Less than three months ago, SA asset managers including Ninety One and Coronation were sounding bullish on local stocks, with some even announcing they were trimming their offshore holdings and allocating the money to domestic equities.
However, the recent unrest that rocked SA has suddenly put offshore investing firmly back on the table, with perennial SA bear Magnus Heystek, of Brenthurst Wealth, arguing the events merely underscore what he’s been advocating for years — that local investors need to de-risk their portfolios from SA by investing offshore.
The majority of analysts Business Day spoke to, however, say the debate over how much of one’s portfolio should be invested internationally is not quite as clear-cut as it might seem.
“We’ve been on calls with a few of the big asset managers in the last few days and they are viewing the recent unrest as a temporary shock rather than a long-term structural change,” says Warren Ingram, co-founder of Galileo Capital. “We’re not convinced that this is going to cause a 180 degree about-
turn from investors who will now look to take as much as they can offshore. The bigger fund managers will view this as an opportunity to buy at cheaper levels.”
One such fund manager is Denker Capital, which oversees about R5.5bn in assets and began trimming the offshore allocation of its Denker SCI Equity fund from 30% to 20% in the midst of the Covid-19 pandemic’s onset in 2020. Claude van Cuyck, a portfolio manager at Denker, says the firm is not hurrying to raise that offshore exposure back to 30% in the wake of the unrest.
Van Cuyck says Denker’s goal when allocating capital offshore is to access investment opportunities that aren’t available in SA, such as Samsung or Oracle. He also says SA still offers good-quality companies that are reasonably priced with unrivalled market positioning, such as Mr Price and Pepkor. He also likes small caps such as Hudaco and Combined Motor Holdings, which he says are “mispriced”.
“There are opportunities in both developed markets and developing markets,” he says. “It’s about where you see mispriced opportunities and how you can access that.”
While the JSE all-share index is still up about 12% year to date, the rand did come under pressure, slipping from about R14.28 just before the disorder to as weak R14.78 on July 14. Ten-year bond yields have stayed well below 9%, suggesting international investors aren't overly worried just yet.
“We’ve been saying for at least the last two-and-a-half years than at exchange rate levels better than R15.50/$, investors should view it as an opportunity to get their offshore allocation right,” says Ingram.
But what exactly is the right offshore allocation? Ingram says a lot depends on an individual investor’s wealth, age and ability to relocate overseas. For high-net-worth individuals, he says an offshore allocation of up to 75% of investable assets should be considered.
But for the typical middle-class citizen who doesn’t have the wealth to realistically consider emigration, Ingram recommends an offshore allocation of at least 25%. However, he says younger investors under the age of 30 could increase that to as high as 50% as they are likely to have to endure a lot more SA-specific risk events before retirement.
“For SA, the spectrum of options for the future range from a failed state to being the next miracle nation,” says Ingram. “When you are faced with such a wide variety of potential outcomes it makes sense to have a bigger offshore allocation.”
But that’s also the reason Heystek argues for a much higher offshore allocation.
“Your offshore allocation should be as high as 70% even for the average person,” he says. “A lot of your future expenses when you retire are going to be linked to the dollar — medical inflation, fuel, travel.”
The big question, though, is whether the recent unrest marks a long-term structural shift in SA’s risk profile. While Citi SA economist Gina Schoeman says it’s too early to know, she is clearly concerned.
“A lot of the unrest is being driven by the same unsustainable fundamentals SA has been grappling with for years — poverty, inequality and unemployment — but now that we’ve sparked them off, have we opened Pandora’s Box in a way that makes this level of unrest a permanent feature of the economy?”
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