Equity investors retreat from SA
Equity investors are flocking offshore in the wake of the recent foreign-currency debt downgrades, afraid of weak economic growth and its effect on the value of their investment portfolios.
This has tested some asset managers’ offshore allocation limits. “The allocation to offshore assets in unit trust funds where we have discretion, [such as] our regulation 28 funds, have largely been at or close to their maximum offshore allowance, so there has been no real change here, as we couldn’t increase direct offshore exposure any further,” said Paul Hutchinson, a sales manager at Investec Asset Management.
Regulation 28 is a section of the Pension Funds Act limiting how much asset managers can invest in each asset class for retirement funds. The Reserve Bank’s limit for investment in offshore assets is 25%.
“In terms of the Investec Equity Fund, however, over the past month, we have increased our offshore allocation. The fund can invest up to 25% of its assets
offshore, but we were comfortable with an allocation of about 12.5% until recently,” Hutchinson said. “We have used the ... recent period of a bit of rand strength to enhance the fund’s diversification by increasing its offshore allocation from 12.5% to 20%, a level we believe is more appropriate for the environment.”
This includes the effect of the recent downgrades of SA’s foreign currency debt. The World Bank estimates these may cost SA 1% of GDP and nudge another 160,000 citizens into poverty.
Nick Brummer, director at InvestOnline, said about 20% of the investment adviser’s clients had asked about moving funds offshore, while Hutchinson said rand-denominated funds feeding into offshore assets and direct offshore funds at Investec Asset Management had seen big increases in inflows.
Hutchinson warned, however, that an investment in dollars at the beginning of 2016 would have eroded savings 20%, so this would not be the “ultimate protection”.
“In addition, despite SA not growing much, the JSE has many offshore opportunities to supplement potential local disappointments,” Brummer said.
Hutchinson said while portfolio managers sometimes wished the 25% offshore cap could be lifted, SA companies earning most of their money off- shore mitigated this somewhat.
In fixed income, foreign investors are propping up the market as large domestic investors sell off their holdings in government debt, and bond auctions at state-owned companies draw scant interest.
“SA appears to have escaped without serious financial consequences, as the 10-year government bond yield is only 15 basis points higher than it was before the cabinet reshuffle,” said Nazmeera Moola, co-head of fixed income at Investec Asset Management. “However, the local bond market has been propped up by foreign investors, who have invested R22bn into government debt since the cabinet reshuffle. There have been massive inflows into emerging market debt funds, totalling $8bn in April and more than $30bn since the start [of 2017].
“In contrast, domestic investors have been net sellers of R10bn of government debt. Unfortunately, foreign investors are concentrating on the 10-year part of the yield curve.” She said SA’s improving inflation profile should have positioned it as “a place to hide” in emerging markets if commodity prices continued to soften. “Instead, the cabinet reshuffle makes it one of the first places foreign investors would seek to sell if they face outflows from their funds.”