Coronation carefully buying abroad
The odd lack of panic among investors in SA could be because of complacency regarding emerging markets
Far from beating a panicked retreat out of SA assets, local and foreign investors have been remarkably sanguine about President Jacob Zuma’s cabinet hatchet job, and the downgrade of SA’s sovereign credit status to junk by ratings agencies Standard and Poor’s and Fitch.
The all share index is about 5% up year-to-date, while the rand is still stronger than where it began 2017, though almost 9% off its best levels for the year of R12.43, before Zuma struck.
Asset manager Coronation, whose assets under management stood at R576bn as of end-March, reckons the real tipping point may come in December, when the ANC holds its elective conference to anoint Zuma’s successor.
Says chief investment officer Karl Leinberger: "SA always had this strong commitment to fiscal discipline and we are at great risk of that discipline being lost or loosened.
"We think the market reaction (so far) is interesting ... it’s very benign. The key point that we want to make is: it’s not that the reshuffle is the end of the world. I think that what really matters for the future of SA and this question on fiscal discipline, is what happens in December. The defining event will be the elective conference and the next election."
Coronation has, however, sold out of SA government bonds in three of its funds, and lowered exposure to bonds in funds where it cannot shed its holdings to zero. Last week the asset manager, which manages about R150bn in fixed income assets, told Business Day there was an "insufficient margin of safety" to justify their prices.
But, says Leinberger: "It’s not like we had (plenty of) government bonds and thought the world had suddenly changed and suddenly sold out ... we reduced further from what was already a consistently low position."
The reason for being low, he says, was based on the opinion that in emerging market equities and bonds, people had gone from being very fearful to perhaps a bit complacent. This would apply as much to Brazil or Turkey or any other major emerging market.
"This is all about pricing. That’s the job of an investor — to understand risk and price it (accordingly)."
As for Coronation’s attitude towards SA government bonds. Leinberger says it would "happily" buy again — if the price were right.
"The pricing of our bonds is being driven more by global investors than by locals. Investors have (in the past) panicked because of political developments, but life has gone on – if you look at Brexit, Donald Trump or the impeachment of Dilma Rousseff in Brazil. Global capital is now perhaps being complacent. There seems to be some fatigue to all these political developments, a feeling that countries will muddle through, despite the long-term concerns."
And if investors have been suffering cold sweats since Malusi Gigaba was installed at national treasury, with controversial economic adviser Chris Malikane in tow, they’ve been good at keeping their panic to themselves.
For its part, Coronation has tweaked its funds by selling some of its SA Inc holdings and government bonds, and buying more offshore assets. Leinberger says Coronation’s funds have, for some time, been at "pretty much our maximum" of offshore exposure.
Asked if Coronation is chafing against the rules that cap offshore exposure to a maximum of 25% for retirement fund investments, Leinberger says the level "is pretty fair."
"The number’s a lot higher than it was, and our own market has changed a lot. We now have a lot of the world’s great companies listed here and that wasn’t the case 10 years ago. I think there are sufficient opportunities to achieve diversification."
As for the firm’s exposure to commodities — which paid off last year after a really tough 2013 and 2014 — Coronation says it has taken some profits but remains overweight, though not at "make or break" levels.