STUART THEOBALD: Rocketing JSE Alsi leaves offshore advisers with egg on their face

JSE Alsi Index has gained almost 80% since the plunge in March 2020, when lockdowns began worldwide.

This column was first published in Business Day. 

If you rushed your investments offshore at the start of the Covid-19 pandemic, the wounds will take some healing. Since the plunge in March 2020, when lockdowns began worldwide, the JSE all share index (Alsi) has gained almost 80%.

Of course, no-one could have predicted the bottom, but had you just done nothing and remained invested through the period, you’d be up about 18% over the past 13 months, with 13% of that delivered this year.

I point this out because it helps to blast out of the water the narrative that SA investors are best served by taking all their investments offshore. Had you done so, you would not only have missed out on the SA performance (the MSCI World index lagged the JSE by several percentage points) but been on the losing side of a 35% recovery in the value of the rand. It would have been a major underperformance.

It is sometimes hard to discern the motives of the “all offshore” brigade that often takes to social media to inflame a class of older (and therefore wealthier) South Africans who feel aggrieved by the performance of the government. Together, they fuel a narrative of permanently declining fortunes. Those feeding the fire often have financial interests in doing so — they are selling the offshore products that just happen to be the alternative.

Good financial advisers know that getting the best for clients often means most of the work is managing their emotions and prejudices. What is best for clients — a portfolio that matches client risk appetite and ability with maximal probable returns — is obvious. For South Africans who will one day rely on their savings to live, it is important to consider that expenses will be in rand.

Profit filler

There is a simple way to avoid exchange rate and inflation risk: invest in inflation-linked bonds to ensure that assets will not depreciate just when you need them. Of course, few should be taking so little risk. If you have a longer time horizon it makes sense to expose yourself to more volatility and diversifying offshore is certainly a good way to optimise your portfolio, especially if you have a long time to build savings out of rand-based earnings. But it will still be important to think about the foreign exchange risk you are taking on and ensure your portfolio limits that.

One has to keep reminding investors that the profitability (and therefore value) of SA companies is only partly linked to the performance of the government. Mining companies and many major industrial companies generate profits from hard-currency-denominated sales. When the rand plunges, it is an instant profit filler as costs are usually in local currency but revenue in hard currency. A counter such as Sasol, for instance, gets a bigger profit boost from rand depreciation than oil price appreciation.

The pandemic has also helped improve efficiencies as SA firms that took a risk-averse outlook cut costs fast. As many have lower cost bases now, the recovery can result in leveraged profits. That has meant strong earnings from some unexpected quarters, including SA’s much-maligned manufacturers who suddenly found themselves far more globally competitive thanks to the rand plunge.

Emerging markets

Indeed, SA’s trade balance has been an astounding strength, recording the best figures since records began. It was partly due to weaker domestic demand on the back of the pandemic and lockdowns that caused a 12% fall in imports in 2020 compared with 2019. But despite lockdowns interfering with production volumes, the value of exports actually grew 10%. The figures boomed in May last year after the rand plunge, but overall the year ended up with a trade surplus of R183bn. And this year has started strongly with a cumulative trade surplus by end-February of R27bn, despite import volumes having recovered.

Compare that with other emerging markets such as Turkey, Brazil and Russia where company performance is more domestically exposed and political fortunes are even more tumultuous. You can see why many foreign investors are favouring SA.

None of this suggests that things couldn’t have been better if the government supported the environment with effective services and policies. The more than 5,000 mining licence applications backed up at the department of mineral resources & energy are a huge missed opportunity. That, and policy uncertainty, is partly why, despite strong commodity prices, miners are not expanding capacity, just earning bigger margins on existing capacity.

The current level of the commodity price cycle could have spurred masses of new investment had the policy environment been conducive. Similarly, capacity constraints at ports, roads and rail have held back greater exports of commodities, agricultural and manufactured goods. We must work harder to take advantage of such opportunities as a country.

So next time the “anywhere but SA” bandwagon comes charging past, see it for what it is: a creaking wreck filled with those who make a living selling the negative story.

Theobald is chair at Intellidex.