BRETT HOPE ROBERTSON: How to invest in a turbulent SA economy

Experts are divided about what this year will bring. Recession is on everyone’s mind as they consider the impact of the geopolitical environment, European tension, surging inflation, the power crisis and now the greylisting. 

Others are “cautiously optimistic”, citing the robustness of SA’s mining and manufacturing industries as evidence that the country’s modest upward trend will continue. Energy self-generation advancements, freight rail infrastructure health, basic income grant decisions and political developments all have a direct effect on the economy.

These are unusual times and investors are looking for ways to prepare a portfolio that can withstand the current SA landscape. There are four major SA economic factors that affect your portfolio:

• Inflation. Globally, inflation in 2022 was at a decade high, and SA was no exception. The country finished the year with a 7.2% inflation rate (annual change of +1.3%). While some believe inflation is slowing, it remains higher than current interest rates, and the central bank suggests additional interest rate increases will be needed to bring inflation under control. To combat high inflation SA investors should consider investing in nonrand asset classes, such as low inflation rate dollar-denominated assets like gold or Bitcoin. 

• Interest rates. The SA Reserve Bank raised its lending rate to 7.25% at its January 2023 meeting, marking the eighth consecutive rate increase since November 2021. Some analysts believe interest rates will remain higher for a longer period of time than markets now expect. Because much business growth is funded by borrowed money, high-interest rates make it difficult for companies to grow. Higher interest rates mean more expensive funding, which results in reduced company profits and lower stock prices.
• Load-shedding. The Eskom collapse is wreaking havoc on the SA economy, and load-shedding has reached record levels, hurting economic activity. Load-shedding directly affects economic activity, company growth and profits. This translates into lower stock prices for SA companies and a weaker rand. As a result, investors can seek refuge from this by purchasing rand-hedged assets.
• Greylisting. In October 2021 the Financial Action Task Force (FATF) issued a report identifying serious flaws in elements of SA’s financial legislation, and on Friday the country was duly placed on its greylist. This will weaken the country’s linkages to the global financial system, raise the country’s financing costs due to increased due diligence procedures, and create an additional disincentive for offshore corporations to do business with the country. Foreign investment, which is critical to the rand’s strength, may be reduced. Local investors can look for shelter from this by buying rand-hedged assets.

These economic points paint a clear picture for SA investors — the possibility of a year filled with rand devaluation and negative stock price movements. Is there an asset class that can provide investors with protection from these economic factors? The short answer is yes. Investors should look for an asset class that provides a rand hedge while also showing growth capable of combating high global inflation rates.

Cryptocurrencies tick all the boxes. When the performance of cryptocurrencies is compared to the performance of SA stocks since January 2020, it is clear that diversified bundles in particular provide investors with protection against rand depreciation and inflation. SA stocks (JSE Top 40) could not keep up with inflation, so those who invested solely in the JSE would have lost money (-19.72%) in real terms.

Crypto bundles are effective for SA investors because they are a rand hedge. Since the rand has depreciated by about 5% a year against the dollar over the last 20 years, South Africans have a distinct need for dollar exposure. Investors should invest in assets denominated in dollars to hedge against currency depreciation. Cryptocurrencies, like all commodities, are priced in dollars and provide investors with protection against rand depreciation.

Hedging is the practice of investing in uncorrelated asset classes to protect an investor’s portfolio against outlier events. Cryptocurrencies are ideal for investors who want to hedge against the SA economy and the market swings it brings due to their low correlation with traditional investments such as stocks, bonds and gold. 

Diversification is a powerful investment tool that is known to reduce investment risk and volatility while maintaining return. Crypto bundles enable investors to effortlessly take advantage of this power by gaining exposure to multiple cryptocurrencies in a single investment without having to take the risk on a single cryptocurrency or manage a crypto portfolio themselves.

While history shows that active managers underperform market indexes by more than 90%, they also charge higher management and performance fees, costing investors more than 20% of their annual return. Crypto bundles charge significantly less (2%-3%) for market returns that are likely to outperform most active managers.

We would have jumped at the chance to invest in internet companies like Amazon and Google back in the 1990s, knowing what we know now. But back then picking the winning internet investment was difficult. The same is happening in cryptocurrency today. Much like the internet bubble of the 1990s, thousands of blockchain-based projects are being developed overnight. This makes it near impossible to identify the next Amazon or Google of the cryptocurrency world, and still tougher to hold onto them for a sustained period.

Crypto bundles automatically rebalance at predetermined intervals, ensuring that investors are always holding the largest and most reputable cryptocurrencies. More importantly, they ensure that you remain invested when the Amazons and Googles are finally found.

• Hope Robertson is head of investment at Revix.