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A currency safe haven could protect from poorly performing equities

If you haven’t considered financial emigration just yet, you have likely thought about taking funds offshore – partly to weather the volatility of the rand and partly to find meaningful growth elsewhere. Although many of the large companies on the JSE have offshore exposure, you’re probably feeling your money will work harder for you in other investment vehicles – and you might be right.

Market returns have been dismal – in fact, Magnus Heystek, Director of Brenthurst Wealth Management, has pointed out that the earnings of JSE-listed companies have fallen from around 11% of GDP in 2017 to about 5% at the end of 2018. Local cash has outperformed equities over the past five years, and although the JSE hasn’t performed any worse than emerging markets, global markets have still outshone it over a ten-year period. The unexpectedly robust US market is partly responsible, but there’s no hiding from the fact that inflation-beating returns just haven’t materialised. 

Weak investor sentiment has led to the sell-down of local assets, which has amounted to a whopping R500bn since the beginning of 2015. There’s also less trading on the JSE: the value of trades for the first six months of 2019 were 11% lower than during the same period last year, according to Financial Mail. Also, the JSE’s investment pie has shrunk as a spate of delistings has hit the bourse, with smaller companies finding the stringent regulatory requirements and high costs too much to stomach in a weak economy. Then there’s the threat of prescribed assets hanging over us, which would force investors to put their funds in the hands of companies owned or managed by the government. One has only to look at the performance of our state-owned enterprises to see how grim that scenario would be.  

None of this bodes well for South Africans heavily invested in local equities, and if Moody’s rating agency is not persuaded that we’re headed down a better fiscal path next year, we can expect a downgrade to junk status. This will mean more capital outflows and the possible reintroduction of exchange controls. 

If you’re thinking global equity markets have more to offer, the answer is: it depends. Global asset managers have had concerns about the markets in recent months. Bank of America Merrill Lynch’s latest fund manager survey shows they’re worried about a global recession and are bearish on equities as an asset class – at least for now – despite some record highs in major indices. Let’s not forget that stocks in the US and Europe had their biggest one-day drop in two months on 2 December, on the back of Donald Trump’s decision to reimpose tariffs on metals exports from Brazil and Argentina. 

UBS Wealth Management, the world’s largest wealth manager, believes the US-China trade war poses an increasing threat to global markets. “Risks to the global economy and markets have increased, following a renewed escalation in US-China trade tensions,” says Mark Haefele, Chief Investment Officer at UBS. Donald Trump has recently signed a bill supporting the protesters in Hong Kong, which has increased the rift between China and the US, and on 15 December Trump could well impose 15% levies on $160 billion of Chinese imports. With no fence-mending moves in sight, around 55% of wealthy investors predict a significant drop in stocks before the end of the year. There could also be a market correction, according to Innes McFee, Managing Director of Macro and Investor Services at Oxford Economics, who believes US stocks are currently overvalued by about 35%.

Now could be a good time to tweak your exposure to equities, especially as JSE share prices could deliver another year of terrible returns in 2020. Nishlen Govender, a portfolio manager at Citadel Investment Services, has suggested we are in a cycle of underperformance relative to the US, and that’s unlikely to change soon. Meanwhile, the prospect of a possible market-friendly Conservative election victory in the UK has given the British Pound a much-needed boost, so if you’re considering an offshore rand hedge, it makes sense to look to sterling. It is, after all, one of the most stable currencies in the world. 

Mercury FX International will set up free-to-have multicurrency accounts capable of holding various currencies indefinitely. They can also offer better-than-bank exchange rates (around 2.5% better) to get an investor’s funds out of South Africa. In addition, they will assist with applications for tax clearance should you need to send out more funds than your allotted annual Single Discretionary Allowance of R1 million. DM

To find out more about Mercury FX services, Click Here .

 

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