At the recent Batseta conference in Sun City, 61% of attendees at a RisCura presentation said, in answer to a spot survey, that Moody’s Investor Service would join Fitch and S&P in downgrading South Africa to ‘junk’ status.

RisCura’s managing director, Malcolm Fair, was speaking at the Batseta – Council of Retirement Funds for South Africa – conference 2017, which is the largest gathering of SA pension and provident fund trustees each year.

As it turns out, SA escaped a junk rating, but on 10 June Moody’s cut the nation’s foreign and local currencies to one grade above speculation.

“The survey showed that trustees are feeling pretty negative about South Africa and the economy,” said Fair, whose presentation focussed on asset allocation and downgrades in the context of pension funds.

Based on the response to the spot survey, most trustees (75%) also believe that the Rand would either remain fairly flat or depreciate by as much as 25% within the next two years.

“Most SA investors, including trustees who make investment decisions on behalf of millions of members, believe that political events are the main drivers of Rand depreciation and credit downgrades,” said Fair.

Trustees also expect bonds and equities to suffer as a result, and for the economy as a whole to do poorly. Fair showed that in reality while the Rand plunged to nearly R14 to the dollar soon after Pravin Gordhan was fired as Minister of Finance in March 2017, within two weeks it started to recover and at the time of publication it was trading at around R12.90.

Also, between December 2015 when then Finance Minister Nhlanhla Nene was fired until the end of March 2017, on average, the Rand moved by about 50c to 75c on the back of negative political news, but recovered within about a week.

“This shows that while political events do impact the currency, their effect is neither as dramatic nor as long-lived as many believe.”

Bonds have not been that affected by political events either. Just two weeks after Gordhan was fired, on 17 April 2017 Brandywine Global, considered one of the best global bond trading managers in the world, sent an article to their investors. In the article they stated that SA bond yields “remain amongst the most attractive on both a nominal and real basis – you get paid to wait by owning South African bonds”. A week earlier, the English press also noted that foreign investors were “…piling into South African bonds despite fears”.

While foreigners own approximately 40% of SA government bonds, many of them are emerging market fund managers with a very small exposure to SA in their portfolios. “SA’s day-to-day political events are hardly even on their radars,” Fair said.

In fact, he added, trade protectionism policies that may come out of the Trump White House will have a greater impact. The proposed rebalancing of the Chinese economy away from a largely production-led to consumption-led economy should also be watched.

Surprisingly, Fair said given trustees views on the Rand, a total of 61% of the typical pension fund portfolio is currency sensitive as it comprises assets with currency exposure (in addition to actual offshore equity) such as offshore property and exposure to Top 40 SA shares like BHP Billiton and Richemont with significant offshore businesses. “Effectively, this means that SA pension funds are in the majority positioned for SA to do badly. In other words, the portfolios will perform well if the currency depreciates all else being equal.”

RisCura’s message to trustees was to look beyond the market noise to understand what’s really going on and to fully understand how their portfolios were positioned. They will then be able to effectively evaluate and review their investment policy statements and strategies.

-Malcom Fair

Managing Director, RisCura

*This article originally appeared in FAnews

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