The rand, bonds and real assets offer compelling valuations.
By all means, retirement fund savers should secure the diversification free lunch by investing 30% of their portfolios offshore. But they might want to hedge the currency risk – that is, the risk of the rand appreciating.
Because Regulation 28 of the Pension Funds Act stipulates that retirement funds must invest 70% of their assets locally, South African investors should make use of their offshore allocation simply to secure the diversification benefit.
From an asset allocation point view, the decision to invest offshore is an easy one because it represents an opportunity to diversify.
However, that does not mean investors should necessarily have an equivalent 30% dollar currency exposure. Instead, they should consider hedging the rand.
Emerging market currencies have been out of favour recently, given the US-China trade war. Locally, we’ve not been very successful in fixing problems, with issues at Eskom, for example, still not resolved. Fiscal slippage is concerning.
Despite these factors, however, I remain slightly optimistic on the rand – mainly because we think it is significantly undervalued. On a purchasing power parity basis, the rand is cheap.
Additionally, real yields on South African assets are very high. For example, the real interest rate differential between South Africa and developed bond markets is historically wide. With the US Federal Reserve prepared for additional interest rate cuts, the differential can be expected to widen further.
At the same time, domestic real yields have risen due to very low inflation. South Africa’s central bank enjoys a high degree of credibility, having been successful so far in keeping inflation at the mid-point of the 3% to 6% target band.
Prices in fixed interest markets look conservative when compared to global equities where valuations are stretched.
In addition, the global economy is now very late into the economic cycle with more and more indicators signalling that the long-running rally in equity markets is coming to a close. One of these is the inversion of the yield curve in the US, which could be seen as a balancing factor in reaction to structured valuations and the global slowdown. Valuations are driven by very easy global monetary policy, which is not due to change soon. This scenario is expected to continue.
Bonds and equities aside, looking at other asset classes in SA, we are more positive on real assets like property where valuations are very compelling. Dividend yields for listed property stocks, for example, are close to an all-time high.
Bastian Teichgreeber is the head of asset allocation at Prescient Investment Management.
The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.