Sherilee Bridge
Some bears hibernate longer than just the winter. This is the case in the South African bond market, with bonds constantly flirting with all-time best levels despite the weakness of the country’s currency against the United States dollar. Investors burnt by the sell-off in the equities market may only need to be reminded of the introduction of capital gains tax in less than three months to spark a fresh bull run on the local bond market. Tax on capital gains is expected to level the playing fields across different asset classes and help to correct the historical neglect of fixed asset instruments in South Africa.
Equities have traditionally been favoured over bonds because South Africa’s high inflation, the tax regime and exchange controls meant equity returns almost always outstripped those of bonds. The past decade has seen all this change.
Standard Bank treasury head Brad Koen says South Africa’s healthy trade surplus, lower interest rates and softening inflation are all helping drive the positive outlook for bonds. What’s more, the reduced supply of government bonds is giving impetus to corporate and municipal issuers who are seeing the lack of state-issued paper as a gap in the market. South Africa has traditionally had a large and liquid market in government and parastatal bonds, but almost no market in corporate bonds. The corporate bond market has grown 70% in a year with the estimated total issues now at about R10-billion. But it is still tiny compared with the R400-billion government bond market. That’s because companies that need capital have inherited the habit of fundraising by selling equities on the JSE Securities Exchange.
South African banks indulged asset managers eager to invest in high-yield debt by creating “synthetic” corporate bonds using credit derivatives. So far, the four banks Standard Bank, Absa, Investec and Gensec trading credit-linked notes on 76 different companies have cashed about R13-billion in trades. Other banks, two of them international players, are itching to get into the market, but it may well be too late. Traders say the ironic thing about the development of this “synthetic” corporate bond market is that it has driven demand for corporate bonds to their highest level. Institutional investors are thought to be underweight in bonds, with only 14% of institutional funds invested in domestic bonds and 50% stored in equities. The fall in the equity market is highlighting this inequality. In Europe and the US funds allocate about a third of their portfolios to bonds. To catch up, local funds need to more than double their allocation. Getting bonds up to the 33% of a balanced portfolio seen as international norm should not be hard and there is strong evidence that bonds, particularly corporate bonds, are becoming more important in boosting portfolio perfomance. But South African companies need to take the plunge too. A Rand Merchant Bank study shows South African companies have the capacity to take on more debt. Overall, non-financial companies listed on the JSE have a conservative debt-to-equity ratio of 46%, with at least 39% of that short term. JP Morgan vice-president for debt capital markets Marc Hassey says banks do not like to borrow for longer than three to five years, but bonds allow companies to borrow over the longer term. As the recession deepens economists say it could take anything from six months to a year and a half before a global economic upturn kicks in investors will continue to flee the equities market. The waiting bond market, which is now far more acessible to investors, could find itself home to established and new investors alike. That means bonds could well slough off their reputation as equity investments’ poorer sister and become the belle of the ball, at least for the night.
@The grass is greener on the other side
The fall in the rand means it is more important than ever to invest offshore
Sherilee Bridge
With the rand falling to yet another all-time low against the United States dollar, many South African investors are again reflecting on the structure of their investment portfolios. Since the beginning of the year the rand has lost more than 8,5% against the dollar and most commentators expect it to slide further.
Last Friday saw the rand fall past its previous historic low of R8,20 to the dollar, touched in April, to 8,24 to the dollar, joining other emerging market currencies in their slide against the robust greenback. Currency dealers again blamed the slide on the beleaguered euro but some said South African policymakers were also at fault. Some dealers said negative sentiment caused by a delay to the listing of Telkom, the postponement of the public offering of electricity utility Eskom to 2007 and last week’s land grab near Johannesburg served to fuel anxiety in the market.
One dealer blamed the fall on investors continuing to pull their funds out of rand-denominated funds and into safe havens such as the US dollar, further depressing the rand. Given the rand’s beleaguered status, the relative small size of the South African economy and its emerging-market status, local investors are being told it makes sense to have a substantial portion of their investment exposed to developed offshore markets.
Most fund managers agree it is prudent for local investors to have up to 30% of their investments outside the local economy. But there is still some confusion regarding the subject of offshore investing and this may be the reason why many South Africans have kept away from this type of investment. Kevin Hinton, marketing manager for MomentumWealth, was quoted by iafrica as saying the fall in the rand means the case for investing abroad is as sound as it ever was. He says even though many economists predict the worst may be over for the rand and that a period of relative stability should ensue, investors who have seen their rand-denominated assets taking one beating after another are less sure. “Over the long term, we have witnessed the perpetual depreciation of the rand. Periods of currency stability have been followed by sharp declines and history suggests we can expect to see further depreciation over time,” said Hinton.
By investing in funds and assets denominated in stronger currencies, growth is achieved on two counts through the underlying fund performance and the depreciation of the rand. Often the simplest way to invest offshore is to invest direct through an offshore fund using individual offshore allowances. Alternatively offshore exposure can be made indirectly through local international funds. Local investors can also opt for structured offshore index tracking products (via asset swaps).
But while both direct offshore funds and local international funds provide the investor with offshore exposure, there are significant differences between the two. For some deciding on a route is a matter of choosing the path with less red tape, for others it will be performance- and return-based.
Performance of offshore investments is largely due to rand depreciation and superior equity returns in offshore markets. With this being the case, almost all financial advisors recommend rand hedges against the dollar and euro. Local international funds do not require South African Revenue Service (SARS) and Reserve Bank clearance, but they are limiting in that funds are capped when an asset swap ceiling is reached by the unit trust company. Fund choices and managers limit the investor and only 95% offshore exposure can be attained.
