THE CASE FOR OFFSHORE INVESTING REMAINS STRONG
THE CASE AGAINST OFFSHORE
INVESTING GOES LIKE THIS: Interest rates in the US and elsewhere are likely to rise to offset inflationary pressures and that is bad for equities. Plus, if the rand strengthens from here, the returns measured in rands will be anaemic, if not negative.
The case for offshore investing is somewhat more compelling: you have a far wider universe of possibilities and no matter the economic environment, there will always be outstanding opportunities.
Lourens Coetzee of Marriott Asset Management puts it in perspective: “The South African stock market makes up just less than 1% of global stock market capitalisation. Considering the small size of this market and that local shares are relatively expensive, we are of the view that investors who adopt a global investment mindset will be well served from both a diversification and valuation perspective.”
Companies such as Coca- Cola, General Electric and Vodafone have delivered dividend growth in excess of 8% over the past year. Coetzee says other companies worthy of mention are Johnson & Johnson and Nestlé. None of these are available through the JSE.
Based on current First World market valuations it is possible to invest in some of the largest and most recognisable companies in the world on yields higher than South African equities.
Some of Coronation’s offshore picks are Porsche, whose only asset is a 31% holding in Volkswagen; Tata Motors, which owns interests in Jaguar and Land Rover; private equity group Apollo Management; Kroton, Brazil’s largest privately- owned education business and Magnit, the largest food retailer in Russia. Coronation says it has increased its exposure to quality businesses in outof-favour emerging markets. These are companies that were selected on the basis of long-term valuations arising from industry- or company-specific issues.
I nvestors can i nvest up to R1m annually in an international fund without obtaining any prior approvals and a further R10m per annum after receiving tax clearance. By externalising your assets, you diversify sovereign risk. Pension funds are currently allowed a maximum offshore allocation of 25%.
Equities are al s o at t r actively priced relative to bonds and cash i n First World markets. Very l ow i nterest rates mean i nvestors can currently receive more income from equities than government bonds and money in the bank. This is a very rare occurrence as equities, unlike bonds, also provide investors with income growth which ultimately translates into capital growth.
As the table above shows, global equities are likely to outperform local equities over the next 10 years, while domestic bonds will have an edge over their global counterparts. That’s a significant break with historical trends, where local equities routinely outperformed global equities. Cash is expected to yield between 6% and 8% a year over the next decade, just enough to hold its own against inflation.
The chart on the left compares the dividend yields of Coca- Cola, Nestlé and Johnson & Johnson to the yields of the US 10-Year Treasury Bond and US cash.