With the rand looking vulnerable, now is the opportune time to invest offshore, even though global markets are experiencing a soft patch, Mark Appleton, chief investment officer at Barnard Jacobs Mellet (BJM) Private Client Services, said in a statement on Monday.
According to Appleton, softer international economic indicators have led to a downgrade in expected growth rates globally over the past quarter. This, in turn, has led to weaker commodity prices that — combined with the continuing rise in United States interest rates — has put downward pressure on global equity markets.
“This soft patch in the international markets has had a negative affect locally. Although industrial and financial shares have been cushioned to a degree by the recent interest-rate cut, resources have been hard hit by falling international commodity prices,” he said.
Appleton added, however, that BJM Private Client Services continues to be concerned about the vulnerability of the rand, which on Friday broke above R6,50 per dollar for the first time since October last year
“Commodity prices have peaked and it is unlikely that we will see further impetus from this sector. Part of the rand’s strength over the last two years has been due to rising commodity prices,” he said.
He continued that the current account deficit at the same time worsened to 4% of gross domestic product, a level not seen for many years. With the latest rise in US interest rates and the cutting of local rates, interest-rate differentials have also narrowed substantially, making South African interest bearing investments less attractive.
“This could have a negative affect on our capital account, as there would potentially be less portfolio money flowing into South Africa. This, in turn, would weaken support for the rand as we rely on large capital inflows to offset the current account deficit,” Appleton asserted.
Although BJM Private Client Services remains positive on the outlook for the local economy and local equities, which remain its preferred asset class, it is aware that some weakness may develop on the back of volatile capital flows, thus providing better buying opportunities.
“If foreigners start to swing their portfolios away from emerging markets, this would cause short-term weakness. Currently, we are taking a more cautious approach when buying share,” Appleton explained.
BJM Private Client Services is expecting local equities to return between 12% to 14% over the next 12 months. Internationally, despite the recent soft patch, equities should perform better than bonds and provide a return of between 6% to 8% in dollar terms.
“Given our view that the rand will weaken, the international markets could outperform the local market in dollar terms,” Appleton concluded. — I-Net Bridge