Direct offshore funds, while needing SARS tax clearance and in most cases demand lump sum investments, have no assets swap limitations and ensure 100% international exposure. However, offshore investing is not without its pitfalls. In view of the fact that the capitalisation of the JSE Securities Exchange is equal to about 1% of the world markets, it is obvious that having 100% of your liquid investments in the JSE is too risky. But the dismal rate of exchange means you sacrifice a sizeable portion of your initial investment in terms of buying power.
Financial advisers say offshore investment should be seen as a long- term investment. With the Reserve Bank allowing a maximum amount of R1-million to be taken offshore, they say it’s a good idea to have between 40% and 60% of all investments abroad. There is also always the more high-risk investments such as currencies and growth stocks, but advisers warn this is only for investors with nerves of steel and an unlimited supply of cash.
@It’s time to go
back to school
Sharon Gill
Investors are becoming a demanding bunch. They are getting increasingly discontented with handing their money over to a broker and sitting pretty. Access to information has changed dramatically over the past five years. Company reports and analysis have moved out of the corporate world of money management and are accessible to everyone with a modem. And as the availability of information increases by the nanosecond, it is increasingly putting investors in the driving seat with their finances. And they are getting increasingly involved in actively managing their money, from tax returns to trading on the share markets. Investment and tax seminars are booked out weeks in advance. Investors are hungry for information and, more than information, they are looking to acquire the skills that were previously the professional domain of tax advisers, brokers and financial advisers. But what’s questionable is whether the financial services industry is responding to the need for investor education.
The easiest place to start looking for advice and information is online. If you go to any reputable search engine and run a search on “investment advice”, “personal finance” or “investor education”, you will be hit with literally thousands of website returns. But browsing aimlessly can be frustrating and what is relevant in overseas money markets does not always apply here.
Depending on your modem speed and sizes of the various sites you download, this approach can produce little more than a migraine. Tailoring the search to local sites wins some rewards. The Ananzi search engine looks only at South African sites and offers up a litany of information on anything from basic economics and weekly investment overviews to “how to avoid bad investment decisions” and “opinion and research” and “what to do with your money”. But it’s a mass of information, and none of it the tailored advice that a keen investment student is after.
Corporate websites like www.libertylife.co.za, www.sanlamlife.co.za, and www.momentum.co.za do cover investment topics and offer advice centres. But content is thin and often product-driven. Financial news websites like www.moneymax.co.za or www.iii.co.za carry market reports, analysis and opinion and display graphs showing useful things like the five best performers and the top 10 fallers on the JSE. They also have fairly extensive glossaries of financial terms but, again, there is no tailored investor school of the type we are looking for.
We start getting warm on sites that offer a dose of virtual reality. Log on to utrade.co.za, which is U-Trade’s Investor Education Centre’s website, and sign up for a free 14-day demo account. You can buy and sell a virtual portfolio and it will track your performance. Many online trading websites offer a trial account, and one way to learn is just to play the game. Or you can play Raider on investorgames.co.za.
This online virtual stock market game also gives you a virtual share portfolio on the JSE using live prices. But it has an added sweetener. You pay to play, but you can win substantial cash prizes. The R20 sign-up fee is negligible if you consider how much a bad decision would cost you if you were dabbling in the JSE for real.
If the Internet is proving aimless, it may be time to hit the bookstore. And it may be where you hit paydirt because the traditional publishing industry has been churning out investment and financial advice books for a while. Exclusive Books has an entire and expanding section dedicated to investment advice. The bestseller list titles are enough to work you into a froth of excitement. Ordinary People, Extraordinary Wealth (Ric Edleman), Rich Dad Rich Kids Smart Kid, Rich Dad’s Guide to Investing and Rich Dad Poor Dad, (Robert Kiyosaki), Millionaire Next Door (Thomas Stanley), Courage to be Rich and 9 Steps to Financial Freedom (Suze Orman), Buffettology (Warren Buffett), and Secrets of the Billionaires (Frank Goldrich). The books range in price between R81 and R164.
A good synergy is possibly to read recommended book reviews online to see what the experts are reading. Moneyweb lists its recommended business and investing books, and highlights some choices like Smart Choices (John Hammond, Ralph Keeney & Howard Raiffa), and Beating The Street (Peter Lynch), the latter catching our interest because it says that not only can the small investor compete with the big guys, he also has a great advantage over the professionals. Another avenue for investors-in-training are seminars and training courses offered by some of the financial institutions and investment consultants. PSG regularly runs one-day seminars to coach private investors in online trading. “These seminars are short and intensive,” says Sandy Dobrin of PSG Investment Services, “but they are recognised by the SA Institute of Financial Markets.”
The seminar is followed with three months of practical coaching where course participants trade “risk-free” on the PSG Online simulation. All buy-and-sell requests receive coaching comments on the decisions they make.
This kind of seminar is invaluable to the uninitiated, for whom the stock exchange is like another planet with its own language. And this is exactly the sort of focused workshop investors are looking for.
PJ O’Rourke explained in his book Eat The Rich, “At the end of the worst possible day for stocks, the market contains the same number of shares it started with. The market is not a different size, we just like it less.” So before you invest your hard earned money, do some homework. If you understand the workings of what you’re throwing your money into, it will be easier to make the right decisions