Pension Podcast: Will political change in South Africa impact institutional investors?

South Africa’s economy has been sluggish in recent years, but upcoming changes could provide hope for institutional investors considering opportunities in the country.

Its economy has been in a low-to-modest growth mode, said Falilou Fall, senior economist at the Organisation for Economic Co-operation and Development, during the Canadian Investment Review’s podcast “Pension Passport.

He highlighted policy uncertainty as a reason investment in South Africa has been on hold. “But going forward, we can expect [a] little bit more clarity in the leadership of the country,” he said, referring to its growth reform agenda and the guidance it’s given for tackling issues in the electricity sector and with state-owned enterprises.

This will help rekindle investment, said Fall, and if investment picks up, growth will follow.

Read: Pension funds’ fixed income allocations losing ground in growth markets: report

Institutional investors looking to the area should also be aware of the urgent need for structural reform, said Michael Bolliger, head of the emerging market asset allocation team at UBS Wealth Management’s chief investment office, during the podcast. He noted the road to reform will be difficult and has the potential to make the country’s current political leadership unpopular because the changes required could lead to layoffs and wage cuts.

“[South Africa’s president] has to act in a challenging environment where he faces opposition for much-needed reforms for both the electorate and his own party. And that makes it difficult,” said Bolliger. “But still, we have the base case that he can succeed and so, hopefully, we’ll see a gradual pick up in South Africa’s potential growth rates in the years ahead.”

Investors looking to South Africa must also understand how the country is exposed to global developments, he added, noting assets including the rand are high beta assets, meaning they’ll be affected by shifts in market sentiment.

Read: Back to basics on currency hedging

As well, South Africa is currently an account deficit country, relying on foreign investors to fund its deficit, said Bolliger. “That means whenever there is growing expectation that monetary policy becomes more dovish, the rand — the currency — will strengthen. And whenever there is expectation that they will become more hawkish . . . then that can be a headwind for the currency and also for local assets.”

The local bond market and currency are interesting opportunities for investors at this time, added Bolliger. “It offers an interesting tactical opportunity. And we’re overweight these markets in a global tactical asset allocation simply because we believe it will generate extra returns over the next six to 12 months.”

Read: Investors urged to be prudent about emerging market plays

South Africa also has some interesting bottom-up opportunities, according to Bolliger. But overall, while the country might be significant regionally when looking at Central and Eastern Europe, the Middle East and Africa, it’s less significant when looking at a broader emerging markets portfolio, especially with other larger players, like China and India, in the mix, he said. And South Africa is still a niche play when looking at a global portfolio.

From a pension fund’s long-term perspective, exposure to the country could be interesting, he noted. “What I think, specifically for the pension funds, can be interesting is to engage in local fixed income markets because they have relatively high return. And also, at this point in time, they provide a rather good entry point. That’s what we think tactically as well. And so that can nicely add to the long-term return potential of a pension fund.”

Listen to the full season of “Pension Passport at download the podcast on AppleGoogle Podcasts and Stitcher.

*Editor’s Note: While Fall works at the OECD, in his capacity on this podcast he isn’t representing the official view of the OECD or any member countries.