Don’t take it all offshore

CONSIDER THE VALUE IN SOUTH AFRICAN ASSETS

For many local investors, it’s hard to feel confident about putting money into SA assets. The risks and uncertainties seem very high, particularly in cash and government bonds.

At the start of 1994, one US dollar bought R3.40. The rand has since depreciated close to 75%; people are therefore worried about losing purchasing power if they invest in SA cash.

The uncertainties about SA’s political and fiscal stability also make many investors wary of local government bonds.

There’s a good chance SA’s sovereign credit rating will be downgraded to subinvestment grade before the end of 2017 and people worry it will cause an exodus of foreign investors and how that would impact bonds.

However, some asset managers argue it would be wrong to ignore SA assets. One must be able to look past short-term noise to recognise the fundamentals.

Sasfin’s Philip Bradford points out, over the past 30 years, SA cash outperformed inflation by 3.5% per year. SA bonds gave 13.5% per year, “which means you were beating inflation by 5% to 6% just being in bonds”.

This isn’t an indicator of what to expect in future, as cash is extremely unlikely to deliver that kind of real return, but it sets an important context. Over this period, SA bonds delivered a higher return for local investors than global equities and local cash outperformed global cash, despite the rand weakening.

Although local cash and bond investments may be risky, investors must consider the margin of safety they’re being given.

“If I go offshore and sit in cash I would be earning zero to 1% in a bank account in the US or the UK. But I can earn 7% to 8% in a money market fund in South Africa,” Bradford says.

Similarly, yields on local bonds are offering decent real returns – not the case with bonds in developed markets.

Investors must consider these fundamentals when making portfolio choices.

With equities you should diversify globally as you have no real advantage sitting in SA buying only SA companies, Bradford said.

Picture: Shutterstock Ford SA has commenced with the second phase of safety recall action for all affected Kuga 1.6 models built at the Valencia Assembly Plant, Spain, between May 8, 2012 and September 27, 2014.