Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
Asset allocation
in a post-downgrade world
The aftermath of the sovereign credit downgrades turned out to be far less severe than anticipated – mainly as the events themselves didn’t come as a huge surprise. In terms of asset allocation, our client portfolios were already appropriately positioned for an uncertain investment environment, and our relegation to ‘junk’ status therefore had little impact on our long-term investment strategy.
After Nenegate in December 2015, investors panicked. Compared to the fallout after that ill-fated episode, however, the response to President Jacob Zuma’s midnight cabinet reshuffle and the subsequent decision by both Standard & Poor’s (S&P) and Fitch to take South Africa down a notch was almost complacent. The immediate impact was some currency depreciation and a jump in bond yields, and the local equity market has also not emerged unscathed. Despite negative investor sentiment, however, the reaction was nowhere near as dramatic as it was in the wake of Nenegate.
After the events of December 2015, government bond yields blew out to almost 10.5%. From an asset allocation perspective, we believed bonds were mispriced at the time – the rise in yields was based purely on investor irrationality. We therefore increased our exposure to local bonds, a decision vindicated when bonds proved to be the best-performing asset class for 2016 – the All Bond Index returned 15%.
Since the downgrades, bond yields have kicked higher by around 70 basis points to 9%. We’re again viewing this as market overreaction and considering it an opportunity to use some of the cash in our portfolios to increase exposure to this asset class for our clients. It may seem contrarian to buy bonds when we’re concerned about the government’s ability to service its debt and repay the capital at redemption, but we believe the potential yield is still attractive enough to compensate for the risk associated with this asset class.
Unexpected events on the political front often drive fearful investors to send their money offshore, which at a weak exchange rate is precisely what they should not be doing. Following Nenegate, the currency blew out to R16.50 against the US dollar, so we certainly didn’t recommend to our clients to take funds offshore at that stage – the currency was way too cheap. As it turned out, the rand strengthened considerably subsequently – just before the credit downgrades, it was trading at R12.50 to the US dollar.
Post-downgrade, our currency has naturally come under pressure. In our view the rand is still strong enough, however – it’s currently trading at R13.36 to the US dollar – to justify moving some funds offshore. For clients with limited international exposure, the current currency levels have opened another window of opportunity to add to their offshore assets.
Another factor we consider when looking at asset allocation from a geographical perspective is the prices of offshore equities versus those of local stocks. On average, there’s not much difference between the two currently. With the exception of the US market, offshore equity markets are priced more or less in line with local markets. We’re therefore considering increases in offshore exposure for our clients mainly from a currency perspective.
Since the start of the year – and since the downgrade announcements – the overall market has moved sideways and essentially retained its levels, propped up by a handful of rand hedge heavyweights such as Naspers, BAT and Richemont. The share prices of companies that don’t have a significant offshore component to the earnings they generate, notably the banks and retailers, have come under severe pressure, however.
In our local equity portfolios, we have substantial exposure to the ‘safe haven’ rand hedges that earn the bulk of their income outside South Africa. But since the credit downgrades, pockets of value have emerged in our market – including the banking and local IT sectors – as a result of negative investor sentiment. It’s of course challenging to get the timing on these cheap local shares just right, but in our experience, a good investment decision is always taken on price. With patience, value will almost certainly be unlocked over the long term.
In a nutshell, in a post-downgrade South Africa, our asset allocation remains as follows: we’re still marginally overweight in local equities, and within our balanced mandates we currently have virtually the maximum offshore exposure allowed in terms of Regulation 28 of the Pension Funds Act. We’re very comfortable with our decision last year to add to local bonds. Our portfolios have fair exposure to offshore equities, but it remains hard to see inspiring returns from global bonds.
The impact of investor sentiment and irrational reaction to ‘crisis’ events such as the recent credit downgrades results in an intra-day tug of war where the direction of the rand determines whether rand hedge counters or shares that derive most of their profits from the local economy will walk away as victors. We still believe, however, that fundamental principles will dictate market prices over the longer term. Our approach to actively managing portfolios therefore hasn’t changed, and we will stay true to our investment philosophy that price levels will be the most important factor driving prospective returns.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
Using your equity portfolio to secure credit allows you fast access to capital.
Sizwe Mkhwanazi has spent 14 years in Investment Management.
Have a question for Sizwe?
South Africa
South Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStarRest of Africa
Sanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth MauritiusGlobal
Global Investment SolutionsCopyright 2019 | All Rights Reserved by Sanlam Private Wealth | Terms of Use | Privacy Policy | Financial Advisory and Intermediary Services Act (FAIS) | Principles and Practices of Financial Management (PPFM). | Promotion of Access to Information Act (PAIA) | Conflicts of Interest Policy | Privacy Statement
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
MANDATORY DISCLOSURE
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
INVESTMENT PORTFOLIOS
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.