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