OFFSHORE INVESTMENT The rand conundrum
Offshore investment has been a winner since early 2011, the rand’s slump boosting the value of US dollar and sterling assets by a third over the past 20 months. But whether offshore is still the place to be is the subject of diverse views among asset managers.
Investec Value Fund manager John Biccard is firmly in the offshore camp. “It is not too late to invest offshore,” he says. “The rand is still vulnerable and foreign equity offers much better value than domestic equity.”
Adrian Saville, Cannon Asset Managers’ chief investment officer, advises caution. If you are looking for rand weakness to deliver returns, he believes it could be too late. “The rand is likely to go much stronger rather than much weaker from current levels,” he predicts.
Taking a view on the rand is a key input for those contemplating offshore investment. Looming large in a rand view is the growing deficit on the current account of SA’s balance of payments and the crucial role foreign bond investors play in filling the gap.
“Without sustained portfolio inflows, the rand will have to weaken to make our exports cheaper and choke off demand for imports,” warns Jeleze Hattingh, a fund manager at Element Investment Managers.
SA’s current account deficit jumped from R13,8bn in September to R21,2bn in October. This took the cumulative deficit for 2012 to R104,6bn, up from R9,4bn in the first 10 months of 2011.
Fortunately, SA has done well this year, so far attracting net foreign bond buying of R84bn, R57bn more than in 2011 as a whole, says Citi strategist Leon Myburgh. Providing a big boost was the inclusion of 12 SA government bonds in the Citi world government bond index in October, a move estimated to have attracted about R60bn in buying by global bond funds.
“SA’s biggest net export is now government bonds,” says Allan Gray equity portfolio manager Simon Raubenheimer. “It won’t last for ever. At some point something will have to give.”
Allan Gray’s portfolios reflect its negative view on the rand. Offshore assets are at the maximum 25% permitted while domestic equity holdings have a strong rand hedge bias. “Well over two-thirds of the aggregate revenues of our top 10 shares are generated either directly overseas, or are exposed to a foreign currency,” says Raubenheimer. A similar strategy is being followed by Coronation Fund Managers, which has long warned of the rand’s vulnerability. The firm’s continued bearishness on the rand is also strongly tied to SA’s current account deficit.
ERRATIC TREND
Coronation’s head of fixed interest investment, Mark le Roux, says foreigners now own about 35% of SA government bonds, on which interest payments place further pressure on the current account. Imports, he adds, are still growing apace while exports are being hampered by weak foreign demand. Add the negative impact of mining sector strikes on exports and Le Roux says you have “a lethal cocktail for the rand”.
SA investors were burnt badly by the rand’s collapse in 2001, which sparked a disastrously timed scramble into offshore funds. This, combined with a decade of strong performance by SA equity, has left foreign funds the poor relation of the unit trust industry. According to the Association for Savings & Investment SA, assets in foreign funds make up only about 5% of the industry’s total assets.
Given the rand’s history of confounding doomsayers, Saville’s contrarian view on its prospects cannot be ignored. But for now the weight of evidence suggests views of managers such as Biccard and Raubenheimer will hold sway. Even Saville concedes: “If your aim is diversification it is never the wrong time to invest offshore.”
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