Amid significant political turmoil, declining economic growth and uncertainty over the past three years, it would have been easy for South African investors to argue: this place is falling apart, let’s take our money and run.
But Dave Mohr, chief investment strategist at Old Mutual Wealth, said he was opposed to such a knee-jerk reaction.
“Having started out in financial markets in April 1980, I’ve seen those scenarios too many times in South Africa and how often it would have been the wrong decision – against all odds – to have done that.”
He recalled how people ran offshore in the Eighties at great cost – investing and hiding money in bank accounts in the English Channel Islands.
“It was completely the wrong thing to have done at that point.”
But although fear is not a good offshore investment strategy, Mohr still believes it is prudent to invest money offshore, even on top of the roughly 50% exposure a typical local balanced fund would already have to the economic performance of the world.
Investors have to recognise that the offshore exposure through locally-listed companies like Naspers, Richemont and a few mining firms is very concentrated, he told a small audience hosted by Financial Mail and Old Mutual Wealth on Tuesday.
“So from a diversification point of view – absolutely – there is still a very strong argument to supplement anything that you have got in your pension fund-type environment in South Africa with offshore investments,” he said.
Regulation 28 of the Pension Funds Act (which caps the level of offshore exposure) has been criticised for trapping people’s money in South Africa, Francois le Roux, 2017 Finalist for Financial Planner of the Year, added.
“I think that argument has been put to bed. That is not true.”
The average local balanced fund, which would house most people’s retirement funds, only had an exposure of about 20% to the South African economy, Le Roux said.
Investors often want to know whether they have to invest directly offshore and if so, how much they have to invest. Most people probably want to invest between 20% and 40% directly offshore, but it would depend on their personal circumstances, he said.
“It would ultimately also depend on where a person intends to retire. Is it going to be local or overseas? If you are not going to retire there, do you intend spending a lot of time there? Do you want to educate your kids there? Tertiary education? Are you going to send them to school there?”
Le Roux said financial advisors have to leave clients in a position where their assets match their liabilities. Liabilities beyond retirement would refer to making capital available for whatever their needs might be, but specifically related to providing an income.
“It is pointless to take everything directly offshore and then be left with no capital that can provide an income here because if you are going to go through the trouble of diversifying offshore and going through the channels and taking your money out you would probably want to leave the bulk of that there for the longer term as opposed to start repatriating those funds soon after that.”
Nesan Nair, senior portfolio manager at Sasfin Securities, said they have seen a big shift in funds offshore due to the fear and greed factor.
During 2017, they had primarily done offshore investments. There were good reasons for it – including South Africa’s low economic growth rate, he added.
Nair said the reason South Africa is experiencing such low growth is a lack of consumer confidence. If that changed, which could happen quite quickly, the country could easily see growth of around 3% to 3.5%. Investors have to ensure that they use an investment vehicle that allows enough flexibility should things change for the better, but at the moment the US and Europe offers better growth rates than South Africa.
While Naspers is essentially a technology company through its stake in Tencent, it only provides investors with exposure to China. If investors believe that technology is going to be an investment theme going forward, they would want to have exposure to companies like Facebook, Google and Amazon by investing offshore, he said.
“You are doing an offshore investment, not necessarily because you are bearish about what is taking place in South Africa at the moment, but because you want to have access to a growing sector of the global economy. Digital is a growing sector. You can’t get that sort of exposure here in a very diversified way.”
Nair said the significant pullback in fixed investment formation in South Africa over the last three years basically implied that even if the country managed to grow the economy on the consumption side, it would hit a ceiling in terms of how many goods and services it could provide. This could constrain growth and returns.
There were also structural factors that could affect South Africa.
He warned that issues similar to the previous electricity supply challenges could affect other areas of the economy like water and roads.
Investors have to be careful, he said. Especially long-term investors wanting to invest in companies that have good visibility of earnings, plenty of runway and opportunities, and a growing customer and product base.
“Right now those opportunities are much more clearer offshore than they are in South Africa.”
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