Taking Stock Autumn 2022

Welcome to Taking Stock

Reflecting on the further easing of exchange controls, fund flows and the Russian/Ukraine war

May 24, 2022

5 minutes

Sangeeth Sewnath
Reflecting on the further easing of exchange controls, fund flows and the Russian/Ukraine war
We are all “Prisoners of Geography”.

I recently read a book by Tim Marshall and borrowed the title to make the above statement. The idea that we are beholden to geography is a powerful one. Not only does it explain much of history, but it is particularly pertinent now as we try to understand the reasons behind the unfolding Russia-Ukraine crisis.

As Marshall says, “Technology may seem to overcome the distances between us in both mental and physical space, but it is easy to forget that the land where we live, work and raise our children is hugely important, and that the choices of those who lead the seven billion inhabitants of this planet will to some degree always be shaped by the rivers, mountains, deserts, lakes and seas that constrain us all – as they always have.”

Marshall’s book explores 10 maps that explain how world history was shaped by geography – from the reasons behind the rise of the US as a global powerhouse, to an explanation for why China and India have never fought each other (hint: they’re separated by a really high mountain range!).

It’s a compelling read, and I highly recommend it. Despite having written the book in 2015, Marshall clearly sets out how geography continues to shape the politics and history of Russia and its neighbours. Russia is vulnerable on two levels – it is a vast, flat country with large borders that are difficult to defend. It also lacks warm-water ports. As long as a pro-Russian government was in charge in Kyiv, Russia’s most important buffer zone would remain intact, and the European Plain would be guarded. Russia would also be guaranteed not to lose the lease on the warm-water port at Sevastopol in Crimea on the Black Sea. But a pro-Western government threatened to change all this, leading first to the uprising in 2014 in Kyiv and then to the conflict we are witnessing today.

In addition to the humanitarian crisis, the impact on the rest of the world – and markets – has been profound and will continue to drive uncertainty and volatility as the conflict draws on.

While the war in Ukraine dominates global headlines, we believe the significant further easing of exchange controls in South Africa (from 30% to 45%) will top the local investment news agenda this year. If the last decade was about increasing equity usage within pension funds, the next decade will be about how the industry adapts to the increased offshore limits.

We believe the significant further easing of exchange controls in South Africa (from 30% to 45%) will top the local investment news agenda this year.

Greater flexibility and complexity bring more responsibility. Advisors will therefore have to consider a wide range of implications – from whether their investment partners have the breadth and depth of offshore expertise, to the impact on the South African economy. An estimated R400-R600 billion could flow offshore, which will have wide-ranging implications for the rand, the stock market and its constituents. We have therefore dedicated much of this edition of Taking Stock to the offshore investment question, sharing not only how our portfolio managers are thinking, but also what the tram lines should be for optimal offshore allocations.

The two biggest beneficiaries of flows were income funds and offshore funds, particularly global equity funds.

Turning to net flows into the unit trust industry over the last calendar year, they were the biggest since 2014 at about R68 billion (excluding money market funds). The two biggest beneficiaries of those flows were income funds and offshore funds, particularly global equity funds, of which the Ninety One Global Franchise Feeder Fund was the biggest flow taker.

Ironically, the trend offshore pulled back a little in the first quarter, suggesting that we really don’t learn from our mistakes. Yet again, investors failed to take advantage of rand strength to invest offshore. (The rand appreciated by 9% against the dollar in the first quarter.)

The global sell-off was fairly indiscriminate.

It was a tumultuous quarter for markets, as global equities, represented by the MSCI All Countries World Index, declined by 13% in rand terms. SA equities held up relatively well and delivered 3.8%, while SA bonds returned 1.9%, with yields providing a strong underpin. The global sell-off was fairly indiscriminate – even the high-quality businesses we own in our Quality portfolios were impacted, so it really didn’t matter whether a company produced earnings or not.

Like in most crises, the one thing that completely broke down in the short term was the correlation between different asset classes, with global equities and SA bonds selling off at the same time. As investment order returns, we trust that the fundamentals will come to the fore again, and some semblance of normality will be restored.

As investment order returns, we trust that the fundamentals will come to the fore again.

In conclusion, our thoughts are with the people of KwaZulu-Natal, who, less than 12 months after the riots that rocked the province, are now faced with the aftermath of an environmental disaster. At Ninety One, we were in the privileged position to provide a substantial contribution for immediate disaster relief to support the flood victims. We have also matched the contributions from our staff members to several relief organisations to help rebuild the province.

We appreciate your support. Stay safe.

Sangeeth Sewnath
Deputy Managing Director

Authored by

Sangeeth Sewnath
Deputy Managing Director

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