THE CASE FOR OFF­SHORE IN­VEST­ING RE­MAINS STRONG

Finweek English Edition - - COVER - ed­i­to­rial@fin­week.co.za

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.

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