*This content is brought to you by Carrick Wealth, leaders in wealth and capital management
If ever there was a need for investors to diversify and not have all their eggs in one basket, or one country, it is now. And despite initial domestic optimism surrounding the election of President Cyril Ramaphosa, South Africa – or more particularly the rand – is a prime example of why one should diversify offshore, although it certainly is not the only one.
Well-planned, advance diversification of one’s investment portfolio across jurisdictions, asset classes and currencies is always the best insurance against unforeseen and unpredictable events. It is an investment philosophy consistently advanced by investment professionals.
Right now, the world finds itself in a pretty volatile and uncertain place: soaring oil prices, uncertainty around the emerging trade war between the US and other powers, the effects of this on currencies and markets, and especially the negative impact this is having on emerging markets like South Africa.
A selloff of stocks and currencies caused emerging markets have just experienced their worst quarter since 2015, and despite something of a rebound since the last days of June, they remain threatened by global trade risks. South Africa, facing its own domestic challenges after the ravages of the Jacob Zuma years, is caught right in the middle of this volatility, and the rand has been feeling the strain.
When President Ramaphosa succeeded Jacob Zuma, local euphoria abounded around expectations of a more positive political and economic outlook. At first the rand reflected this optimism as it gained ground. There were high expectations that this trajectory would continue, but it was not to be. Year to date the rand has depreciated by around 11% to the dollar, with levels currently flirting with R14 to the dollar.
The blame is not Ramaphosa’s. The rand is one of the most freely traded and liquid currencies in the world, and usually finds itself among the first in line when global investors start ditching emerging markets. Economists are generally predicting continued rand volatility going forward, saying it will remain at risk from heavy portfolio outflows.
But what about the longer-term outlook? Will Ramaphosa bring about the much-needed reforms and attract both local and foreign investment that will stimulate improved economic growth, with positive spin-offs for the local currency?
Since coming to power, Ramaphosa has taken impressive steps and launched initiatives that bode well for reversing the devastation that set in under his predecessor. But as the saying goes, one swallow doesn’t make a summer. He still faces divisions in his party that may slow him down, as well as a critical general election in less than a year that requires his attention and could delay his preferred political options. Then there’s the current emotional deliberations around expropriation of land without compensation that is causing much uncertainty. Many people fear it could adversely affect property rights in general, something that is anathema for any investor.
But even if Ramaphosa succeeds against such high odds, it still is no certain safeguard for the rand. As an emerging market currency it remains vulnerable to global economic and geopolitical events, which at present are subject to a pretty uncertain outlook. And US President Donald Trump shows no inclination to ease up on that front, nor do the Chinese and other powers.
Possible future scenarios
While nobody has a crystal ball to predict the future, professional services firm PwC tried doing just that with its recently-released report titled, “Investment Decisions: Why South Africa, and Why Now?”. In it PwC considers five possible future scenarios for South Africa under the leadership of Ramaphosa over a five-year horizon, from 2018 towards 2022-2023. Probability ratings ranged from a worst 5% to best 50%, still leaving much room for uncertainty.
The scenarios, which are current as of President Ramaphosa’s maiden State of the Nation Address on 16 February 2018, are fairly optimistic on economic growth, with PwC seeing a 75% probability for improved economic growth under Ramaphosa’s leadership compared to the preceding few years. But projections for the rand over the same period, are less optimistic, with all but one of the scenarios predicting further rand depreciation.
In summary, PwC’s worst-case scenario with a 5% probability foresees GDP growth below 1% and the rand averaging R18.20/dollar in 2022; the downside scenario with a 20% probability foresees maximum GDP growth of 1.5% and the rand averaging R16.90/dollar in 2022; the baseline scenario with a 50% probability (the highest), foresees GDP growth lifting to 3% and the rand averaging R15.60/dollar; the upside scenario with 20% probability foresees GDP growth higher than 4% and the rand averaging R14.50/dollar; and the best-case scenario with 5% probability foresees GDP growth higher than 4% and the rand still averaging around R13.30/dollar in 2022. Various degrees of more possible credit rating downgrades are also contained in some of the scenarios, which will bring their own pressures to bear.
Diversify offshore…the best option
It is clear that many domestic and global factors raise uncertainty with a potential to negatively impact a volatile rand, and therefore also your rand-based investments. The most sensible way to protect your portfolio and the value of your assets from depreciating along with the rand, is to diversify offshore in more stable, hard currencies. A well-structured portfolio would follow the first-world norm of having at least 40% of your assets outside of the country in which you live.
If you would like more information or advice about how to manage your risk by diversifying offshore, contact Carrick Wealth.
- Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning and integrated wealth management solutions. Carrick is also licensed in Zimbabwe, Botswana and Malawi, and holds three global licences in Mauritius. Carrick at all times maintains its independence with regard to product providers and asset managers, providing bespoke risk assessment, financial planning and other services to high net worth individuals (HNWI). Through our own qualified and experienced wealth specialists, as well as through partnerships with industry leaders in the fields of foreign exchange, tax, international property, offshore bank accounts, trusts, wills and estate planning, Carrick is able to provide the highest levels of service for your financial planning and investment requirements, both offshore and domestic. This communication is intended solely for information purposes for the use of designated recipients and is not an offer, recommendation or solicitation to transact. While it is based on information available to the public and from sources believed to be reliable, Carrick makes no representation that it is accurate or complete or that any returns indicated will be achieved.