Best to invest overseas warn South Africa’s wealth managers

While there is undoubtedly wealth in Egypt and Morocco, and Kenya, Nigeria and Ghana are seen as “interesting but high-risk” markets for private banking, the most developed market on the continent in terms of penetration, technology and service levels is undoubtedly South Africa, says Seb Dovey, wealth management consultant at think-tank Scorpio Partnership.

“Private banking and wealth management in the pan-African region is still very much in its infancy,” he says. “It is a highly challenging arena. The South African market is the exception to the rule,” he says, with nationals from other African countries often using Johannesburg or Cape Town as hubs for their financial affairs.

Competition for business of local HNWIs is fierce between the likes of Investec, Standard Bank, Nedbank and FNB Wealth. While Investec is the leading private banking brand in the country, Standard Bank is the bank with the most committed approach to growth across the region, says Mr Dovey.

“The local banks have achieved relative success due to the advanced nature of the technological solutions employed,” confirms Craig Arenhold, CEO of risk analytics software provider StatPro South Africa. “The financial services sector remains well regulated, and is far more mature than many of the other markets in the country. South Africa is a complex blend of first and third worlds, and the financial services sector is certainly placed firmly in the first world.”

Continuous investment in technology is more of a feature in this market than in Europe, with rival institutions in a constant race to update portals. “To invest in technology is integral to the future success of any wealth management business,” says Corrie De Bruyn, appointed CEO of PSG Wealth in 2014, after joining the business in 2006 as head of online trading and investments. PSG has recently launched a “new secure client portal” enabling customers to view and transact all products held with both PSG and external advisers.

Despite this technological progress, the banking and financial sector faces political and economic challenges, says Mr Arenhold of StatPro, pointing to the government’s well-intentioned Broad-Based Black Economic Empowerment initiative to redistribute wealth, which he says has left many people unable to find formal employment with larger financial institutions. 

“Skilled workers are sometimes unable to find fit-for-purpose employment, resulting in them leaving the sector or country,” says Mr Arenhold. “The people put into these positions don’t seem to have the requisite skills required for, as an example, specialist back-office administration roles.”

Of particular concern are political machinations which have led to wild currency swings and outflows of capital. He points to December 9, 2015, which saw a movement of approximately 10 per cent of South Africa’s GDP out of the country overnight, following the firing of finance minister Nhlanhla Nene, briefly replaced by unknown back-bencher Des van Rooyen, leading to a drop of 5.4 per cent in the value of the South African rand against the US dollar in a single day.

“Events since then have continued to deteriorate,” says a highly pessimistic senior private banker at one of the country’s leading institutions, warning of further political interference and negative influence of influential families. “What are our private clients thinking? Just look at the rand. The currency is the share price of the country and that tells you all you need to know,” says the private banker.

“The implication of the political uncertainty, coupled to the global commodities downturn, has resulted in a very low local business confidence index,” coupled with poor growth and rising inflation, with many South Africans actively seeking hard-currency hedges, warns Mr Arenhold.

Clients are increasingly concerned about political instability and the sovereign risk it creates, says PSG’s Mr De Bruyn, with growth of less than 1 per cent and higher interest rates eating away at disposable income.

“These factors make it extremely important for wealth managers to manage the expectations of their clients, to implement appropriate investment horizons and diversity their portfolios.” 

Despite myriad investment opportunities in neighbouring countries, the money is inevitably flowing to London and other Western capitals. 

“We believe in the African story, especially considering the healthy economic growth drivers in some countries and appropriate investment opportunities,” says Mr De Bruyn. “But most of Africa’s financial markets still need to be developed and issues around governance, transparency and liquidity need to be addressed.”

South Africa’s wealth managers prefer to invest clients’ portfolios in the developed world, focusing on multi-national conglomerates active in selected emerging markets, he says, “especially when economic conditions at home are less than favourable – this is usually the safest approach”.