South African investors should be smiling: the treasury has taken further steps to break the barriers of exchange controls and make investing offshore less painful.
Exchange controls are now virtually non-existent for the average South African investor. Last year exchange controls were relaxed, allowing investors to apply for other investment opportunities, including property, over and above their R4-million annual foreign investment allowance.
South Africans who had emigrated could also withdraw their previously blocked rands without incurring the 10% levy. Now new rules proposing to treat inward-listed companies as domestic assets instead of offshore holdings, published in the medium-term budget policy statement on Tuesday,will allow local investors to trade in shares of companies with foreign headquarters.
In addition, cross-border transaction thresholds in Africa will be amended to reduce red tape, simplify payment mechanisms and eliminate bias between resident and non-resident individuals. There were no further details of how this would unfold, but a policy document from the Reserve Bank is expected before the end of the financial year. It is a big leap by the government to cut the red tape that has had investors in a knot for years.
Although the JSE still has to thrash out the details of these proposals with the treasury, the South African Reserve Bank and the Financial Services Board, it is nevertheless a big boost for the volume-hungry local exchange and institutional investors such as unit trusts and pension funds, which are currently limited in terms of the amount they can invest in foreign companies listed on the JSE.
Some of the inward-listed companies, including British American Tobacco, Aquarius Platinum, Oando Plc, Uranium One and Central Rand Gold, have been regarded as foreign holdings in investment portfolios. Investors’ exposure in these companies therefore has been limited in terms of prudential investment guidelines as well as foreign exchange. These restrictions have also meant that the JSE could not include these companies on the bourse’s indices, so global giants such as British American Tobacco did not form part of the JSE-FTSE Top 40.
Denzil Burger, portfolio manager for macro strategy investments at Old Mutual Investment Group, said the new rules would give both institutional and retail investors more flexibility in their portfolios by providing some additional capacity for offshore investments when they believed it was necessary. “British American Tobacco, for example, has been a popular holding for both institutional and retail investors, given its defensive nature in slow economic growth periods, and therefore is likely tobe widely held among institutions and retail investors alike.”
Burger added that once these companies were classified as domestic assets, “this will lower the offshore exposure of investors and give them the opportunity to invest more offshore”. Although the rand has weakened over the past three months, investor appetite for offshore stocks is growing, especially with most European and United States counters looking cheap. “Offshore valuations remain relatively attractive and South Africans should use this opportunity to increase their offshore holdings,” said Burger.
The new regulations will not affect the “London Five” — the dual-listed South African companies Anglo American, Investec, Old Mutual, BHP Billiton and Mondi that are already classified as domestic. Apart from the benefits for local investors, the new rules will also improve South Africa’s position as an investment destination for offshore companies. Foreign-owned junior mining and exploration companies with African assets, which have traditionally listed on the Toronto and Australian exchanges, may benefit from investing on the JSE now that there is an increase in the pool of available capital.
Michelle Joubert, the JSE’s head of investor relations, said the bourse still needed to have a discussion with the relevant government authorities to understand fully the details of the new proposals and how they would be effected. She said the JSE would not comment on which companies would be included in the local indices because the local exchange and its London partner, the FTSE, had criteria which companies first had to meet before joining an index.