In the February 2022 budget the National Treasury announced that Regulation 28 of the Pension Fund Act would be amended to allow pension funds to invest as much as 45% of their funds in offshore assets.
Before the move to 45% the limit had been set at 30%. As Regulation 28 limits expanded, so did pension fund allocations to offshore assets. I wrote a year ago that there was a benefit to the country of SA pension funds holding US dollar assets. These holdings had the same stabilising effect on the currency and a similar macroeconomic stability impact as foreign exchange reserves. We saw this is 2023 when repatriations by locals stabilised the rand during the load-shedding crisis.
According to SA Reserve Bank data, private pension funds held about 29% in offshore assets by end-June 2024. This number was up from 16% a decade before. The Public Investment Corporation was at about 36% in September. Pension funds are not restricted regarding which assets they can invest in offshore. However, most allocate their allowance to offshore equities, benchmarked to the MSCI World Index. This is essentially an allocation to US stocks.
Nine of the top 10 counters in the index are US tech or tech adjacent names, the biggest of which is Apple and the smallest Tesla. These stocks account for just over 23% of the index’s market capitalisation. About 73% of the index is in US equities. Assuming about 80% of offshore assets are invested in the MSCI World, then 16% of SA pensions are in US equities, compared with about 21% of pensions in domestic equities.
SA pension funds’ equity holdings are thus almost evenly split between the JSE all share index (Alsi) and the S&P 500. How wealthy we are when we retire depends a lot on how the S&P 500 performs. This has worked out perfectly for SA pensioners so far. SA stocks have performed terribly since SA stagnated after the commodity supercycle ended and we ran out of electricity in 2012. The MSCI World has outperformed the Alsi in rand terms in nine of the 13 years to 2024. A rand invested in the MSCI in December 2011 would be worth R7 now. For the Alsi the number is R2.72.
The beauty of the global/US equity trade was that pensioners’ rand investment rose as the rand weakened, which has happened in 77% of the years since 2011. Moreover, when global equities sell off the rand weakens even more, protecting the rand value of the investment. In every year in which the MSCI World has sold off, so has the rand. Add to this the continuous rally in US equities over the past decade (they rose in 10 of the 13 years), and any local pension fund would be having tough conversations with trustees if they did not hold offshore equities.
We have experienced a long period of US economic and equity market exceptionalism, but the policy-making coming out of the White House now is concerning. Every credible economist has warned that starting a trade war would be terrible for the US economy, and the US stock market continues to sink. The jury is still out on whether the US will avoid a recession in the short term, and potentially weakness in the medium term. Markets seem to be giving a negative verdict so far.
We had already started to think in terms of an SA macroeconomic recovery that could lead to multiple years of Alsi and rand strength. The EU’s turn towards fiscal expansion and infrastructure investment could bolster demand for commodities, supporting the rand and local equities. The dollar is expensive and the rand cheap. US equities are overpriced and SA ones offer deep value.
Holding US equities has served SA pensioners and savers well over the past decade and a bit of local economic malaise. However, it is not a foregone conclusion that this is how we should be invested going forward. It may be time to think about dumping US equities.
• Lijane is global markets strategist at Standard Bank CIB.
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