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Offshore Investing Can Be Lucrative

One of the earliest lessons a student of investment markets learns is not to let emotion dictate investment decisions. Unfortunately, that’s exactly the mistake most private investors make with offshore investing.

Eamonn Ryan

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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.

Currencies Count

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.

Before becoming a financial writer and freelance journalist in 1997, Eamonn Ryan was a legal adviser, company secretary and alternate director at listed company Cashbuild Limited from 1988 to 1997. Since becoming a financial writer, he has focused on the business and financial sectors, as well as personal finance, writing for Finweek, The Star Business Report, Sunday Times Business Times, Business Day, Mail & Guardian, Entrepreneur, Corporate Research Foundation (which brings out a series of books each year ranking SA’s best employers and best managers), as well as a host of once-off and annual publications such as ‘Enterprising Women’ and ‘Portfolio of Black Business’. He also writes media releases, inhouse magazines and sustainability or annual financial reports for various South African corporates and financial services groups, including the Ernst & Young annual M&A book.

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1 Comment

1 Comment

  1. joe johnston

    Jun 22, 2011 at 00:27

    I think when you say that pegging a currency against another one reduces volatility, that is a subjective statement. It could go either way, up or down and the risk you now carry is not in your own economy’s strength, but based on another economy’s strength. Your currency might be less volatile for speculators to hurt, but in terms of risk, it’s much greater. Even though I said risk, consider the domino effect that could take place if the dollar tanks. If that ‘tanking’ does occur ( it’s not unrealistic to state that the US economy is on thin ice ) then all those asian currencies are going to see speculators milk them like obese cash-cows turning into drought-stricken cattle.

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Investing

The Best Way To Get Your Teenager To Start Investing Right Now

Jeff Rose advises a young fan on where to start his investment journey.

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In this video, Entrepreneur Network partner Jeff Rose talks about receiving a letter from a young investor, who is looking for advice on how to begin investing.

Rose talks about the act of actually doing the investing versus worrying about reading books or asking others about the process. Taking action gets the most results, since you are able to make mistakes and start the learning process. Taking action also leads to more experience, which is to say if you begin investing as a teen, you will be much more savvy about investing as a twenty-something.

In answering this young investor’s concern about investment direction – the fan hopes to balance short-term gain and long-term gain, as well as to establish some padding for a future business – Rose turns him in one specific direction: A Roth IRA. When he was younger, Rose didn’t even know what a stock was until far into his college years; during this time, he discovered the Roth IRA and learned of its compounding power, as well as the accessibility of an initial investment.

As another route, Rose also mentions starting a business. This path, Rose explains, will help you achieve the most return on investment.

Related: Making International Investing Simple And Transparent – CybiWealth Digital Platform

Click on the video to hear more tips for a younger investor.

This article was originally posted here on Entrepreneur.com.

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5 Insider Tips Every Trader Needs to Know

Here are five insider tips that every trader needs to know.

Ethan Featherly

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Like in every profession, there are a lot of figures circulating regarding how many forex traders actually make money, and how many traders lose more money than they earn. We are not going to launch into speculations that we can’t prove with accurate statistics. However, there is one thing we can say without citing any official sources: there are more people losing money than those earning.

Why? The answer can be found in the annals of human psychology. Some go into forex expecting to get rich overnight, while others do not (understandably) have the time to dedicate themselves fully to this activity. So what can you do, concretely, to join the group of people earning money? Here are five insider tips that every trader needs to know.

1. Choose a Methodology and Stick With It

Even before executing your first trade, you need to have a rough idea on what you will base your decisions on. In this sense, you must know what intel you will need to make the appropriate decision, like when to enter and exit a trade, which timeframes are the best (more on that later) and so on and so forth.

Some people are partial toward fundamental factors (foreign investments, inflation, unemployment rates, and other economic indicators), coupled with a chart, for executing a trade. Others prefer the raw numbers and stats of technical analysis.

But, whichever methodology you choose, make sure to be consistent and that it is adaptive, as there is no objective way to tell if one is truly better than the other. The most important thing to consider is whether or not your methodology and the strategies built around it are adaptive enough to keep up with the changing dynamics of the forex market.

Related: How Founder Of 27four Investment Managers Drove Transformation In The Industry

2. Always Calculate Your Expectancy

Expectancy is a formula that traders use to determine how reliable their trading system is. It involves going back in time to your previous trades (a journal will come in handy here), measuring how many traders were winners versus losers, and then finding out how profitable your winning trades were as opposed to how much money was lost after bad trades. The formula is as follows:

E=[1+(W/L) x P – 1, wherein W is the average winning trade, L represents Average Losing Trade, while P is Percentage Win Ratio.

3. Define Your Trading Goals and Build a Strategy Fitting of Your Personality

forex-tradingMost forex beginners come into the market thinking that they know everything that one could possibly know, without any sort of long term plan or concrete goals. This is the one mistake that eventually leads most traders to quit forex, because the reality of the market – and the trade itself – will hit them straight on sooner rather than later.

Therefore, the first thing you need to do is set a couple of goals. Start small and realistic at first – do not set yourself for winning a ridiculous amount of money in the first months because you will be sorely disappointed.

After setting the goals, you can start looking at various trading strategies and see which ones will help you achieve these goals and, most importantly, whether or not they are a good fit for your personality.

