Taiwanese Invest Over Hundred Billion in South African Currency: 2 Strange Systems Make Taiwan the Largest Overseas Holder of South African Currency
The COVID-19 pandemic has impacted the economies of emerging markets around the world, and in particular, at the end of March, international credit rating agency Moody's downgraded South Africa's debt to junk level, causing investors holding South African currency to probably cry out this year....
According to statistics, since the beginning of this year, the exchange rate of the South African rand to 1 US dollar has fallen from 14, and even reached 19 to 1 US dollar in early April, setting a new historical low and falling by more than 30%.
There is no doubt that the South African rand is one of the worst-performing emerging market currencies, replacing Turkey and Argentina as the country most worried about by emerging market investors. However, the South African rand has always been a high-yield currency beloved by Taiwanese people, and has directly impacted high-yield bond funds priced in South African rand that were once popular in Taiwan.
According to statistics from the Fund Information Observation Station, as of February this year, out of more than 4,000 funds approved for sale in Taiwan, about 168 funds were priced in South African rand, with a total of approximately NT$300 billion (about $10.5 billion) held by domestic investors. However, if we include financial products such as South African rand fixed deposits and South African rand investment-type insurance policies that were invested in the past, the financial industry estimates that the scale is at least NT$700 billion (about $24.4 billion) or more.
A financial industry person pointed out that Taiwanese people began buying large amounts of South African rand around 2009, when almost all Taiwanese bank managers and insurance business personnel were promoting the purchase of South African rand-related products. It is estimated that the amount of South African rand purchased at the time was at least NT$10 billion (about $352 million), which helped Taiwan quickly become the first largest overseas holder of South African currency outside of South Africa.
When the South African rand falls, Taiwanese investors make money from the interest rate difference but lose from the exchange rate difference
However, ten years ago, when Taiwanese people bought South African rand fixed deposits, 1 South African rand was exchangeable for about NT$4.1. But as the South African rand has continued to depreciate, 1 South African rand is now only worth NT$1.64, which means that the South African rand has depreciated by about 60% over the past ten years.
In other words, if Taiwanese investors had bought South African rand fixed deposits ten years ago, just the exchange rate would have fallen by 60%. Even South African rand with high interest rates can't withstand the exchange rate decline, and although investors make money from the interest rate difference, they face the miserable situation of losing from the exchange rate difference when they exchange back to US dollars or New Taiwan dollars, which is essentially "Taiwanese people slowly giving their money to South Africa".
Observing the main South African rand high-yield funds currently on the market, such as the offshore funds preferred by Taiwanese people, the ANZ Income Growth Fund (South African rand) holds NT$103.3 billion in the hands of Taiwanese people, the Lippo Global High Yield Bond Fund South African rand hedged level also holds NT$4.49 billion in the hands of Taiwanese people, and the Fidelity Emerging Markets Bond Fund South African rand holds NT$2.51 billion in the hands of Taiwanese people, ranking as the top three South African rand-priced funds loved by Taiwanese people.
In Taiwan, there has been a long-standing problem with the financial system. Bank advisors and insurance salespeople tend to exaggerate the risks of investing in Taiwan, while exaggerating the benefits of investing abroad. However, Taiwan people are not familiar with overseas markets, yet they still put their money into them. Financial industry insiders have pointed out that this is mainly due to the commission structure. When Taiwanese people invest in overseas bond products, bank advisors and insurance salespeople can earn high commissions, but these products may not necessarily be the best for customers.
Looking at the top 10 most popular overseas funds held by Taiwanese people, the total amount held by Taiwanese people in just four funds, such as the AllianceBernstein Global High Income Bond Fund, the Allianz Income Growth Fund, the Franklin Templeton Global Investment Series Emerging Country Fixed Income Fund, and the Fidelity Global Emerging Markets Debt Fund, has exceeded NT$100 billion.
Among them, the first-ranked AllianceBernstein Global High Yield Bond Fund is held by Taiwanese people in an amount of NT$415.4 billion, accounting for 63% of the overall fund size, approaching the statutory limit of 70%. The third-ranked Franklin Templeton Global Investment Emerging Markets Fixed Income Fund also has a proportion of Taiwanese people's holdings to fund size of 64%.
"Why do Taiwanese investors hold such a high proportion of a single fund? Because the commission is the heaviest." Financial industry insiders observe that in the past, foreign investment trusts have discovered that the higher the commission given, the more Taiwanese bank managers like to sell, and the more Taiwanese investors buy. From the 2008 structured debt crisis, the 2009 Taiwanese people buying South African rand, the 2015 TRF incident, to the current junk bond storm, history keeps repeating itself, but Taiwanese people always lose.
Another peculiar reason is that each fund is classified into different risk-return levels based on the type of fund and investment region before it is listed. According to the "Fund Risk-Return Level Classification Standards" published by the Investment Trust and Consultant Association, the risk levels range from low to high in the order of RR1, RR2, RR3, RR4, and RR5. A significant distinction principle is that bonds are low-risk while stocks are high-risk.
One of the reasons why Taiwanese people tend to invest in high-yield bond funds (also known as junk bonds) is because the risk-reward classification of these funds is only at the RR3 level, which is considered a low- to medium-risk level. This classification does not adequately warn about the risk of default for junk bonds, which is why Taiwanese people have been buying large amounts of these bond funds.
Financial industry insiders also say that many people are currently discussing the issue of South Africa's bond rating being downgraded to junk, but as an example, they say that before the financial crisis of 2008, Lehman Brothers' credit rating was still AA, but it eventually went bankrupt. This shows that credit ratings are only the lowest ethical standards, and are a lagging indicator. "If you can invest successfully just by looking at credit ratings, that's fine, but if you can buy more than two thirds of junk bonds even with credit ratings, that's a very frightening thing."
The South African rand has recently fallen to a relative low against the New Taiwan dollar, and investors are wondering if they can take advantage of the low prices to invest. A senior financial industry executive advises against it, saying, "There are many cheap investment products available around the world, why do you have to buy the chaotic South African rand?" Investing in the South African rand is like having a 'scumbag husband', it is better to divorce earlier. If the investor is determined to take the risk and enter the market, all investment risks must be borne by themselves.