Offshore, onshore or explore the continent
Global markets get investors thinking
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
Watch margins rise.