The challenge is how to get private investors, mostly wealthy people who invested offshore a decade ago and are in some cases still in the red, to see value offshore.
Traumatic experiences are making many people blind to what is probably the best investment opportunity of the coming decade — the fact that one can buy world-class American and European companies at the same price as fairly average local ones. While the private investor is in danger of missing out, the institutional market is taking full advantage, with pension funds ramping up their offshore exposure to the maximum 25% (with a further 5% allowed for Africa). For instance, Gareth Johnson, branch head of Alexander Forbes Financial Services says institutional investors are investing almost too much in their offshore forays. If these in-the-know investors are so sure of the offshore market, should the private investor not be following suit?
Best Asset Class of 2011/12
John Duncan, technical marketing manager at Rand Merchant Bank Unit Trusts, says: “International funds will possibly enjoy a podium finish this year after disappointing local investors for over a decade. An overvalued rand may still continue to benefit from elevated commodity prices and favourable interest differentials in the next quarter or two but a weaker bias would underpin rand returns for international funds and balanced funds with rand exposure. Investors may have to wait until 2012 for some payback but the fundamentals appear to have swung in the favour of offshore assets.”
For those too-cautious investors who missed the JSE rally, there is still an opportunity to catch the offshore one. During the first seven weeks of this year the US market rose 7%, similar to the increase of the MSCI World index, while the JSE was down 5% (each in dollars) for an 11% differential. In addition, the rand has also weakened somewhat.
Stanlib Retail director Paul Hansen says the US market is up 28% in dollar terms since August last year and 26% in rand terms. “There’s no question private investors have already missed the first boat,” says Hansen, while urging that there’s still time for latecomers.
“The economic recovery in developed economies remains in its early phase, their interest rates remain low and despite the recent rally equities remain at historically low forward valuations of 13,7 times,” he says. In fact, the US market is still at its 1999 level, as is the MSCI World Index (or 2000 level in rand terms).
Last year the enthusiasm was all for emerging markets because of their superior yield to developed markets, but that story has changed in recent months with the impact of inflation. Hansen says he does not expect any improvement in emerging markets until food inflation cools, thereby leaving the field open to developed economies like the US, UK and the rest of Europe.
“The US is anticipated to deliver record corporate earnings by the end of 2011, last seen in 2007, on top of its low valuations. We see strengthening consumer spending, so it is still a sweet spot for equities. Therefore, we still like offshore despite the recent rally. At Stanlib, we’re very overweight offshore equities, and slightly underweight local equities,” he says.
With retail investors running scared of equities, there is little else to appeal in the offshore market: the money market is offering a 0,05% return and the bond market 3% to 5%. Stanlib reckons the average investor should prudently have 20% to 30% of their total assets offshore, within a wider range of 15% to 40%. Stanlib head of offshore investments, Anthony Katakuzinos, says the rationale for investing offshore should not require any further explanation than the facts that South Africa accounts for barely 2% of the global economy, we’re an emerging market, and we remain highly concentrated on commodities.
“Offshore gives you exposure to a lot of key industries that simply do not exist on the South African markets, and at valuations that compare favourably with local listed companies. Furthermore, offshore gives you exposure to other emerging markets.”
Incredible statistics abound, with China boasting 850 million mobile phone users and now overtaking Japan to become the world’s second-biggest economy. Brazil has added 2,6 million jobs to its formal sector alone in 2010. Investec Asset Management reports that returns to date have vindicated this approach, with developed markets delivering a disheartening -2,9% to rand-based investors over the decade ended 31 January 2011, while emerging markets surged 128% and South Africa delivered an astonishing 197% over the same period.
“The nature of diversification is that countries all perform differently, so it stabilises a portfolio,” says Katakuzinos. Recognising the bad experiences that many investors have had offshore, he says people have to put that behind them, just as they have to put any sort of poor investment behind them or miss out on future opportunities.
“Back in 1998/99 at the height of the offshore dot.com bull market, valuations were 35 to 40 times, whereas today the MSCI Worldwide index is 15 times, and on a forward earnings is only 12,5 times. In addition, the rand is extremely strong compared to a decade ago — so the circumstances are vastly different.”
Given that retail investors remain highly cautious and conservative following recent market volatility, Katakuzinos points out that property funds are currently offering superior returns to vanilla cash investments for the conservative investor. “They’re showing reasonable yields of 5% to 7%, compared to less than 1% on the money market,” he adds.
For cultural reasons, South Africans tend to look first and foremost at the US dollar, the British pound or the euro as a distant third, when it comes to selecting a currency for their offshore investments.
Tristan Hanson, head of asset allocation at Ashburton, describes what he calls ‘some very interesting alternative currencies’. “We tend to like currencies in emerging markets at the moment, especially in emerging Asia. Through our products we are in a position to give clients exposure to currencies such as those of China, Korea and Malaysia, which we believe will appreciate over the long run.” Unlike the rand (and currencies of developed economies) these currencies do not float entirely free but are closely managed by their central banks, primarily against the dollar, reducing volatility.