17 July 2022
Twenty months ago, the South African Reserve Bank (SARB) published commentary unintentionally implying that institutional investors – the custodians of retirement funds – were suddenly allowed to place all their assets offshore, from a prior limit of 30%. Very swiftly, a chorus of negative comments appeared in various media claiming that South Africa was a failed state, and recommending that investors take all their assets offshore.
This type of story resonates with many South Africans disenchanted with local politics. The negative publicity also adversely affects the local economy and the reputation of the country within the global investment community. The narrative spun by these ‘influencers’ at the time, was that the freedom to invest offshore in a much greater universe of potential options and instruments would set free South African long-term investors whose nest eggs could be compromised by holding domestic assets.
This created a wave of FOMO – the fear of missing out – as many ‘panic-stricken’ investors quickly transferred funds offshore. It was unfortunately driven by market commentators who are generally trusted for their knowledge, insight and judgement.
However, the actual returns in domestic and international markets since then – fortunately for us, but unfortunately for the “influencers” – reflect a different story. Two years later, if we had followed the noise, we would have lost money.
The Capped SWIX index return for local equity markets, which returned 20.4% for the one-year period ending March 2022, versus the MSCI All Countries World Index, which returned 5.8% in rand terms.
This means that anyone who disinvested R100 000 from the local equity market at that time, to invest offshore, would have lost R14 600. That’s a costly mistake by any standards.
Even in 2022, with a wealth of information and investment advice immediately available to us via the Internet, our emotional nature can override discipline and introduce bias into our routine investment decisions.
The kicker is that the last year is not a once-off. Over the past 20 years, in rand terms, international equities have performed at around 8.6% per annum, versus South African equity returns of 13.9%. For any investor planning for retirement, a difference of 5% per year is significant.
But remember, making a decision to invest offshore purely based on perceptions of a weak rand has frequently proved catastrophic.
Shortly after the announcement from the Sarb nearly two years ago, the error was corrected. The Reserve Bank clarified that the prevailing prudential limits still applied. However, in the most recent National Budget Speech, exchange controls were relaxed, allowing South African investors to take up to 45% of their assets offshore.
Again, the debate to consider offshore investment opportunities hangs over local investors, but the question here is whether exchange control really is an issue for South Africa-based investors.
Our team’s investment modelling indicates that offshore asset holdings should be somewhere between 30% and 40% of a portfolio, making the government limit of 45% superfluous. We welcome the allowance of greater flexibility but believe there is still good value in domestic assets going forward. Increasing exposure to the full 45% would only ever be prudent based on a considered valuation perspective and never as a result of an emotional sentiment or market-noise perspective.
Finally, Eggers reminds investors that markets are cyclical – they seldom head in one direction.
Extreme statements like ‘South Africa is headed only one way’ or that it is a ‘failed state’ are overly simplistic and incorrect from various perspectives. The domestic investment market is not necessarily a coincidental reflection of the political environment. It is not only South African investors who forget this principle and overreact, contributing to the creation of market cycles around the world. We continue to advise that investors base their allocation decisions on a considered view of long-term objectives and avoid impulsive changes to policy based on emotion, fear or headlines.
Clive Eggers is head of Multi Managed Portfolios at GTC.
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