It’s been a bumpy start to the year for the South African economy, with severe droughts, a plunging currency and political turmoil, all affecting business confidence negatively.
The rand has still not fully recovered from the finance minister debacle late last year, and has not only weakened against the greenback, but against all major and emerging market currencies.This has resulted in local and international investors struggling to find value, but it certainly doesn’t mean that investment opportunities don’t exist.
So, what should investors do in the face of sluggish economic growth and shattered investor confidence?
To answer this question, we need to compare some of the different investment options available and how they are currently performing. Below we look at three popular options and weigh up whether they provide safe, long-term value and, most importantly, excellent returns.
Pension Funds – Offsetting poor economic performance but average at best
With Regulation 28 of the Pension Funds Act limiting equity exposure, pension fund administrators will have to diversify into other asset classes such as property, bonds, cash, and preference shares.
Owing to the JSE’s poor performance, perceptive pension fund managers will be looking for more offshore exposure to take advantage of the Rand’s poor performance. However, here again, Regulation 28 comes into play, limiting offshore exposure.
For investors, it’s important to remember that a combination of factors including, higher inflation, a volatile investing environment, the poor performing rand and stock market could all potentially reduce the financial performance of the pension fund. This in effect will offset any gains made by a higher interest rate as the value of the pension fund will inevitably decrease in a failing market.
Government bonds – Marginal stability during volatile times
As investors look for ways to protect their capital, an increasingly popular option is government bonds, as is evidenced in their 2015 results. Here, the sustained, widespread investment in long-term government bonds served to boost the listed real estate sector to a highest total return of 7.38%. However, investments in short-term government bonds are not proving as lucrative, only returning a mediocre yield of 3%.
When it comes to investing in government bonds, two of the major risks investors need to keep in mind is that a dramatic increase in inflation, or the government’s inability to repay the bond (should they default) could result in negative returns. However, with inflation at around 5.2% and forecasts stable for the rest of the year, while government bonds continue to offer investors steady returns, these can by no means be considered impressive.
Private equity – Managing risk and reward for excellent investment returns
The biggest benefit when it comes to private equity investments, is that they give investors the opportunity to invest in regions that are experiencing strong economic growth and generating robust returns.
In Africa, where investment markets are still developing, private equity provides vital capital for developing businesses. Here the South African private equity industry, in particular, represents more than R180 billion in assets under management, and this number is growing daily.
The South African-managed funds that invest outside of the country effectively serve to assist investors to manage the risk of being too heavily invested in poor performing regions via this “offshore” diversification into other regions. This means they not only provide safety but also exceptional long- and short-term value.
By mid-2015, the South African private equity market delivered a ten-year internal rate return of 21.7%, while the FTSE/JSE All Share Index only delivered a 17.1% return over the same period. So really the proof is in the pudding so to speak, with the above statistics clearly indicating that if you’re looking for safety, diversification and higher returns, private equity investments are definitely the best option to help you grow your investment capital.
Ecsponent’s private equity investment offering positions investors to benefit from both local and international investments on the African continent, with all profits generated by its African operations flowing back into the locally listed company. This benefits investors by not only eliminating the risk of investing offshore but in addition delivers greatly improved yields to investors.
Back at home, Ecsponent successfully overcomes the local economic and investment challenges by adapting and aligning its investment strategy according to the changing market conditions, thereby successfully allowing it to continue securing superior gains for its investors.