Off­shore, on­shore or ex­plore the con­ti­nent

Global mar­kets get in­vestors think­ing

Finweek English Edition - - Creating wealth - BY SHAUN HAR­RIS shaunh@fin­week.co.za

THE WOB­BLE IN global eq­uity mar­kets, mi­nor as it has been so far, has had private in­vestors think­ing. Two op­posed lines of thought seem to be emerg­ing. One is a sud­den and largely un­jus­ti­fied fear of off­shore eq­ui­ties (I’m lim­it­ing the ar­gu­ments to eq­ui­ties, though pru­dent off­shore ex­po­sure should in­clude other as­set classes as well). It goes along the lines of: “I’m in­vested in an off­shore fund, I’ve seen the ma­jor global in­dices take a knock, is it time to bail?”

The sec­ond has been a re­minder to some in­vestors that there’s a mar­ket be­yond our borders and per­haps that part of their port­fo­lios should be in it, as the JSE isn’t im­mune to global mar­kets. In the week or so fol­low­ing the crack in the Shang­hai mar­ket (which, in­ci­den­tally, has re­cov­ered fully) the S&P 500 and FTSE in Lon­don both dropped be­tween 5% and 6% but, back home, the JSE all-share, in rand, lost 7,5%.

Now th­ese in­vestors are say­ing maybe I should spread my risk and go off­shore. One even said to me he was aware his off­shore eq­uity ex­po­sure was low but with global mar­kets look­ing weaker this was a good time to con­sider buy­ing for­eign eq­ui­ties.

Sen­si­ble long-term in­vestors won’t buy ei­ther ar­gu­ment. Off­shore di­ver­si­fi­ca­tion is a nec­es­sary part of a bal­anced in­vest­ment port­fo­lio and those with a long-term view will prob­a­bly ride out for­eign mar­ket cor­rec­tions.

How­ever, for those in­vestors who want to go off­shore is now a good time to buy for­eign eq­ui­ties? Larry Jones and Pa­trick Gif­ford, chief in­vest­ment of­fi­cer and a con­sul­tant re­spec­tively at Ned­group In­vest­ment Ad­vi­sors in Lon­don, say eq­ui­ties world­wide aren’t par­tic­u­larly ex­pen­sive rel­a­tive to his­toric val­u­a­tions or com­pared to bond mar­kets.

They ar­gue that while there’s no guar­an­tee that re­cent strong rates of earn­ings growth will be sus­tained “global GDP growth re­mains healthy and at­trac­tive op­por­tu­ni­ties ex­ist in many mar­kets”.

A sim­i­lar ar­gu­ment can be made for SA eq­ui­ties. Dave Eliot, CEO of Imara As­set Man­age­ment SA, feels re­cent weak­ness on the JSE of­fers an op­por­tu­nity for as­tute in­vestors. “We wel­come the cur­rent pull­back in share prices and look for­ward to be­ing able to buy se­lected stocks on at­trac­tive yields.”

With the econ­omy grow­ing at around 5% and in­fra­struc­ture and as­so­ci­ated spend­ing com­ing through, Eliot feels cer­tain com­pa­nies in the cor­po­rate sec­tor will bol­ster prof­its. “There’s no slack in our econ­omy and short­ages – es­pe­cially of skilled man­power – have be­come the name of the game. Watch mar­gins rise.”

In­vestors shar­ing those views have then to de­cide how much to put into SA eq­ui­ties and how much off­shore. It’s a ques­tion I’ve of­ten asked in­vest­ment pro­fes­sion­als and, if I get an an­swer, it’s any­where be­tween 15% and 30% of a port­fo­lio or “as much as you can af­ford”.

It re­ally de­pends on an in­vestor’s risk profile, as­sets and li­a­bil­i­ties and what he plans to do with the off­shore com­po­nent of his in­vest­ments. In this case it’s prob­a­bly best to con­sult a good in­de­pen­dent fi­nan­cial ad­viser.

But here’s an in­ter­est­ing thought for in­vestors want­ing to stay in eq­ui­ties but per­haps seek­ing some pro­tec­tion against re­cent volatil­ity in global mar­kets and on the JSE. It seems that other stock mar­kets in Africa tend to have a low cor­re­la­tion with the main bourses world­wide and be­have al­most con­tra­cycli­cally.

Now I can see the Afro pes­simists throw­ing their hands in the air, point­ing to geopo­lit­i­cal in­sta­bil­ity and ask­ing why a South African in­vestor, who prob­a­bly has the bulk of his port­fo­lio in the lo­cal mar­ket, would want to in­vest more in other emerg­ing mar­kets, com­pared to this coun­try, which are prob­a­bly more sub­merged than the emerg­ing mar­ket JSE?

Well, Roelof Horne, who man­ages In­vestec As­set Man­age­ment’s Africa funds, says cor­re­la­tion is low. He says that bar­ring ex­changes that are con­stituents of the MSCI emerg­ing mar­kets in­dex – that’s SA, Egypt and Morocco – very few global fund man­agers are ac­tive in the other African coun­tries. “In mar­kets where prices are made by lo­cal in­vestors, global con­ta­gion un­der any gen­eral or emerg­ing mar­ket sell-off should be muted.”

The re­cent down­turn seems to sup­port that view. As part of the in­dex, SA and Egypt fol­lowed the global trend. But over the same pe­riod, four African stock ex­changes reg­is­tered gains and losses in other mar­kets were neg­li­gi­ble.

Kenya was the ex­cep­tion, los­ing 6,6%, but Horne as­cribes that to lo­cal fac­tors. And de­spite be­ing part of the in­dex, Morocco strength­ened by 2% over the pe­riod.

“As with the global sell-off in May 2006, African mar­kets have largely be­haved de­fen­sively – in line with ex­pec­ta­tions. Un­til those mar­kets be­come more main­stream we ex­pect their prices to con­tinue to be driven by lo­cal fun­da­men­tals and mar­ket con­di­tions,” Horne says.

It may take a brave in­vestor to di­ver­sify sig­nif­i­cantly into other re­gional mar­kets. But there are Africa funds – oth­er­wise what bet­ter ex­cuse to pile into a Land Rover and go ex­plore th­ese other mar­kets? I must ap­ply for leave.

The Africa op­tion. Roelof Horne

Dave Eliot

Watch mar­gins rise.

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