The world is changing fast and to keep up you need local knowledge with global context.
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By Brian Butchart*
For more than 8 years now Brenthurst has been advising a healthy allocation to global assets.
International markets had a bumper year in 2019. The S&P 500 was up 30%, the Nasdaq up 35% and the Euro Stoxx 50 up 25%. Over one, three, five and now ten years, almost all international markets leave the JSE ALSI trailing behind in both US dollars and Rands.
Annualised USD Returns
Astute investors who focused investments offshore and diversified risk from the local market were handsomely rewarded, beating inflation and achieving returns well above the JSE ALSI, for several years now.
Offshore investment, considered by investors as a key part of their investment strategies do so for several reasons:
1. DIVERSIFICATION – Although the JSE ALSI has some quality, dual listed companies, our market is tiny representing less than 1% of global investment opportunities. As a result, we’re missing out on industries such as technology, biotechnology and electronics for example, currently not available in SA.
In addition, our local market comprises of approximately 100 companies driving the returns of the local market vs the global equity benchmark, the MSCI All Country World Index (MSCI ACWI), currently comprising of more than 2 500 investable companies.
Diversifying internationally provides accessibility to growth regions benefitting from mega-drivers such as industrialisation, urbanisation, digital advances and growing consumerism which South African investors are missing out on!
2. OPTIMISATION – Studies on optimal SA portfolios recommend a minimum offshore allocation of 20% to 30% through the cycle for long-term investors, requiring a return of inflation plus 4% to 5% in rand terms.
This is a classic recommendation for retirement savers aiming to optimise outcomes for their future pension, restricted by regulation 28 of the Pension fund act. Investors with more global spending requirements, including a larger
share of foreign currency denominated spending, or bequest motives (where multiple generations may live on different continents), can typically justify a larger offshore allocation.
Whatever strategic allocation range an investor deems to be appropriate, Brenthurst suggests an offshore allocation at the higher end of their appropriate strategic weighting, given the elevated level of economic and political risks facing South Africa at present.
3. PROTECTION AGAINST DECLINING PURCHASING POWER, due to the devaluation of the local currency over time.
Forecasting is probably the most difficult skill to master and at times impossible considering the number of variables at play. Forecasting the Rand is no exception, especially over the short-term. The Rand is one of the most volatile currencies in the world. Over longer periods however, trends tend to emerge.
The rand depreciated against the US dollar on average by 4.24% per annum, over the last 20 years. Over 50 years this number spikes to approximately 7% per annum.
Many items in a consumer’s shopping basket from fuel to food to healthcare, are largely priced in foreign currencies as the inputs are either commodities, with prices struck in global markets, or heavily reliant on imported content. Viewed from this perspective, adequate offshore exposure is merely a hedge against the long-term expected increase in the price of a future shopping basket. Episodes of currency weakness will more than likely remain a strong driver of price increases into the future as it is widely expected that the rand will continue to gradually weaken against all major international currencies, as experienced for several decades.
4. LACK OF STRUCTURAL REFORM AND POLITICAL WILL
Most South Africans remain hopeful of an economic recovery, however the structural hinderances such as Eskom and other State-owned enterprises, political interference and corruption pose to our economy are no secret.
Persistent uncertainty and more aggressive load shedding levels will impact foreign direct investment, political and economic stability, employment and economic growth.
An unreliable power supply places an enormous constraint on the South African economy and will continue to deter both local and foreign investment, urgently required to alleviate unprecedented unemployment and reignite growth.
Constructing flexible and adaptable investment strategies to protect your wealth therefore becomes your artillery to improve investment outcomes. This is in no way negative or unpatriotic as some purport, but sensible considering the magnitude of SA’s woes.
Even Finance Minister Tito Mboweni is frustrated at the slow pace and lack of urgency required by government to implement structural reform, evident in a recent tweet:
If you cannot effect deep structural economic reforms, then game over! Stay as you are and you are down graded to Junck Status!! The consequences are dire. Your choice. Yep!! Askies!!
— Tito Mboweni (@tito_mboweni) January 10, 2020
The economy is faltering, unemployment worsening, load shedding is expected to remain a regular feature, while SOE’s are bankrupt. State spending remains unabated, municipalities are teetering on the brink of collapse and there are no decisive measures to stop the deterioration of government finances. Unfortunately, the hope instilled in Cyril Ramaphosa’s cabinet has waned. The more time passes without definitive action, the less confidence this creates, with the impact on the local stock market evident for several years now.
5. DECOUPLING OF SA EQUITY MARKETS FROM EMERGING MARKET PEERS
Economist Mike Schüssler of Economists.co.za reported about the magnitude of the South African challenges, compared to our emerging market peers earlier this year. He noted a decoupling of SA and other emerging markets, starting in 2013 and more significantly in 2015 after the firing of former Finance Minister, Nhlanhla Nene.
“If SA stayed with EM indices the JSE would have been valued R2.5 trillion higher now. Our pensions, investors etc suffered. A savings destruction!” he commented.
Although the JSE may be cheap based on historical valuations, it could remain subdued for longer on the back of lower expected earnings, considering the uncertainties regarding Eskom and the impact on growth and the economy.
Investors seeking insights on the outlook for the JSE ALSI that failed to keep pace with emerging market peers over the last 7 years and barely beating inflation, are waiting to see how the ruling party addresses the first key event this quarter – The Budget and Eskom. With the World Bank lowering South Africa’s growth forecast below 1%, Moody’s rating call shortly after the budget could set the tone for the local market in 2020.
The alarming debt situation at Eskom and other SOEs, a sluggish economy, poor growth, higher unemployment, lack of structural reform, expropriation without compensation, prescribed assets, water shortages, corruption, lack of consequences if any, and a potential downgrade will most likely continue to keep investor sentiment at all-time lows which won’t bode well for the local economy, stock market or the rand.
Therefore, we continue to advise a flexible global strategy invested across multiple geographies and asset classes, expected to offer global growth and protection of wealth in hard currency.
- The Brenthurst Global Equity and Brenthurst Global Balanced Fund delivered Stellar USD returns, up 26% and 18% respectively over the last 12 months, while other international funds selected in Brenthurst’s global portfolios delivered in excess of 30%. More details here: Offshore investing.
- Brian Butchart is the Managing Director of Brenthurst Wealth, a CERTIFIED FINANCIAL PLANNER® professional and head of financial planning for Brenthurst’s Cape Town offices. He manages compliance and operations nationally for all Brenthurst offices. He started his career in financial services in 1998 and previously worked at Citadel and Magnus Heystek International.
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