With US and other international markets suffering from Donald Trump’s ‘trade war’ and positive sentiment surrounding Cyril Ramaphosa, many South Africans may be looking to re-shift their investment towards South Africa instead of overseas.
In addition, new changes under the 2018 national budget have stipulated that the foreign allocation limits for institutional investors are to be increased by 5% across all categories – life insurers, collective investment schemes, investment managers and retirement funds.
Speaking on the issue, Kyle Wales, portfolio manager at Old Mutual Investment Group’s Titan boutique said that it always makes sense for investors to have a portion of their wealth invested globally.
“South Africans typically expatriate their money when pessimism about South Africa is at its peak and repatriate their money when the consensus regarding South Africa is overwhelmingly positive,” he said.
“However, this leads to significant investment losses as the currency fluctuates.”
Wales said that many people fail to consider the benefits of diversification that being invested in global equities offers.
He explained that while the expected return of a portfolio will always be lower than the return of the asset, the purpose of investing offshore is to reduce the concentration risk that comes with exposing all your investments to one market.
“This strategy works particularly well, especially if the assets in your portfolio underperform at different points in the cycle,” he said.
In these instances, Wales said that the risk of the portfolio can be below the weighted average risk of all the assets within the portfolio.
“This holds true for the MSCI ACWI and the JSE ALSI because, since 2008, their rolling annualised 5-year returns have exhibited a low correlation with each other.”
“Better diversification, however, is not the only reason investors should invest globally. Investing offshore offers South African investors a world of growth opportunities,” he said.
“Why would an investor limit themselves to an investable universe of $1.2 trillion (the market cap of the JSE), much of it concentrated in a handful of companies, when you could be investing in an enormous universe of $79 trillion in which no single stock accounts for more than 1%.
“This includes great companies like Coca-Cola, Google and Microsoft, whose products the average South African uses every day. When last did you drink a soft drink that wasn’t manufactured by Coca-Cola, use a search engine that wasn’t Google or use a spreadsheet that wasn’t Excel?
“These businesses have the added benefit of being globally diversified: so the degree to which they are impacted when one country invades another – think Russia and Ukraine, its neighbours boycott it – think Qatar, or a finance minister is replaced – think South Africa, is very small indeed,” he said.
Wales pointed out that one potential risk of investing internationally is that global markets are currently expensive.
However he highlighted that this is often outweighed by the value that is being offered.
“Looking from the top down, this is true, but there are many companies that individually offer value. An example of this is Legal and General, a UK insurer, which trades on a low forward P/E multiple of 11X and a dividend yield of 7%, even though it is growing at high single to low double digits,” he said.
He added that even though some of the stocks which look expensive at the moment – like the so-called ‘FANGs’ (Facebook, Amazon, Netflix and Google) – they look far cheaper if you adjust for the multi-decade growth opportunities that are available for them to exploit.
“A stock that can grow its earnings north of 20% per annum doubles its earnings in just north of three years – not in five, due to the benefit of compounding – and one that can grow north of 50% – as Facebook did – doubles its earnings in less than 1.5 years, not 2,” said Wales.
Wales said he believes the only sensible investment strategy for the average person is to decide what portion of their monthly savings they wish to invest globally and what portion in South Africa,and to keep this percentage stable – regardless of what happens in South Africa.