The compelling story of investing offshore

The global economic growth outlook for the year is far from rosy, with real prospects of it slowing to below 3%, meaning we are heading for a global recession. 

According to the World Bank, growth is expected to slow from the revised 3% for 2018 to 2.9% in 2019. 

International trade and manufacturing activity has softened, trade tensions remain elevated, and some large emerging markets have experienced substantial financial market pressures.

Neil Shearing, group chief economist at Capital Economics, says that while growth of below 3% may not sound like a big deal, one has to be mindful of the earlier statement by the International Monetary Fund (IMF) according to which a figure below 3% constitutes a global recession.

There is little reason for optimism since many of the causes of this downward growth trajectory remain firmly in place – Britain is still without an exit from the EU, trade tensions between the US and China remain, and country-specific issues are starting to emerge across the globe.

Economic growth of below 3% would be a “worse outcome” than most analysts currently anticipate. 

It is likely to produce a combination of weaker stock markets, lower bond yields and renewed easing by the world’s major central banks, says Shearing. 

Over the last decade investors have become accustomed to achieving higher-than-average returns with a lower level of volatility.

Radhesen Naidoo, business analyst at Allan Gray, says that while 2018 was a disappointing year for global stock markets overall, with the MSCI World Index down about 9%, the S&P 500 down 4% and MSCI EM Index down 15%, it can also present opportunities.

The South African economic growth outlook, meanwhile, also remains grim with concerns around current debt levels, the impact of unstable electricity supply and general elections on 8 May.

Good time, bad time, anytime

“Considering all these elements it is probably an important time to consider introducing offshore exposure if it is something that you do not hold already,” says James Newell, head of investments for the Maitland Family Office.

The South African economy contributes around 1% to global gross domestic product (GDP) and the companies listed on the JSE, especially if you strip out the likes of Naspers* and Richemont, is but a fraction of what is available globally. 

A primary reason to invest offshore is of course to achieve portfolio diversification. 

And with that in mind there really is not a “bad time” for global exposure, although there may be greater opportunities at specific times, says Newell. Paul Hutchinson, sales manager at Investec Asset Management, says SA remains an emerging market although there are “pockets of first-world industries” such as banking and mining, and our roads and ports infrastructure.

“By world standards, though, we are a small economy with a relatively illiquid and volatile stock market. 

Investing in international markets provides access to countries, currencies, asset classes and industries that are not available locally.”

The way to go

Investors can access global shares, exchange-traded funds (ETFs) and other collective investments through SA stockbrokers and private client portfolio managers. 

“There also are a number of share trading platforms available which give investors the ability to buy shares and ETFs on any of the major exchanges,” says Chris Potgieter, head of Old Mutual Wealth Private Client Securities.While there are many unit trust funds in SA that provide offshore exposure, an increasing number of astute investors are choosing to invest directly in global companies listed offshore, he adds.

Citadel chief investment officer George Herman says a basic method of gaining global exposure is buying shares in companies listed on the JSE that derive a major portion of their income from foreign sources, or companies that are dual-listed, commonly known as rand-hedge stocks. 

A direct investment is possible by using the discretionary allowance (a maximum of R1m per individual per year, including a R200 000 travel allowance), or by obtaining tax clearance from the South African Revenue Service (Sars), at a maximum of R10m per individual per year. 

“Once the hard currency is overseas, you can then invest in line with your objective in funds or portfolios,” says Herman. 

These funds can remain offshore.The proportion of your investment should be determined by a thorough personal financial analysis, and not by an emotive decision informed by the “mood” in the country. 

Each person’s liability structure and risk preferences will dictate what proportion of their investments should be offshore, says Herman.Newell says with asset swaps (where you can invest into a rand-denominated fund which uses its asset swap capacity, or the investor can open an asset swap account with a local provider) the investor needs to be cognisant of the fact that when that account is closed, the funds have to be repatriated to SA. 

Allan Gray’s Naidoo advises to adopt a “regular approach” to investing offshore, rather than making a once-off investment decision or, for example, trying to time the rand.

Investors should determine how much of the investment portfolio they want to place offshore, what they want to achieve by doing this and then formulate a plan to invest as regularly as possible in carefully selected assets. 

The exposure

Based on Allan Gray’s research into the average SA household’s spending habits on imported goods and services, the company believes that investors should have 30% to 50% of their total investment portfolio offshore. 

Typically, during times of volatility and negative market returns, many investors tend to buy shares and assets that make them feel comfortable, says Naidoo. 

But in doing so, they then often ignore the relationship between price and intrinsic value. (See article on investment risks on p.34)

He warns against “popular investment opportunities”. 

If an investment is popular, then that popularity will already be reflected in the price investors have to pay.

“It’s a good idea to partner with an offshore manager whose investment approach is one that you can understand, and who will identify good investment opportunities on your behalf,” says Naidoo.

Opportunity knocks 

Old Mutual’s Potgieter believes emerging markets, led by China and India, are going to be the drivers of global economic growth for decades to come. 

“The ultimate driver of equity investment returns is corporate earnings, and the long-term driver of corporate earnings is economic growth. As such, emerging markets will play a significant role in driving global equity investment returns.”

He says if long-term capital growth is the objective – and assuming that valuations are favourable – then broad sectors such as information technology, healthcare and consumption are places to look at.

However, within these broad sectors there are sub-sectors that can be more attractive or less attractive than the broader sector. 

For example, within consumption, there are staples and discretionary products. 

Within discretionary goods, there will again be sub-sectors such as luxury goods. 

“The emerging market consumer presents an attractive market for the long term. Personal Consumption Expenditure (PCE) is likely to increase considerably in these markets over the next two decades – whether that be for basics such as food, education, healthcare or for the consumption of fashion and luxury goods and entertainment or travel experiences.”

If growth is the objective, he recommends avoiding sectors such as utilities and industries that are in decline, such as print advertising.

Maitland’s Newell currently sees more opportunity in the US market – not in large-cap stocks but rather the mid-cap sector which consists of smaller businesses.

They do see investment opportunities in Europe as some of the troubles in the region fade. 

Emerging markets, despite the high risk, also offer opportunities.

“What we recommend is to allocate funds broadly on an asset-class basis. We find fund managers that we are comfortable with. We would use a range of funds that are exposed globally and let the fund manager decide on the underlying assets,” says Newell. 

According to Herman, emerging markets are significantly more volatile than developed markets, and SA investors should carefully consider where they want to invest, since they already face emerging market risk through their SA assets. 

“Bonds, however, are overvalued in developed markets due to the lingering effects of quantitative easing, as well as a lack of inflation. Bonds in SA are fairly valued on economic fundamentals, and barring credit ratings-risk, present very compelling value.”

The right mix 

Portfolio diversification is a fundamental concept in investing and is ultimately about risk management, says Old Mutual’s Potgieter. 

“While it’s very intuitive and easy to understand – don’t put all your eggs into one basket – the implementation is quite a balancing act. Many investors often find themselves with too much concentration (in a specific market, asset class or sector), while others settle for average performance because of over-diversification.”

Effective portfolio diversification will lower the volatility of a portfolio because not all asset classes, industries and sectors, or geographies perform in sync. 

Therefore, by owning investments in different industries, companies and even geographies, industry, company and geography-specific risk is minimised, he explains. 

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the 18 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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