The JSE has recorded foreign outflows of R65bn so far this year, up from R42bn over last year’s matching period as poor investor sentiment and the relaxing of retirement funds’ offshore allocations weigh on the asset management industry.
Glenn Silverman, a strategist at investment consultant firm RisCura, said one of the headwinds facing the industry is that recent legislative changes increased outflows.
“From a flow point of view, the recent decision by National Treasury to increase the pension fund offshore allowance from 35% to 45%, has resulted in net outflows from the SA savings industry as pension funds have shifted assets to be managed offshore,” said Silverman.
“As far as markets are concerned, most local managers believe that local assets — equities, bonds and property — are currently undervalued, as a consequence of poor investor sentiment, leading to foreign sales of local assets. Emerging markets have struggled generally, with SA assets even more affected by the likes of load-shedding,” he said.
Revenues of asset management companies are driven largely by movements in asset values, which rely mostly on the performance of markets, but also by the flow of assets in and out of the SA savings industry.
One of the biggest pools is pension funds, but it had systematic outflows as their overall growth depends on market returns.
Ninety One, SA’s largest asset manager, said in its year to end-March earnings statement that relaxing exchange controls on retirement assets came while SA “is not attracting offsetting flows of the same quality” [as before].
That puts puts more pressure on the industry and ultimately on asset prices as there is less money buying assets, said Ninety One.
Net sellers
Silverman said one way to reignite the industry is to stem the foreign sell-off of SA assets.
“Foreign investors have been substantial net sellers on the JSE for several years, and any reversal of this trend could add further momentum to the market. Any improvements in the news flow, whether economic, political, global growth or relating to electricity supply — that is, reduced load-shedding — could serve as a further catalyst for a market advance,” he said.
Stanlib, with assets of more than R600bn under its custodianship, warned the industry faces more headwinds than tailwinds in the next two years for reasons such as high net-worth individuals continuing to emigrate and taking their money with them.
Silverman said policymakers have several options to stem emigration of wealthy individuals, including implementing better policies aimed at boosting consumer, business and investor confidence.
Silverman said such policies would help achieve positive outcomes such as attracting and retaining skilled people, fostering economic growth and reducing unemployment.
“Asset managers typically charge higher fees and earn higher margins when managing money on behalf of individuals as opposed to institutions such as pension funds,” he said.
“Emigration, to the extent that it leads to included disinvestment from SA assets (or lower margins), would thus negatively affect the industry. Emigration is not only a concern for the local industry (which would have fewer funds to manage), but also for the country as it results in, inter alia, a loss of skills and potentially lower future tax revenues for the country.”
Highly regarded
With margins squeezed at home, some asset managers, including Ninety One, have looked to the Middle East, particularly Saudi Arabia, to deploy some of the trillions of rand under their management for growth.
Faisal Rafi, investment researcher at RisCura, said Saudi Arabia is a highly regarded stock market for investors in emerging markets for several compelling reasons.
“It serves as a safe haven for emerging markets during periods when most of them struggle due to high oil prices. Given that the Saudi economy is heavily reliant on oil, it tends to perform well when oil prices are elevated,” said Rafi.
“The country is undergoing a rapid transformation under the leadership of Crown Prince Mohammed bin Salman. His vision includes diversifying the economy away from oil, resulting in the opening up of what was once a closed, conservative nation where women weren’t allowed to drive, and cinemas were banned.”
Foreign investors also continue to sell SA bonds, with outflows amounting to R116bn so far this year, according to JSE data. At the present rate that would exceed 2022’s outflows of R155bn.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.