Keep your eyes open
Pedro van Gaalen
Global markets may be what SA investors should look at right now, writes
Before Covid-19 shut down the country, SA’S economy was already grappling with significant structural issues that dampened returns from domestic investments. A strong rationale already existed for local investors to increase offshore allocations to realise better returns and protect their wealth through diversification.
“SA was in recession before Covid-19 hit, with a weak fiscal position,” says Reyneke van Wyk, head of investments at Stonehage Fleming Investment Management in SA.
As the country went into lockdown, ratings agency Moody’s assessed that Covid19’s impact on the economy would further lower SA’S fiscal position amid “very weak” structural growth prospects.
The agency subsequently downgraded the country’s sovereign credit rating to subinvestment grade. Fitch took a similar view and downgraded the country deeper into “junk” status in April.
“SA’S precarious economic situation left the country badly exposed … because our coffers were bare,” explains Magnus Heystek, director at Brenthurst Wealth.
While markets had generally priced in the downgrades, these decisions heaped additional pressure on the rand.
This raised borrowing costs at a time when SA looked to global markets for financial assistance
Wehmeyer Ferreira … risks still exist
to combat the virus.
“We’re going deep into debt to finance our way through this crisis. The country will sit with a high debt and repayment schedule for some time to come,” says Heystek.
“The critical factor now is how SA manages itself out of this crisis. The government’s economic restructuring plan will determine the extent of the recovery and the returns investors can expect from the local market. However, more government regulations and micromanaging of the economy won’t help us out of this.”
Van Wyk believes the government’s risk-adjusted approach and its economic rescue package totalling 10% of GDP are sensible, but says the government should accelerate the phased reopening of the economy in a health-conscious manner. “But the local economy offers few globally competitive companies like Naspers in resilient sectors,” he says.
Based on these fundamentals, Heystek asserts that local investors need to build their global portfolios. “It is tough with the rand at current levels, but no local exposure is available to growth markets and industries and the companies best placed to benefit from the post-covid-19 recovery. Health-care, for example, offers huge potential. Whoever develops the vaccine will offer significant opportunities, but that won’t happen in SA.”
Wehmeyer Ferreira, chief operations officer at 1nvest, explains that by April 23 the rand had depreciated by 35% due to the lockdown, downgrades, global market sentiment and the currency’s role as a proxy for emerging markets.
“At these levels, the rand looks oversold compared with long-term fair value, but most of the risks are still prevalent. Therefore investors should adopt a balanced approach to global investing or externalising money offshore.”
According to Van Wyk, an investor’s decision to continue externalising capital at current weak rand levels depends on certain factors. “These include the availability of additional long-term surplus capital and the investor’s current local and global allocation relative to their long-term target split. We
Magnus Heystek …coffers were bare strongly believe in investing the majority of a portfolio offshore.”
Emil van Rensburg, head of Absa Global Investment Solutions, suggests that the rand could regain some losses in the short to medium term as investor sentiment changes and becomes more accommodative of risk.
“But the rand will likely continue deteriorating moderately against major developed currencies in the long term due to anaemic economic growth, increasing government funding requirements, twin deficits on the fiscal and current account, deteriorating government debt levels and other structural challenges,” he says.
“This rand depreciation is likely to be broadly in line with the interest rate differentials of respective government bond yields.”
Madalet Sessions, portfolio manager at Denker Capital, adds that the exchange rate’s future trajectory depends on SA’S growth and inflation prospects. “It is impossible to know whether SA will embrace policies that will result in accelerated growth and continued moderate inflation,” she says.
“The appropriate course of action is to have sufficient exposure to both domestic and offshore assets so that an investor has the greatest likelihood of meeting their investment objectives, irrespective of the outcome of SA’S policies.”
Van Wyk believes SA’S recovery could be relatively slow. “Given the unprecedented uncertainty, it is hard to establish how much has been priced in.”
A continued phased approach to globalising an investment portfolio remains prudent for local investors.