It’s just too soon to tell

Financial Mail - Investors Monthly - - Feature: Offshore Investing -

With the threat of a credit rat­ing down­grade still hang­ing over the coun­try, would now be a pru­dent time to move as­sets abroad?

This is a ques­tion that will be weigh­ing heav­ily on in­vestors’ minds in the com­ing months, as the im­pact of such a move on the cur­rency and lo­cally held in­vest­ments will un­doubt­edly be se­vere, writes Jo­hann Barnard.

Opin­ion is di­vided on whether ratings agen­cies will make the cut and whether gov­ern­ment will be able to de­liver on its promised re­forms to ad­dress the agen­cies’ concerns, which is one of the key con­di­tions needed to avoid the down­grade to be­low in­vest­ment grade sta­tus.

Speak­ing at a pre­sen­ta­tion to fi­nan­cial ad­vis­ers in Sand­ton ear­lier this month, In­vestec As­set Man­age­ment di­rec­tor Jeremy Gardiner said he felt fairly con­fi­dent that the down­grade could well be staved off. “For the first time ever we have busi­ness, labour and gov­ern­ment work­ing to­gether. It’s very ex­cit­ing and if we con­tinue to do that, we will get through again,” he said.

His con­fi­dence is based, first, on the ap­par­ent unity in ad­dress­ing is­sues such as labour un­rest and the fact that busi­ness and labour should be able to en­gi­neer a res­o­lu­tion to the peren­nial con­flict. Sec­ond, he be­lieves fi­nance min­is­ter Pravin Gord­han will keep to the un­der­tak­ing to en­sure the in­de­pen­dence and proper func­tion­ing of key in­sti­tu­tions such as the Re­serve Bank and Na­tional Trea­sury.

Third is the mat­ter of eco­nomic growth. This has to be seen in the con­text of SA’s emerg­ing mar­ket peers such as Turkey and Brazil. Gardiner says that even flat growth, as pro­jected by the Re­serve Bank, is bet­ter than the neg­a­tive growth fore­cast by peers.

Stick­ing with Brazil as a bench­mark for the tra­vails of emerg­ing mar­kets, Galileo Cap­i­tal’s War­ren In­gram says the down­grad­ing of that coun­try’s credit rat­ing last year to junk sta­tus has not re­sulted in complete doom and gloom.

“You would think that the cur­rency, mar­kets and the econ­omy would suf­fer in the 12 months af­ter the down­grade. But if you look at the ex­am­ple of Brazil, and if you have a free-mov­ing cur­rency, chances are greater that it and the mar­ket will strengthen fol­low­ing a down­grade,” he says.

“The cur­rency and mar­ket will no doubt take a hid­ing im­me­di­ately af­ter the an­nounce­ment, but once the panic is over and peo­ple start to an­a­lyse the fun­da­men­tals, SA [will be seen to look] pretty good com­pared to its peers. SA is un­doubt­edly the smartest oper­a­tor in [what would be] a much smaller pond of emerg­ing mar­kets rated at junk sta­tus, and our peers are go­ing through some pretty tough times. So we could at­tract more emerg­ing mar­ket in­vestors, and if his­tory re­peats it­self — coun­tries tend to take cor­rec­tive ac­tion and in­tro­duce re­forms — sen­ti­ment could be­come more in­vestor pos­i­tive.”

The clever money ap­pears to be on adopt­ing a wait-and-see ap­proach, as it is impossible to pre­dict what might hap­pen over the next few months.

In­gram sug­gests that it may not be a bad idea to start phas­ing in off­shore in­vest­ments in the pe­riod be­fore the credit rat­ing de­ci­sion and then wait­ing to see how mar­kets and the cur­rency re­act. “I would cau­tion, how­ever, that it’s dan­ger­ous to make an in­vest­ment de­ci­sion based on a ‘yes or no’ out­come,” he says.

Stephen Mein­t­jes, head of eq­uity re­search at Mo­men­tum SP Reid Se­cu­ri­ties, says that fac­tors such as changes in po­lit­i­cal lead­er­ship and whether gov­ern­ment de­liv­ers on the promised re­forms could sway sen­ti­ment pos­i­tively, though only time will tell what the out­come may be. “So I would keep some pow­der dry for the even­tu­al­ity of a down­grade, though it does look as if the econ­omy will be bet­ter off next year,” he says. “You have to look for stocks in par­tic­u­lar niches or those grow­ing suc­cess­fully out­side SA. I would say it is too early to in­vest in SA econ­omy-geared stocks.

“As for out­ward-looking JSE stocks, one could sim­ply fo­cus on these, but the gen­eral prin­ci­ples of in­vest­ment pred­i­cate that one should look fur­ther afield as well.”

He says it is a par­tic­u­larly dif­fi­cult time to be try­ing to make de­ci­sions on in­vest­ing off­shore given all these un­cer­tain­ties, es­pe­cially about where the rand may end up. The view by some that it might strengthen to close to R12/dol­lar adds to his sense of cau­tion as peo­ple could lose out by in­vest­ing too early, should SA avoid the credit rat­ing down­grade.

The sense of un­cer­tainty is not helped by global mar­kets gen­er­ally not point­ing to any clear win­ners or safe havens. The Brexit de­ci­sion alone has thrown such de­ci­sions into tur­moil as the world awaits the full im­pact of the UK leav­ing the EU.

Dave Christie, a prod­uct spe­cial­ist at Ash­bur­ton In­vest­ments, says this has led the firm to adopt a more de­fen­sive ap­proach while it searches out value and tries to dis­cern where the mar­kets may go.

“It is def­i­nitely pre­car­i­ous at the mo­ment and an in­ter­est­ing place to be post-Brexit. We have been light on eq­ui­ties and are hold­ing onto some dry pow­der for when the mar­kets im­prove in terms of offering bet­ter value.

“Right now is pos­si­bly a time to sit on the side­lines given the un­cer­tainty of how Brexit [will play] out and then to try and pick up some value in pock­ets that we can find,” he says.

The sense of un­cer­tainty is not helped by global mar­kets gen­er­ally not point­ing to any clear win­ners or safe havens

Dave Christie

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