A major relaxation of exchange controls leaves South African fund managers with the dilemma of whether or not to move more money overseas.
An amendment to prudential rules announced in last month’s budget allows pension and mutual funds to invest 45% of their assets abroad, up from 30% previously.
It is the biggest adjustment ever to the offshore limit and gives South African investors the chance to “fundamentally” rebalance their portfolios, said Izak Odendaal, investment strategist at Old Mutual Wealth in Cape Town.
Fund managers have already jumped at opportunities to increase their overseas exposure. But with global markets changing following Russia’s invasion of Ukraine, and South Africa enjoying a stable rand and rising commodity prices, it’s not an easy decision this time around.
Many investment companies are wondering how to adjust our asset allocation,” Odendaal said in an interview. You can think of South Africa much more as a regional part of your portfolio, rather than the heart of your portfolio. We are still thinking about it. We haven’t made any decisions yet. »
Pension and savings funds manage a total of 2.96 trillion rand ($197 billion) in the country, according to the Association of Savings and Investment South Africa. This means outflows could amount to R444 billion if fund managers push their offshore allocation to the new limit.
That amount is unlikely to come out immediately, although clients have expressed interest in moving more money overseas, said Victor Mupunga, senior research analyst at Old Mutual Wealth Private Client Securities. The question is where to go?
U.S. stocks are historically expensive, growth prospects in Europe are in jeopardy due to soaring energy prices, and China’s regulatory restrictions have weighed on emerging markets as an asset class, Odendaal said. . Meanwhile, sanctions against Russia have, in effect, eliminated a major resource competitor to South Africa, Odendaal said. Without Russia, investors seeking exposure to the emerging market resource sector have few other options.
“It’s reshaping the whole landscape of investing in emerging markets,” Odendaal said. “And in that context, South Africa doesn’t look so bad.”
More comments from Odendaal
On the rand:
- “The rand doesn’t look particularly cheap or expensive. It’s only when it’s cheap or expensive that you want to make a big call. It’s going to be hard to predict a scenario that’s going to make him significantly stronger from here. But for it to weaken, you will need something like another emerging market crisis.
On the effects of the Ukrainian war
- Generally, South African markets will be affected along with other emerging markets. This was not the case with the Ukrainian crisis, the country benefiting from the rise in commodity prices.
- Rising mineral exports are expected to offset rising oil imports, although consumer spending is expected to suffer.
- “I’m not in the camp that says we’re heading into a recession.”
On the liquidation of South African government bonds:
- “Maybe investors are panicking about the interest rate outlook. I don’t think we’re going to see a steep rate trajectory. It’s clearly not an overheated economy. It will be gradual.”
- “We’ve been bullish on bonds for a long time, and we think the latest spikes (in yields) should make you even more bullish.”
More comments from Mupunga
- Commodity prices are likely to pull back at some point and Old Mutual believes there is a need to be more careful when investing in resource stocks.
- The fund manager increased its investments in banks, which recovered quickly from the coronavirus pandemic.
- Retail stocks may struggle as inflation picks up and rates rise, while the stable rand has been a headwind for dual-listed companies or a large proportion of foreign income, so- saying hedging shares in rand.
- South Africa has so far not benefited from index fund rebalancing due to the exclusion of Russia, as many investors have been unable to get their money out of Russia. This may change over time.
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