Should I join the rush offshore?

Johannesburg - The collapse of the rand, which has fallen from more than R10 to the dollar to nearly R14 to the dollar in the past year, has evoked two distinct reactions from investors.

There are those who see this as the beginning of the end and are making plans to take as much of their investments as possible offshore; then there are those who think the rand has fallen too far and will recover, providing a better opportunity to take money offshore at a later stage.

The latter tend to be those investors who were burnt in the 2001/02 rand collapse. When the rand weakened from R8/$1 to nearly R13/$1 in the space of a year, investors poured money into offshore markets.

Unfortunately for them, the rand recovered substantially, returning to nearly R7/$1, and, rubbing salt into the wound, offshore markets produced virtually no return in the following eight years, while the South African stock market trebled in value.

So, once again, people are asking where the rand is heading – but that question is perhaps best left to people who believe in crystal balls, usually economists. A far more important question for an individual is: “How does offshore fit into my portfolio?”

As Ronen Yudelowitz, financial adviser and committee member of the Financial Planning Institute of Southern Africa, explains, moving money offshore needs to be contemplated against the backdrop of a holistic financial plan.

“One should avoid taking money offshore based on hype and rather look at the fundamentals of such an investment,” says Yudelowitz.

These would include whether you have offshore obligations like educating a child abroad, for example, or if you plan to retire overseas. In that case, you may need a higher offshore component than the average investor. You also need to consider whether or not you can afford the risk associated with fluctuating exchange rates. For example, a pensioner in South Africa relying on an income from the investment could not afford for the rand to strengthen.

Most financial advisers would agree that there is always a case for having some offshore exposure in any well-balanced investment portfolio.

As Sangeeth Sewnath, deputy managing director of Investec Asset Management, says: “By world standards, South Africa is a small economy with a relatively illiquid and volatile stock market.”

The FTSE/JSE All Share Index makes up just less than 1% of the world’s market capitalisation. To put that in perspective, the returns of the JSE are driven by 100 major companies. In comparison, the MSCI All Country World Index is made up of 2 500 companies. This means offshore exposure reduces your risk from a single country and only 100 shares to multiple currencies, countries and thousands of companies.

Pieter Koekemoer of Coronation Fund Managers argues that the reasons to invest offshore are not about which currency or investment will do better over the next 12 months, but rather for strategic reasons such as diversification and access to larger markets.

“For the typical South African investor, aiming to retire here and with children planning to live here, this strategic weight is somewhere in the 20% to 40% range.”

The rand has held up relatively well

As Koekemoer explains, most of this return has come from a stronger dollar, which strengthened 35% to 75% against most emerging markets and commodity-producing currencies. It may come as a surprise to investors, but the rand has performed relatively well against the dollar compared with other emerging and commodity-based economies.

While the rand has lost 17% so far this year, the Brazilian real has virtually collapsed, weakening 40%, and the Australia dollar is down 22%.

With a weakening economy, many economists believe the rand is still fragile. Investec’s Sewnath says that even without a weaker economy, a currency will always depreciate in line with the difference between its inflation rate and that of its trading partners.

Local companies look expensive

South Africa’s markets are not looking cheap. Koekemoer explains that although mining companies have seen lower share prices, other industries have seen rising share prices over the past few years, with the financial and industrial index up 22% a year.

“This means that a big part of our market remains richly priced and, therefore, susceptible to more downside,” says Koekermoer, who believes that other emerging markets offer far more investment opportunities than South Africa at the moment, and that the rand remains vulnerable because of weaker commodity prices and budget deficits.

Other markets show more value

Koekemoer says many investors are moving money into developed markets such as the US, the UK and Europe, but he argues that the best opportunities lie in emerging markets because these markets and currencies have fallen significantly over the past three years and are showing value.

Coronation’s multiasset funds remain at full offshore weightings.

Koekemoer says that, of these, about 30% are invested in emerging markets.

This is not a short-term decision

It is impossible to predict the rand’s movements over the next year, so the decision to invest offshore should not be made on short-term decisions, argues Sewnath, who says that studies have shown that returns of foreign investments measured in rands over shorter time horizons are more affected by the exchange rate than investment returns.

It is only over longer-term horizons that the underlying investment contributes more to the return than the exchange rate. Therefore, when investing offshore, you must take a long-term view to benefit properly from the return potential of the international assets in which you are invested.

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