SA investors face quandary over offshore exposure

A major easing of foreign exchange controls presents SA money managers with the dilemma of whether to move more money offshore.

An amendment to prudential rules announced in last month’s budget enables pension and mutual funds to invest 45% of their assets abroad, up from 30% previously. That’s the largest adjustment yet made to the offshore limit, and gives local investors the chance to “fundamentally” rebalance their portfolios, said Izak Odendaal, an investment strategist at Old Mutual Wealth in Cape Town.

Money managers have previously jumped at opportunities to increase their offshore exposure. However, with global markets in flux as a result of Russia’s invasion of Ukraine, and SA benefiting from a stable rand and rise in commodity prices, it’s not an easy decision this time.

“A lot of investment houses are grappling with how to adjust our asset allocation,” Odendaal said.

“You can think much more of SA as a regional portion of your portfolio rather than the core of your portfolio. We’re thinking this through. We haven’t made any decisions yet.”

Potential outflows

Pension and savings funds oversee a total of R2.96-trillion in the country, according to the Association of Savings and Investment SA. That means outflows could amount to R444bn if money managers push up their offshore allowance to the new limit. 

It’s unlikely that amount would flow out at once, though clients have expressed interest in moving more money abroad, said Victor Mupunga, a senior research analyst at Old Mutual Wealth Private Client Securities.

The question is: Where to?

US stocks are historically expensive, the growth outlook in Europe is at risk due to soaring energy prices, and China’s regulatory clampdowns have weighed on emerging markets as an asset class, Odendaal said. Meanwhile, sanctions on Russia have, in effect, removed a major competitor to SA in the resources field, Odendaal said. Without Russia, investors seeking exposure to the emerging market resources sector have few other options.

“This does reshape the whole emerging market investment landscape,” Odendaal said.

“And within that context, SA isn’t looking so bad.”

More comments from Odendaal:

On the rand:

• The rand doesn’t look particularly cheap or expensive. It’s only when it’s cheap or expensive that you want to make a big call. It’s going to be hard to foresee a scenario that’s going to cause it to strengthen dramatically from here. But for it to weaken, you’re going to need something like another EM crisis.

On the effect of the Ukraine war:

• Typically SA markets will get be along with other emerging markets. This hasn’t been the case with the Ukraine crisis, with the country benefiting from higher commodity prices.
• The increase in mineral exports should compensate for increased imports of oil, though consumer spending is likely to take a hit.
• I’m not in the camp that says we are headed for a recession.”

On the sell off in SA government bonds:

• Maybe investors are panicking about the interest-rate outlook. I don’t think we’re going to see a steep rate path. This is clearly not an economy that’s overheating. It will be gradual.
• We’ve been bullish on bonds for a long time, and we think  the latest spikes (in yields) should make you even more bullish.

More comments from Mupunga:

• Commodities prices are seen pulling back at some point and Old Mutual sees the need to be more cautious about investing in resources stocks.
• The fund manager has been adding to its investment in banks, which have recovered quickly from the coronavirus pandemic.
• Retail stocks may struggle as inflation accelerates and rates rise, while the stable rand has been a headwind for companies with dual listings or a large proportion of foreign income, the rand hedge stocks.
• SA has not benefited so far from the rebalancing of index funds due to Russia’s exclusion because many investors have been unable to get their money out of Russia. That may change over time.

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