the poor performance of the JSE over the past three years has been the consistent selling of local equities by foreign investors,” according to Brenthurst Wealth Director and Investment Strategist, Magnus Heystek.
In January 2017, foreign investors were net sellers of a further R24,4 billion in bonds and SA shares bringing the total rolling annual outflows to R163 billion. Even more astounding is the fact that since September 2013 a net amount of R263 billion was sold out of SA equities and bonds. The outflow is unprecedented in modern times and SA, apart from China, is currently the only emerging market country experiencing such an outflow.
JSE versus the world
If the outflow of capital is not the result of global themes, then the only conclusion is that this trend has been driven by local factors. International credit agencies have been highlighting the serious structural issues in the SA economy which is leading to such an outflow.
The issues are as follows:
1. SA’s working age population is not growing faster than its economy, pushing up unemployment to 13-year highs at above 27% of the population.
2. SA’s gross domestic product has been declining for several years, both in rand as well as in dollar terms.
3. The economic growth rate has been disappointingly low for several years, well below trend line and is not expected to have grown by more than 0,5% in 2016.
4. The countries debt (at 50% of GDP) has doubled since the global financial crisis and is now at record levels.
5. Unclear policies across many sectors of SA industry (mining, tourism, small business) have led to a plunge in confidence in the private sector. Companies would rather invest in other parts of the world or keep their money in cash than invest more money in SA due to policy uncertainty.
6. The economy has failed to react to the collapsing currency. Economic activity in export-sensitive parts of the economy normally reacts positively to a weaker currency. This time around it is not happening to the same extent.
“Offshore diversification, even though it introduces a higher degree of volatility and uncertainty, is the correct investment approach for investors with long term investment horizons,” Heystek says.