14 INVESTING AFTER THE DOWNGRADES 31 May 2017
SA unlikely to offer local investors decent returns
Following the downgrade to junk status by both S & P Global Ratings and Fitch Ratings as well as expectations that the country ’ s GDP will stand at just 0.2 % in 2017 , South Africa appears unlikely to offer local investors the chance of decent returns . To mitigate the risks domestically and increase potential for greater and diversified returns , investors are increasingly looking to take advantage of their R11 million allowance to invest outside of SA . MoneyMarketing spoke to Wayne Sorour , Head : Old Mutual International South Africa , about investing offshore .
Shouldn ’ t sensible investors already have their money offshore ? Since the Nene debacle , we ’ ve seen high net worth individuals ( HNWIs ) diversifying a larger percentage of their total investment portfolio offshore . It ’ s situations like the present one – following SA ’ s downgrades to junk status – that make people think about further increasing their assets offshore and not having too much investment exposure to this country . This includes property . Also , the increase in the offshore allowance to R11 million per person per annum allows investors to diversify and take money offshore more regularly .
What do you do for those HNWI clients that have already used up their offshore allowance for the year ? For those clients , we make use of private asset swaps . [ Asset managers are permitted , as per the SA Reserve Bank , to invest a portion of their assets offshore and what they do not use is often given or sold to investors ].
Clients invest into the same vehicle , the same strategy and stock , but these funds have to be repatriated . What we then do at the end of the year , when the investor qualifies for another R11 million offshore allowance , is unwind some of those asset swaps and convert them to the direct offshore route .
Are foreign equities in aggregate presently priced at fair value ? Foreign equities have had a phenomenal run over the last year . The Dow Jones moved from around 18 000 points to a touch beyond 21 000 at one stage and then came back slightly . There ’ s really been good returns offshore and obviously the valuations have moved up . It depends on what you ’ re buying – there are still good stocks to buy , but their values have definitely moved up . Our advice , in many instances , where clients are investing a lot of money at one time , would be for them to consider phasing this in .
Are offshore bonds out of favour at present ? With offshore bonds or cash , you ’ re not going to get much return for now , so we ’ re steering away from that and rather looking at equities . Obviously , the risk increases and that ’ s why we recommend a staggered approach . If clients want a balanced portfolio , they ’ ll have to look at holding cash and the balance in equities .
Is it sensible to say that for the foreseeable future , local investors are not going to get much value out of South African assets even if the ANC leadership changes ? One must be careful not to mix politics with economics . You ’ ve still got some good companies in SA that are diversified or listed offshore . Many are increasing that percentage of profit and gains coming from their offshore operations and reducing those coming from SA . These local companies , as long as things continue as they are offshore , will benefit . However , for companies that are 100 % SA-based , it ’ ll be a struggle for a while .
What about those who insist that SA assets now present buying opportunities ? In our space , we want to stick to investment principles , so it ’ s not a matter of trying to time the markets on or offshore . We stick to the principles of diversification which HNWIs should have started some time back . The consideration is now about increasing this exposure .
Look at the choice you have internationally placed against locking your funds into SA only . Take the medical sector . Locally there are three stocks you can invest in , but on the London Stock Exchange itself , there are 60 medical sector stocks .
We recommend that clients have a financial plan and review that plan as new situations arise . A plan
would take into account a key question such as : Where will you need the money ? If all your future expenses will be in US dollars , then the bulk of your investable cash should be held in US dollar offshore investments ( for instance , amongst other things , for children ’ s overseas university education ).
If a client is looking purely at a return on investments , switching funds to asset swaps is easier in terms of paperwork or regulation . The negative of an asset swap is it is taxed in rand , whereas if you invest offshore directly you only get taxed on your dollar or sterling gains .
Do clients putting funds offshore worry about the rand ? After the downgrades , there ’ s been a bit of a kneejerk reaction . The rand weakened and people ask if it ’ s going to weaken further – or strengthen . Some people adopt a ‘ wait and see ’ approach and sometimes it ’ s to their detriment and sometimes it ’ s to their benefit . With an annual offshore allowance of R11 million , clients can invest some funds now and some later to get a cost averaging on the rand .
To time the rand is very difficult . You can ask four economists right now and you ’ ll get four different outcomes for the rand . That is why we encourage clients to consider buying hard currency using a phased in approach .
Wayne Sorour , Head : Old Mutual International South Africa