Spooked by South Africa’s political situation and the prospect of the country being downgraded by international credit ratings agencies, investors have been disinvesting from local financial mar-kets and taking large stashes of money offshore.
Such a move, however, may well prove to be badly timed because, despite some recovery since its low point in January, the rand is still weak.
Investment experts advise that the best time to invest offshore is when the rand is strong and offshore markets are cheap.
Currently, neither offshore share markets nor the local market are obviously cheap and many asset managers are advising only one thing: diversification.
South African Reserve Bank statistics show that money moved out of South Africa for the 16th consecutive quarter, reaching an alarming pace in the fourth quarter of last year as political events knocked investors’ confidence.
Anton Raath, the chief executive of Sanlam’s Glacier investment platform, told attendees at the company’s investment roadshow this week that investors are moving money strongly from local to international funds on the platform, resulting in offshore funds “growing at a furious pace”.
At the same event, Sanlam Private Wealth’s chief executive, Daniel Kriel, noted that flows were highest in the last quarter of last year and the company’s global equity offering had showed a huge inflow.
The problem with this recent trend is that the rand reached its weakest level to the United States dollar, at R16.80, in January, following the firing of former Finance Minister Nhlanhla Nene.
Alwyn van der Merwe, the head of investments at Sanlam Private Wealth, says the rand has depreciated to well below what is regarded as its fair value when its purchasing power is taken into account. He says there is a less than a one-percent chance that it will deteriorate further.
Taking money offshore when the rand is strong and then having the local currency weaken can boost your offshore returns in rand terms. Doing the opposite will diminish your returns.
The rand is notoriously difficult to call, but both Van der Merwe and Geoff Blount, the managing director of Bayhill Capital, a specialist private client share portfolio company, say South Africans have a habit of calling it wrong. Many took money offshore in late 2001 and early 2002, when the rand reached its previous low of around R10.50 to the dollar.
The time to take money offshore was when the rand strengthened to about R8 to the dollar between 2009 and mid-2011, before the rand weakness that peaked in January set in.
Van der Merwe says it is unlikely the rand will strengthen to R8 to the dollar again, but it could well improve to about R13.50.
Another obvious time to invest offshore is when markets are cheap and the economic outlook is good. By many forecasts, the economic outlook is currently not good and foreign share markets are not particularly cheap.
In their quarterly market and economic review, economist Sanisha Packirisamy and Herman van Papendorp, the head of asset allocation at Momentum, say concerns over the health of the global economy have deepened. Most major regions are expected to expand at a slower pace this year relative to the growth rates observed in 2015.
Packirisamy and Van Papendorp say the US economy is facing external risks and its growth is softer, while the European Central Bank and the Bank of Japan eased monetary policy further in the first quarter of this year in response to “serial disappointment” over growth and inflation in those regions.
Sanlam economist Arthur Kamp told the Glacier investment roadshow that it remains a low-growth, high-debt, low-inflation, low-interest-rate world and this is likely to be the case for some time.
Kamp says the central banks’ easy monetary policies have been effective to some extent, but inflation is the missing ingredient.
Central banks such as the Bank of Japan and the European Central Bank are looking at other monetary policy measures, and in the US the Federal Reserve is likely to raise rates very slowly, he says.
Peter Brooke, the head of macro-Solutions at the Old Mutual Investment Group (OMIG), told a recent OMIG investment conference that the world is trapped in economic purgatory: between growth heaven and depression hell. Growth is not good enough to break into heaven but the liquidity afforded by the central banks ensures the world does not go into a depression.
He says this is likely to result in equity markets surging back and forth as data about economic factors becomes available, creating more volatility in your investments.
Adding to the woes of the global economy, China’s transition from an economy driven by massive infrastructure spending to a more consumer-driven economy is injecting a lot of volatility into equity markets. The most obvious effect has been the plunge in the price of commodities.
Despite the gloom pervading global markets, OMIG is predicting a five-percent-a-year real (after-inflation) return from offshore equities, versus a 4.5-percent real return from local equities.
In 2001, when the rand was so weak relative to the US dollar, it was easy to make the case for South African equities, because shares on the local market were cheap relative to their expected earnings, Van der Merwe says. The FTSE/JSE All Share Index was on a relatively low price-to-earnings (PE) ratio of 10, while the offshore market was on a PE ratio of 25 at the time. (The PE ratio of a share indicates how expensive or cheap a market or share is relative to what you can expect to earn from the share and how quickly you will recover your investment.)
He says the gap between prices relative to earnings is not as obvious now. The local market is on a PE ratio of about 19, while the US market is at a similar level and Europe is a bit cheaper, he says.
Brooke says the combination of the volatility resulting from the global economy, the news from China, and the local political situation and rand weakness means that South African funds face extreme volatility, which is likely to endure for some time.
You need to be careful about how you pick shares or funds, as the ground shifts a lot every day, he says.
Van der Merwe says that, given all the uncertainties in the global and local markets, this is no time to be too brave. Rather, it is a time to protect your portfolio by diversifying your investments.
The time to be brave is when markets are relatively cheap, he says.
EMERGING MARKETS: FORTUNES BRIGHTER
The first quarter of the year was marked by a turn for the better in the fortunes of emerging markets, after a challenging 2015.
Equities in markets classified as being “less than developed” significantly out-performed their developed-market counterparts in the first three months of the year, with the MSCI Emerging Markets Index up 5.8 percent compared with a 0.2-percent loss for the MSCI World Index, both in United States dollar terms, Templeton Emerging Markets reports
Hywel George, the director of Investments at Old Mutual Investment Group, told the group’s recent investment conference that early signs of a rotation from developed markets to emerging markets started in December, and key global strategists have already begun to reposition their portfolios in favour of emerging markets.
Mark Mobius, the executive chairman of Templeton Emerging Markets Group, says the long-term investment case for emerging markets remains positive for a number of reasons:
* Economic growth rates in general continue to be faster than those of developed markets;
* Emerging markets have much greater foreign reserves than developed markets; and
* Debt-to-GDP (gross domestic product) ratios of emerging-market countries generally remain lower than those of developed markets.
Even with major economies, such as Russia and Brazil, in recession, emerging markets overall are expected to grow 4.3 percent in 2016, more than twice the 2.1-percent growth rate projected for developed markets, Mobius says.
Although investors have been concerned about China’s growth slowing down, China remains one of the fastest-growing economies in the world, he says.
Emerging-market countries, which account for nearly three-quarters of the world’s land mass and four-fifths of the world’s population, have considerable potential in terms of resources and demographics and look to be in a strong position to benefit from technological advances, he says.
It is also important to remember that emerging-market countries represent a large share of world economic activity and equity market capitalisation, Mobius says.
“Many investors have been underweight in emerging markets and, in our view, this could represent a risk, especially as emerging markets appear undervalued versus developed markets based on price-to-earnings ratios,” Mobius says.
Among the emerging-market regions, indices tracking Latin America, Europe, the Middle East and Africa have recorded double-digit gains, but emerging markets in Asia generally lagged, advancing only slightly, Templeton reports.