South Africa’s political and economic fortunes may have turned the corner, and the strong rally in global equities seen over the past decade appears to have ended. But the case for investing offshore is as compelling as ever – particularly as the rand’s strong gains over the past year means investors will get more value for money.
However, there is broad consensus that taking money offshore primarily to hedge against possible rand weakness is a mistake, as the volatile currency repeatedly defies expectations – its appreciation of more than 8% since early 2017 took asset managers, analysts and currency traders by surprise.
The main reason for investing in foreign markets remains the fact that they offer more opportunities to diversify assets and mitigate risks, as the structure of the JSE is highly concentrated in a few large companies, asset managers point out.
“If you invest offshore now, you do it from a position of rand strength,” says Rhynhardt Roodt, the co-head of Investec Asset Management’s 4Factor global equity team.
“But it’s more about diversification – people often miss how small the South African investment market is – there’s a whole world out there.”
Another factor to consider is that for the first time since the global financial crisis in 2008, there is synchronised global growth, the main factor that drives corporate profits and share prices.
Although markets are likely to remain volatile this year after a spectacular plunge in January, the trend in global equities is likely to remain upwards – so if your investment horizon is more than 10 years, the best place to be is in equities, Roodt adds.
Hywel George, director of investments at Old Mutual Investment Group, says he believes that equity market valuations are generally not “unduly expensive”, particularly outside the US, towards which most South African investors gravitate.
He shares the broad view that European markets are more attractive, both in terms of price and the fact that they are export-orientated.
“If global growth is going to be strong, you want someone who can export into that very effectively. I think profits are going to surprise on the upside in Europe.”
Germany is the accepted favourite on the continent, with what is arguably the best-managed economy, industrial sophistication, productivity, and the euro – which is expected to continue strengthening against the dollar this year.
Asset managers are also keener on emerging markets than they have been in the past, with inflows so far this year undisturbed by rising US interest rates, which normally signal a risk-off environment and trigger capital flight from developing economies.
Emerging markets will drive global economic growth this year. The World Bank forecasts their pace of growth at between 4.3% and 4.5% this year and next, compared with just 2.3% and 2.2% in developed economies over the same period.
Old Mutual Investment Group SA says global equity remains its preferred asset class, with an expected real return of 4.5% over each of the next five years. In SA, it anticipates real returns lower than the average of 6.1% over the past five years.
Nonetheless, the ability of government to implement its planned growth-enhancing reforms could boost returns over the next few years.
Although the JSE rose by 21% last year, when large multinational companies like Naspers are stripped out, local stocks have gone “nowhere” and therefore offer better value, says Mark Lindhiem, head of strategy at Alexander Forbes Investments.
“SA is a much more attractive place now than it was three to four months ago,” he adds.
Emerging markets are widely seen as the place to invest this year – even though SA is part of this asset class, it only accounts for about 7% of the emerging-market benchmark, so you would get 90% of your exposure on other emerging markets, says George.
Asset managers favour China over India, as the Indian market has performed better on the back of faster growth, and valuations are much more expensive as a result. They also see good opportunities in South America and Mexico.
“The best thing to do is to buy an emerging-markets fund and get that diversified exposure. It’s a highly technical call, so it’s an area where you would really like to entrust a professional investment firm to make those calls for you,” George says.
The big question, as always, is how much of your portfolio to invest offshore. There is no magic formula, as this depends on your goals – which country you plan to retire in, whether you will send your children overseas and whether you like going on overseas holidays.
Adrian Saville, chief executive of Cannon Asset Managers, has the contrarian view that this makes currency the most important consideration in your allocation.
“You must choose a currency that is likely to do better than your own currency in time – choose countries and currencies that are well managed,” he recommends.
Although they are reluctant to provide general guidelines, asset managers estimate the amount that investors should hold offshore at between 35% and 50%.
But there are big risks. At present, the biggest threat is that US interest rates will rise faster than expected as momentum in the economy builds and inflation climbs.
This will hit treasuries hard and have a negative impact on global equities – including those in SA and other emerging markets, so no market will escape the fallout.
Most asset managers advise against investing in global bonds. This is because they are expected to deliver negative returns over the next five years despite the understanding that they're less volatile.
The other big threat to investing offshore – although it will also affect SA – is the risk of a global trade war sparked by US President Donald Trump, who slapped tariffs on all steel and aluminium imports at the start of March and then announced an additional $60bn in tariffs on some Chinese imports.
The Chinese have since retaliated, saying they plan to impose tariffs on roughly $50bn of imports from the US.
On the upside, Trump secured a trade deal with South Korea – the type of bilateral arrangement that he wants.
At the same time, the US stock markets have clawed back much of the losses triggered by mounting concern over the impact of Trump’s threats.
It might be a good idea, however, to avoid the technology sector – at least in the short term – which has suffered amid concerns over regulatory oversight, especially in terms of advertising revenue following the backlash against Facebook after the data-harvesting exposé.
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.