Financial Mail - Investors Monthly
DOWNGRADE BLUES
Local investors must consider when to boost their offshore allocations
Adowngrade to junk status by Moody’s Investor Services looms large over the local economy after the ratings agency cut SA’s outlook to negative in November 2019.
If there are no concrete structural and policy reforms to contain spending and borrowing and boost revenue, supported by a credible mediumterm vision in finance minister Tito Mboweni’s budget speech, Moody’s next scheduled assessment on March 27 may herald the end of the country’s ratings reprieve.
Faced with the economic consequences of a downgrade, local investors must consider when to boost their offshore allocations to preserve their wealth.
While many market commentators argue that the downgrade is mostly priced into the currency and bond yields, Kurt Benn, head of the balanced franchise at Absa Asset Management, believes the liquidity impact from forced selling by bond investors after a downgrade will result in short-term bond and rand selloffs.
“Therefore, it is prudent to hedge against this outcome because it could be quite material. As such, maximum offshore exposure is our preference.”
Global investors will also take their cue from the budget. Greg Flash, chief investment officer at Cinnabar Investment
Management, says: “Without spending cuts, we believe that foreign investors will leave in droves, which will blow out the rand. While we don’t like to time currency movements, we suggest that investors who plan to increase their offshore allocation do so before the downgrade.”
Shane Curran, co-founder of InvestSure, suggests investing offshore in a lump sum, depending on available capital, or in stages to get the dollar cost average price. “The majority of your allocation should go offshore before the decision.”
Following the downgrade, Curran says, investors should remain calm amid possible sustained rand weakness. “Wait it out before taking more capital offshore, especially as investment opportunities may emerge locally.”
However, Wayne Sorour, head of Old Mutual International SA, cautions against any acute response to the looming downgrade.
“Be sensible if you plan to take a big portion of your wealth offshore. I would recommend a balanced and phased approach over at least six months.”
Sorour suggests that investors speak to an adviser or planner to determine their needs based on their risk profile and income requirements.
“Investors must consider their risk tolerance because the wrong risk profile could have long-term implications on their financial planning.”
Discretionary investment allocations will also vary. “Ultra high net worth individuals should ideally allocate more of their portfolio to offshore investments, while those who require income from investments should be more cautious.”
Sonia du Plessis, a CFP® at Brenthurst Wealth Management, adds that rand depreciation will have a knock-on effect on inflation.
“For investors who plan to remain in the country, offshore diversification is a prudent means to protect their wealth from inflation’s corrosive impact. We currently advise these clients to invest 50%80% of their portfolio offshore in hard currency or asset swaps, depending on their risk profile and life phase.”
For anyone planning to emigrate, Du Plessis recommends a more aggressive approach. “Take as much money as you can offshore as soon as possible.”
However, she advises “leavers” to give it time before taking the final step of financial emigration. “Make sure you’re happy in your new home as there could be tax implications when divesting from your local pension fund and other investments.”
Amid these calls to boost offshore allocations, Nadia van der Merwe, senior manager at Allan Gray, says that while a downgrade is probable, it is not a given.
“It is also difficult to predict the extent of the resultant fallout. While there could likely be a bond sell-off coupled with a weakening rand, the extent of the depreciation and capital flight remains unknown and is unlikely to be permanent.”
Kuhle Kunene, head of wealth advisory at Standard Bank, agrees that expulsion from the world government bond index should only temporarily influence the rand and bonds.
“While the local currency may have to partly unwind the recent outperformance versus its peers, we forecast that it will remain relatively stable, on average, against the dollar in 2020, premised on dollar weakness, apart from a downgrade-related spike.”
The Standard Bank Group economic research division expects the rand to end the year at R14.60/$ and R14.90/$ at the end of 2021.
Van der Merwe also highlights risks in global markets due to prevailing market valuations and unpredictable macro factors.
“Investors should be wary of attempting to time markets in anticipation of local volatility. Follow an appropriate longterm investment strategy — offshore allocations should form a core part of your portfolio, but a thorough understanding of the inherent risks in these markets is imperative. Be careful not to invest blindly in perceived ‘safe’ markets or base your investment strategy on binary events.” ●