The relegation of South Africa’s bonds to junk status has prompted many South Africans to rethink their investment strategies, and begin moving money offshore. Not necessarily such a good idea, argues Alex Funk, CEO of Cinnabar Investment Management, an independent discretionary fund management business.
“Taking money offshore is only prudent when the decision is prompted by sound reasons and the timing is good,” says Funk. “Fear never drives wise investment choices. Of course, the downgrading of our sovereign debt is a blow for the country, but investors must keep a cool head. There are many reasons why I believe the majority of investors should consider retaining their South African investments.”
Funk argues that that most investors will retire in South Africa, and for them onshore investments make the most sense. Moving money around the world can be expensive and, because the rand is so volatile, an investor drawing money from offshore could find him- or herself on the wrong side of one of the currency’s periodic surges. For example, late in 2015, the rand was trading at around R17 to the Dollar, whereas only a few months later it was in the R13 region. Anyone drawing money from an offshore investment during this period, would have experienced a value fluctuation in the region of 20% – a significant variation for a retired person.
Investment analysts categorise the rand as an “exotic” currency, meaning that it is highly unpredictable. Forward planning to time drawdowns from offshore investments is thus virtually impossible.
These practical considerations aside, Funk also notes that over half of the Top 40 stocks on the JSE are dual listed, which means they are effectively earning dividends in dollars. Similarly, 35% of the companies in the property index have their main listing offshore, with an inward listing on the JSE. In other words, these onshore investments are effectively rand hedges because their income is earned offshore.
“Following this kind of ‘onshore offshore’ investment strategy also has big benefits in terms of simplifying tax and estate matters, thus reducing risk,” he points out. “It’s also worth pointing out that many overseas jurisdictions are not as well-regulated as our financial services sector, again increasing risk for investors.”
It is also worthwhile noting that foreign investors continue to see value in the South African market, which is why the currency has seen periods of strength since the downgrade. Foreign investors remain interested in emerging markets like South Africa, particularly with regards to bonds. Whereas US bonds are yielding only around 1%, investors can score 8% or more on South African bonds, plus the chance of timing the currency correctly.
He points out that Brazil’s experience followed a similar trajectory; it was downgraded to junk in February 2016, after which its currency appreciated significantly against the dollar and its stock market delivered a 20% return. If the returns are high enough, it seems, investors will take on some extra risk.
“While I don’t have a crystal ball, I think it is highly unlikely that we are going to see wholesale nationalisation of private assets and a run on the banking system, which would be a reason to rush offshore. If you intend to spend your retirement here, it makes sense to have the bulk of the investments that will fund it here and, as I have explained, one can still ensure plenty of offshore exposure by choosing onshore investment vehicles carefully,” he concludes. “As always in investment, take the time to think things through objectively, and don’t make long-term decisions quickly.”
Cinnabar Investment Management
Cinnabar Investment Management is a Discretionary Fund Manager helping local and global clients create a world of success by making better investment decisions.
Cinnabar Investment Management
Tel: 011 768 1022