Some helpful questions to ask in this case are in the lines of ‘’Do I feel comfortable holding positions overnight?’’ or ‘’How much risk am I willing to assume for a given trade?’’, ‘’Am I more comfortable following a trend or betting against it?’’, ‘’Will I trade to gain some additional income, or full time?’’. Another equally viable method which will help you asses your strengths and weaknesses is doing a personal SWOT analysis.

4. Make use of Multi Time Frame Analysis

Regardless of whether you are a swing, day or long term position trader, it is highly recommended you always approach trading in a top-down fashion. This technique involves starting with a higher time frame chart and gradually zooming down to your current trading time frame chart. By doing this, you can get a ‘’big picture’’ view of the price action.

This tip is important because many traders commit the grave error of building their trading decisions around the time frame in which they are currently trading. For instance, when a trader sees a hammer candlestick pattern on a five-hour chart, they push forward with the trade without considering what might happen in the following time frame. What you are doing here is similar to a game of chess – you have to think a few steps ahead and choose your forex trading products and tools wisely in order to land a successful trade.

5. Do Not Use More Indicators Than Necessary

Indicators are simply visual representations of market realities that show things such as price movements, patterns and the like. As useful as they are, after trading for a while, you will soon realise that at some point they become quite counterproductive.

Many traders will tell you that the only indicator that you need is price, and everything else is there just to make one understand how the market got to that point. And since succeeding in the forex market is mostly about getting in on a trend before anyone else spots it, you can probably guess why over-crowding your monitor with indicators is not such a good idea.

Conclusion

Whatever some might tell you, forex is not a walk in the park. Like everything in life, it takes hard work and dedication to reach the point where you can state without doubt that you have achieved excellence. However, even the most dedicated and hard-working traders need a push in the right direction in the form of some lesser known insider tips that only traders will know. Hopefully, the tips in this article will provide you with the insight necessary to take your trading efforts to the next level.

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Time For An Alternative Investment Approach

The age of high-risk, high-reward thinking may be all but done, for now.

Fedgroup

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For years the investment formula applied by investors has been to craft a diversified portfolio of assets weighted more towards equities. It made sense to build a foundation on safe, low-risk, low-return capital preservation investments and, depending on your age, allocate a relatively larger portion of your investable income into higher risk, higher return equities.

But is this justified in the local context? While global equity markets have enjoyed a decade-long bull run following the 2008-2009 financial crisis, consistently delivering 10% to 15% annual returns, the JSE has been a perennial under-performer over the last four to five years.

Volatility

Despite this fact, significant investor capital has continued to flow into local equities, either directly into stocks or via unit trusts, ETFs and endowments.  And now amid more volatile global economic conditions, where global indexes have come off record highs in early 2018, local equities are still projected to underperform in the medium-term as the market correction that many predicted gathers momentum.

Related: Investing In Wealth-Generating Assets

This shift is symptomatic of the volatility that currently characterises global markets as Brexit plays out, trade wars intensify, and widespread socio-political instability creates systemic economic risks. Yet, investors are still being advised to put their money into higher-risk vehicles.

Further compounding the issue is the fact that the country’s exchanges are dominated by a few large entities, which are all negatively impacted by the country’s dire economic situation. This means local investors must also contend with concentrated risk.

Outdated thinking

Despite these threats, many financial advisors have stuck to the traditional investment playbook by telling clients to “stay calm and remain invested in equities.” But given the prevailing market conditions, investors can realise better returns from investment opportunities that break from this conventional approach.

Returns from various fixed-rate investments, for example, have and continue to outperform equity investments, and do so without the associated risks.

While reducing risk is not necessarily a key concern for naturally risk-included entrepreneurs, when it comes to investing our hard-earned money we have the power to manage that risk. So, forget the old, pervasive attitude of “no risk, no reward.” It’s dated and, quite frankly, unwarranted.

The new reality is that fixed-term, low-risk investments have become among the best-performing asset classes — a fact that is tearing at the foundations of conventional investment advice. Entrenched beliefs must therefore be challenged, especially when investments that offer security can match or outperform high-risk options such as equities.

So, what are our options, given that fixed-rate investment options currently abound? Well, before diving into a vanilla offering from a bank, consider what your capital is secured against.

Forward-looking investments

forward-looking-investments

Banks generate their returns by lending out pooled deposits in the form of loans and credit. Some of this lending is secured, much of it is not. This can introduce risk into your investment, because the ability of debtors to repay debt is often compromised in a struggling economy, and bad debts will impact the returns that a bank can offer depositors.

Forward-looking secured investments, on the other hand, offer a set rate for five years and are secured against a variety of assets, like Fedgroup’s Secured Investment in participation bonds, which removes significant risk from the equation. These types of collective investment schemes are also regulated to protect investors.

Related: Balancing Business And Investment Risks

While it may not be prudent to completely disinvest from the local stock market, there is a case to be made to be more circumspect with future investments, matured investments, or that portion of your portfolio that is earmarked for reallocation. With this money, an investment that delivers both capital security and a high, fixed rate of return might well prove more attractive than the traditional wisdom of local equities.

The guaranteed, low-risk returns currently offered by fixed-rate investments have transformed these products from fringe options into mainstream investment vehicles that can no longer be ignored. With the chance to outperform the average equity investor, isn’t it time to rethink your conventional investment approach and consider the lucrative and, more importantly in such volatile times, secure opportunities offered by these alternative investment options?

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