17 Aug 2017
Europe looking attractive for SA farmers who want to invest offshore
There can be no question that South African farmers are under financial pressure. The last few years have been very difficult for the agricultural sector and cash flows are a serious problem.
“We have just had five years of the worst drought in history,” says Rico Bezuidenhout, an adviser with specialist agricultural financial services firm Raddix. “This year we had a wonderful grain harvest, but the price on maize especially is such that farmers are making losses. At the same time, cattle prices are going up, so the farmer who sold his cattle last year or the year before to make ends meet is now having to buy that stock back at four or five times the price.”
Farmers are also worried about the levels of political and economic uncertainty in South Africa. As they generally have most of their wealth invested in their farms, they are heavily exposed to local risks.
“There is a lot of uncertainty amongst farmers about the way forward in South Africa,” Bezuidenhout explains. “A lot of farmers, particularly the older ones, have large amounts of wealth locked up in their farms and they understand how risky this is. Investing in offshore markets is almost seen as an “insurance policy” against some of the political risks that exist locally.
They are therefore looking for investment options that give them some exposure to offshore markets. However, they are doing so at a time when some of the world's large markets are looking over-valued and higher risk. This puts many farmers in a bit of a conundrum. They want to make sure that they have international exposure, but they are cautious about where to invest.
A region that is therefore receiving growing interest is Europe. Markets in the Eurozone have under-performed for some time, but this appears to be changing.
For the first six months of 2017 the Eurostoxx 50 index was up 17.24% in dollar terms, making it one of the world's best performing markets. Global investors are putting money back into the region as its economic and political environment show encouraging signs of improvement.
“Europe has been in a bit of a slump for the last few years, but growth is coming back into the region,” says Brian McMillan from Investec. “The result of the recent French elections has also added some stability to a Eurozone that had been facing a lot of political uncertainty.”
An important question for South African farmers is how best to gain exposure to European equities, and particularly the Eurostoxx 50 Index. This is the most recognised benchmark in the region as it is made up of Europe's biggest companies across 11 countries, including Bayer, SAP, Siemens and LVMH.
One option is through the db X-trackers Eurostoxx 50 exchange-traded fund (ETF) listed on the JSE. This provides easy access to a rand-denominated investment that can be bought and sold as simply as a local share.
Others prefer to actually take their money offshore and invest in an international fund. This means that their investment will be made in Euros, and that they are protected against any South African-specific risks.
Low cost ETF options include the HSBC Eurostoxx 50 ETF, which has a total expense ratio of just 0.05%, and the iShares Core Eurostoxx 50 ETF, which costs 0.10%.
However, as Bezuidenhout notes, for many members in the farming community there is a desire for products that offer some kind of built in risk protection.
“This is particularly true for farmers selling their farms and needing to invest that money,” he says. “They are normally older people that are inherently more conservative. They would rather go for something that offers protection of capital.”
For these investors who want some level of guarantee, there are investments that provide capital protection, but also the opportunity to benefit if markets are favourable.
An example is the Investec Wealth Accelerator Equity Structured Product, which is currently open for new investments. It offers 100% capital protection over a four year period, and if the Eurostoxx 50 Index grows at all over this time, even by just 1 point, investors will receive a return of 63% in rand terms, which is an annualised 13%.
“The 100% capital protection at expiry provides comfort for investors who want to protect their wealth,” explains McMillan. “At the same time, the opportunity is there to generate inflation-beating returns over four years.”
In a global environment of low growth, having this capital protection and the potential upside is also highly attractive.