Sasfin Asset Managers, the investment arm of Sasfin Wealth that manages about R22bn in assets, styles itself as a boutique outfit that aims to provide clients with capabilities that go beyond what typical money managers in SA offer. Chief investment officer Arno Lawrenz sat down with Business Day to provide some insight into how market conditions are affecting the firm’s investment decisions.
Q: Given the war in Ukraine, accelerating global inflation and worldwide supply-chain disruptions, what are the main investment concerns of your clients at the moment?
A: Clients’ concerns revolve firstly around potential capital losses as financial markets adjust to the changing economic paradigms. Secondly, clients are concerned about global inflation pressures and what that does to pricing of financial assets in SA. An additional concern is that we have already seen social unrest in some emerging markets resulting from rising fuel and food prices. In a country where the unemployment rate is at crisis levels, these additional stressors can be catalysts for social upheaval and uncertainty. We should not underestimate the significance of the tectonic shifts in the economic and geopolitical paradigms we are living through today.
Q: Is the overwhelming sense that your clients just want to get as much money offshore as possible or is it not that simple?
A: Most sophisticated investors understand the principle of diversification in their investment portfolios and would have embraced a global investment strategy. But they would also realise that going offshore is not a guaranteed investment. In some spaces there are attractive returns to be made in SA assets. Having a flexible and agile investment policy is the key. No longer can one say that exchange controls are a driver of just wanting to get money out of the country. It must form part of a well-thought-out investment strategy and clients who are close to their advisers understand this perfectly well. If there is no strategy, then you are most likely not making decisions for the right reasons.
Q: What are the main considerations for clients that want to take money offshore but who still reside in SA and have significant business interests and family roots in this market?
A: Generally, taking money offshore is part of a considered wealth strategy. It involves diversification, access to sectors that are not available in SA, and also growth vectors that are not available here. A client who has business interests here generally see opportunities here, so by investing offshore it is not driven by fear, but by a need for diversification and also partly a longer term currency hedge.
[However] going offshore also introduces exposure to currency volatility. The rand is known as one of the most volatile currencies in the world, and for good reason. [But] volatility works both ways — up and down. Many an investor has seen a good underlying investment tarnished by expecting the rand to always weaken, only for the opposite to occur.
Q: What asset classes are your favoured picks for SA-based investors looking to weather the current storm in financial markets? The consensus is that over the next five years the best bet is offshore equities and SA bonds. What’s your view?
A: SA’s growth outlook is very mediocre, exacerbated by the known issues such as Eskom’s energy constraints. For corporates, apart from some resilient sectors, this is a problematic environment in which to operate. Certainly in local equities we can find some very cheap assets, but they can also be cheap due to those growth constraints. The required approach is to work out which companies have the right combination of resilience, balance sheet strength, management quality and valuation that makes for a good investment. Then we can supplement that with investment in global companies offering diversification, growth trajectory and sectoral exposures that we do not have in SA.
On bonds, we do see SA bonds as attractive, but there are increasing signs that the current global inflation surge may well introduce some risks to small open economies such as SA, and this may mean that local bond yields, while historically cheap, may need to adapt to this new paradigm. Certainly we do not see a bull market in bonds in SA any time soon, but the underlying income yields make for a very attractive combination with growth assets.
Q: In terms of offshore equities, which economies do you favour at present when looking at a medium to longer-term investment horizon of say 5-10 years?
A: There is still much to be made of the resilience of the US economy. There are good reasons the US remains key to the health of the global economy. However, we do not underestimate the growing role of China and Southeast Asia, who have shown that, while they do not necessarily overlap completely in Western political paradigms, they have been able to create economic growth vectors that have astounded much of the West.
Of growing importance globally is the ability of an economy to transform the socioeconomic challenges into opportunities. China has, for example been able to drastically reduce extreme poverty while at the same time creating world-leading industrial innovations and high growth rates. In many other regions, rising inequality remains a paradigm that appears to be well entrenched with little end in sight. Investing in stable, growing economies where there is a balance between shareholder interests and societal interests is a preferred route for us.
Q: Ninety One also said that one of the unintended consequences of raising the offshore asset allocation limit to 45% is that it could reduce demand for rand-denominated feeder funds, which could see many asset managers closing these products. What is Sasfin Asset Managers’ view?
A: Certainly there is a risk for feeder funds to lose some of their appeal — in particular where they have been used to gain offshore exposure without going through the administrative requirements of exchange controls. This will especially be the case where such funds are small and uneconomical in generating fee income. The number of counters listed on the JSE has declined drastically over the past 20 years meaning that the ability of investment managers to create properly diversified funds has been impacted. Opening channels to investors to diversify offshore then makes complete sense, and is in the best interests of clients. So this is a great move forward. We believe the benefits will far outweigh any unintended consequences.
Q: Is the world headed for a 1970s-style Great Inflation shock?
A: We believe the right way to understand the current inflationary cycle is more akin to the period after World War 2 rather than the 1970s. Regardless of that, these are levels of global inflation not seen in more than a generation. Without a doubt it is a transition to a completely different economic environment.
In Europe and the UK it is already being spoken of as a cost-of-living crisis, and in some regions we have seen social upheavals. No doubt there will be political ramifications of this inflation surge as well. The growing realisation of countries’ dependence on others will also feed into nationalistic sentiment. Germany is already shifting its energy reliance away from the Russian supply of oil and gas, and also towards more renewables.
In much the same way that the Covid-19 pandemic accelerated a shift towards e-commerce, this inflation surge will also accelerate an energy-use transition. This transition will bring renewed volatility as we try to anticipate what those shifts will be, and of course, central banks’ attempts to rein in inflation will almost certainly bring heightened risks for recessionary conditions. Those corporates and countries that are more exposed to interest rate risks through a higher debt burden will inevitably suffer more through this period.
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