Financial Mail

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.

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