One also needs to include a comment or two about Regulation 28, the regulation contained in the Pension Act that determines how much of your pension money can be invested in offshore markets, currently capped at 25%. Don’t expect much commentary or criticism on this limitation from the investment industry. It’s a case of don’t rock the boat and don’t attack the regulator as it could be career-limiting.
But the reality is that by restricting how much of your pension funds can be invested into offshore markets your investment returns over time have been and will be affected quite considerably.
Treasury has done a very good job, although deeply flawed, in attacking the investment industry and the effect of fees on investment returns. In doing so it has pretended to be the good guys when it comes to the investment industry.
I would suggest that a similar study will prove that Regulation 28 has a far more damaging impact on your future pension. The restriction — essentially driven by exchange control policy and therefore a political imperative — is proving to be very costly. With our market moving sideways and barely beating the inflation rate over the past three years, most of the growth in pension funds has come from the offshore exposure in portfolios.
I would challenge Treasury and its acolytes in the investment industry to justify this restriction on greater offshore exposure. Over the longer term this regulation is reducing your pension fund by several percentage points per year, much more than the hypothetical reduction in returns as a result of fees, as it often claims.
Yet, when you retire you are allowed 100% exposure within your living annuity.
Shouldn’t it be the other way around?
By writing this I am not making a prediction. Most predictions tend to be wrong, but trends on the other hand tend to last much longer than most think. They also don’t change over the year-end. Much of what could happen in 2017 will merely be a continuation of what happened in 2016 and the years before.
The biggest trends today as far as investments are concerned and which should guide investment strategies are as follows:
- The US dollar is still in a rising formation. This trend is likely to be boosted by the accelerated increase in US short term interest rates. This could cause a huge suction effect, drawing money out of emerging markets, particularly ones with structural defects, such as South Africa, Turkey and Brazil. This money will flow back to the US.
- The United States has regained its position of the economic powerhouse of the world. Despite the anti-Trump rhetoric from the liberal press I reckon that The Donald could surprise the world with his economic policies.
- Trump has signaled that he intends using fiscal policy as his main economic growth weapon. China, too, over the Xmas break announced a $300 billion investment programme to rebuilt its railway infrastructure.
- Money flows to countries that welcomes and appreciates foreign investment. The ANC has geared up its anti-west and anti-business rhetoric in recent years. It’s no surprise that those with the money have elected to deploy it elsewhere…
- This even goes for the local business community who, with R1 trillion in cash on their balance sheets, have elected not to invest or rather invest in other parts of the world. Why should you, dear investor, feel obliged by feelings of patriotism to invest in the local market, when the big boys are not. Misplaced patriotism is not going to feed you ten to 15 years down the line.
- It’s still too early to determine if the recent uptick in commodity prices is the start of a new trend. Some analysts suggest that it will take another ten to 15 years before we experience the next truly global commodity rally again. Take heed as South Africa’s fortunes waxes and wanes in line with the commodity sector.
Until this changes, my own personal wealth will remain fully exposed to offshore markets, despite the short term volatility introduced by currency fluctuations.
Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at email@example.com for ideas and suggestions.