In February our average prudential balanced portfolio returned minus 0.12% (January 3.98%). Top performer is Namibia Asset Management (0.31%), Momentum (minus 1.10%) takes bottom spot.

In February key foreign bourses continued to out-perform the SA Allshare Index, the Nikkei being best performing index seemingly achieved by a mere comment by newly elected Japanese PM Abe that the Bank of Japan needs to relax fiscal policy. Since the beginning of 2012, the Nikkei produced 36.7%, and the DAX 31.3% versus the SA ALSI at 24.2%. Over this period the Rand depreciated by 10.3% against the US$ and by 11.1% against the Euro.

Together these two elements would have produced a return of 56% and 49.8%, respectively, for an SA (US Dollar) investor in the Nikkei, respectively in the DAX, returns that compare favourably with the top performing sectors of the FTSE/JSE. Foreign investors in the SA ALSI in contrast, would have had a return of 11.4% (US investor) and 10.4% (Euro investor) since the beginning of 2012.

Foreign investors in SA bonds and other fixed interest instruments would have earned negative returns since the beginning of 2012. The attractiveness of borrowing cheap money offshore to benefit from higher interest rates in SA is therefore no longer an argument unless the investor were to hope for the Rand to strengthen again which appears unlikely at this stage. In the light of these developments, a declining trend in net bonds purchases by offshore investors is not surprising.

Despite these negative developments for foreign investors in SA, total foreign portfolio flows are currently still at a fairly high level of over R 100 billion measured over rolling 12 month periods, still providing support to the Rand. We would expect the influence of foreign portfolio flows on our local financial markets to slowly fade away.

Local fundamentals and investor sentiment should in time, however, become a much stronger determinant for our local financial markets. Consensus amongst equity investors seems to be that SA equities are not cheap by historical measures and in relative terms when compared to other African and offshore investment opportunities. Such foreign investment opportunities are therefore likely to be pursued with more vigour by local investors going forward, which also will impact negatively on local equity markets.

A changing tide of portfolio investment flows out of  SA, the continuing negative inflation differential between SA and its major trading partners, negative SA current account data and the fact that SA Reserve Bank in March once again kept the Repo rate unchanged, is likely to weaken the Rand further and dampen the interest in local bonds. A weaker Rand is likely to lift the inflation level. This environment is bound to lead to an increase in the Repo rate in the next 12 to 24 months and to higher interest rates generally.