In the dynamic landscape of investment strategy, Loago Bokole, CEO of Riscura, champions the potential of local equities, extolling their value at the Botswana Pension Society Conference 2024.
“If it were up to me, I would have our equity exposure sitting in Botswana equities,” Bokole said as highlighted their exceptional performance. Some of these significant counters are targeting profits exceeding P2 billion and Bokole believes there is a lot of value to extract out of them.
A prime illustration of this trend is the First National Bank Botswana (FNBB), recognised as the most profitable bank in Botswana. FNBB also holds the title of being the most valuable company on the Botswana Stock Exchange (BSE), boasting a market capitalisation of P11.6 billion. In its half-year results, the bank achieved a record Profit before Tax of P879 million, showcasing a notable 28% year-on-year growth.
“These are positive indicators,” Bokole said, despite the illiquid nature of onshore markets.
Offshore vs onshore
In contrast, offshore markets often experience heightened volatility coupled with currency fluctuations, which foster aspirations for increased returns in the financial realm. Conversely, locally, market experts contend that realising gains takes more time due to the illiquid nature of the market and the limited investible options on the Botswana Stock Exchange (BSE). Nevertheless, during and post the COVID-19 period when global markets faced a downturn, the local market witnessed a rally.
A key question posed to Bokole is do investors then take their money offshore and have that currency benefit but with volatility or do they keep it local where there is more upside but there is illiquidity?
To illustrate his point, Bokole provided an example. He explained that if an investor were to invest a billion pula into the local equity market today, they wouldn’t be able to fully allocate it, underscoring the limited investment options available.
“So you have to be cognisant that there are great opportunities and it would take time to access those opportunities, somewhere between 18 to 24 months.”
During the conference, Daniel Loeto the Bank of Botswana (BoB) CFO expressed that restricting offshore investments to 50% reduces diversification opportunities, potentially impacting long-term returns. Pension fund assets have grown to over P100 billion over time, largely due to gains in offshore markets.
P8 billion repatriated
Latest data from the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) indicate that as at December 2023, a total of P8.84 billion has been repatriated back into the country, in line with the new pension funds rules which limit offshore cap to 50%. Finance Minister Peggy Serame said this phased repatriation of pension assets will continue with an inflow of P0.5 billion for the year 2024 and will proceed with an annual inflow of P4.17 billion thereafter until the end of 2027.
“These projections are based on the assumption that a stable working environment will prevail.”
Potential Impact on NRR
As these funds return to home soil, Loeto cautioned that domestic markets might offer limited options for high-growth assets compared to the global market, potentially affecting Net Replacement Ratio (NRR) targets.
NRR represents the percentage of pre-retirement income a retiree can expect to maintain after accounting for retirement income sources like pensions. An NRR of 70% indicates retirees can maintain 70% of their pre-retirement living standard. For example, the Net Replacement Ratio seeks to allow a pension fund active member who is earning P10,000 to earn P7,000. The NRR computation assumes that members’ post-retirement cost of living should be lower because for a typical member, the mortgage should be paid off at retirement and children would have grown up, and hopefully independent.
Tech stocks
To bolster his argument regarding the limited options for high-growth assets compared to the global market, Loeto pointed out that the growth potential of companies like Sefalana and Choppies Supermarket pales in comparison to giants such as Amazon and Walmart.
However, certain fund managers, such as Allan Gray, intentionally avoid investing in these tech stocks. Ntsoaki Rampa, an Investment Analyst at Allan Gray, emphasised during the conference that they refrain from participating in the US tech space because they consider those companies, while undoubtedly great, to be overvalued. Due to their risk aversion, Allan Gray opts to invest in companies they perceive as undervalued rather than taking on such risk.
“Our view on risk is quite different in the sense that we think that risk is permanent loss of capital,” Ntsoaki explained.
She elaborated that this typically happens when investors purchase excessively expensive assets. Ntsoaki argued that when funds are tied up in highly expensive assets, they are susceptible to experiencing capital losses in the long run. To illustrate, she provided a straightforward example: if one purchases an asset for P100, and when an asset bubble eventually bursts, the value of the asset drops to P60, resulting in a significant loss of capital.
“When you retire you have locked in the P40 loss permanently and we view that as a risk,” Rampa said adding that “we don’t view volatility and short-term movements of interest rates and share prices as a risk, especially for long-term investors such as pension funds”.
“We think that if you are buying overvalued assets today, that is a bigger risk.”
Rampa provided another perspective using Bitcoin. Bitcoin is quite speculative due to the unclear definition of how its value is determined. In 2022, the market witnessed a rally in Bitcoin. However, when inflation increased and interest rates followed suit, the value of Bitcoin more than halved. Although there was a recovery in 2023, with Bitcoin reaching $72,000 last week, it subsequently plummeted due to outflows this week. International experts anticipate that it may rise further, especially with the controversial halving.
However, Rampa cautioned that there is a real possibility that investing in Bitcoin at its current peak could lead to significant losses, especially if there is heightened volatility due to geopolitical tensions and rising inflation. She emphasised that such events could potentially cause the value of Bitcoin to halve, highlighting the inherent risks associated with investing in the cryptocurrency.
Recalling her statement about the risk being the permanent loss of capital, Rampa reiterated that investors are essentially locking in the current Bitcoin price, and if it halves, they could potentially face a permanent loss of capital. This is precisely why she emphasised that Allan Gray is cautious about investing pensioners’ funds into speculative instruments like Bitcoin.
Tactical investing decision
At Riscura, Bokole looks at investing from a risk-return perspective. To manage the challenge of limited gains locally he gave an example. He said if they are expecting Botswana equities to do 25% but their model is also expecting developed equities market to do 23%, “I then have to be cognisant of saying I want a risky asset, it might not be the one I want but there is a comparable return in a foreign jurisdiction that I can get access to. “So you then make a tactical decision to say let me buy a bit of foreign in the meantime because they are liquid,” he said adding that as opportunities come in Botswana, “I then disinvest and bring the money back home”.
The thing about the exchange rate for Bokole is that as a pension fund, if they put money in a dollar account in one of the banks in Botswana, they benefit before they even account for equities offshore.
“You benefit from the dollar appreciation because the pula is designed to depreciate against the dollar.”
The pula has been set to depreciate by 1.51% against a basket of other currencies in 2024.
Bokole highlighted another benefit derived from a rally in foreign equity markets. He found it particularly intriguing that 80% of the returns stem from a select group of seven high-performing stocks in the US. These include prominent tech companies, such as those mentioned by Loeto.
“Then you know that in aggregate when diversifying you look for unlisted assets that actually reduce volatility,” he said.
Identifying undervalued pockets
While Rampa acknowledged the presence of overvalued stocks, she also pointed out that there are opportunities to identify undervalued pockets within each asset class.
However, she emphasised that this analysis is conducted on a counter-by-counter basis or asset-to-asset.
“The key thing is to look for pockets of opportunities within these bubbles that may occur.”
Rampa highlighted that many property companies have observed that unlisted property participants are currently inflating some prices due to an abundance of capital chasing the same assets.
“We are going to have the same problem even on the equities side. We will have a lot of money chasing the same assets,” Rampa said adding that this means “we are going to have high valuation on the equity, property and bond side.
“Yields that were currently offered from the government and other issuers will start to come down.”
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