Off­shore in­vest­ments aren’t great at beat­ing SA in­fla­tion

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

Your as­sets should match your li­a­bil­i­ties, and off­shore eq­ui­ties will have to in­crease steeply in price if they are to pro­duce re­turns that will en­able them to out-per­form South Africa’s in­fla­tion rate con­sis­tently. Laura du Preez re­ports Many fund man­agers may be look­ing to off­shore mar­kets to spice up their re­turns, but one of the smaller man­agers says you can di­ver­sify a multi-as­set port­fo­lio with­out the risks of in­vest­ing off­shore and pro­vide in­fla­tion-beat­ing re­turns.

Many larger man­agers have 25 per­cent of their port­fo­lios off­shore and very low ex­po­sures to South African listed prop­erty, but thanks in part to its small size, Grindrod As­set Man­age­ment has been able to put 25 per­cent of its multi-as­set port­fo­lios in listed prop­erty and di­ver­sify into other as­set classes, such as pref­er­ence shares.

Ian An­der­son, chief in­vest­ment of­fi­cer of Grindrod As­set Man­age­ment, says it has avoided off­shore mar­kets be­cause of the low yields and the low rates of eco­nomic growth and com­pany earn­ings in those mar­kets, whereas the lo­cal listed prop­erty mar­ket has a rel­a­tively high yield with room to grow.

Grindrod is not neg­a­tive on off­shore mar­kets, but it is con­cerned that in­vestors may be in­vest­ing over­seas for the wrong rea­sons, An­der­son says.

Grindrod fo­cuses on in­vest­ing in as­sets that are ex­pected to con­tinue to de­liver good yields in the form of div­i­dends from eq­ui­ties or in­come from listed prop­erty and other in­ter­est-bear­ing as­sets.

Most off­shore eq­uity mar­kets have an aver­age div­i­dend yield of about two per­cent, while Grindrod’s lo­cal eq­uity port­fo­lios have a div­i­dend yield of 4.5 per­cent, and its lo­cal prop­erty port­fo­lios have a yield of eight per­cent, An­der­son says.

Growth in off­shore div­i­dend yields is likely to be in line with in­fla­tion in off­shore mar­kets, which is a lot lower than the lo­cal in­fla­tion rate of around six per­cent, he says.

Lo­cal div­i­dend yields are fore­cast to grow at twice South Africa’s in­fla­tion rate, and prop­erty yields at be­tween seven and nine per­cent over the long term, An­der­son says.

To match the lo­cal in­fla­tion rate, off­shore as­set prices need to rise steeply, or your off­shore in­vest­ments could be mis­matched with your li­a­bil­i­ties, which, if you live here, grow in line with lo­cal in­fla­tion.

Over the past 11 years, off­shore eq­uity mar­kets have out-per­formed the lo­cal in­fla­tion rate by just one per­cent a year, An­der­son says.

In ad­di­tion to the volatil­ity of off­shore mar­kets, South African in­vestors face a cur­rency risk when us­ing the un­pre­dictable rand to in­vest in over­seas mar­kets.

Ge­off Blount, chief ex­ec­u­tive of­fi­cer of Can­non As­set Man­agers, is also of the view that your as­sets and your li­a­bil­i­ties should be matched. Un­like global eq­ui­ties, South African eq­ui­ties have al­ways beaten lo­cal in­fla­tion, and in­ter­est rates and yields have his­tor­i­cally been – and are likely to con­tinue to be – higher in South Africa than over­seas, Blount says.

He also takes the view that move­ments in the rand defy logic, and forecasts are likely to be in­cor­rect.

The rand’s re­cent “wob­ble” has many in­vestors again ask­ing whether or not they should in­vest off­shore and, if so, how much of their port­fo­lio to al­lo­cate, he says.

But the rand should not in­form your de­ci­sion; in­stead, Blount says, you should match your as­sets to your li­a­bil­i­ties, con­sider the need to di­ver­sify into in­dus­tries not rep­re­sented in South Africa, and un­der­stand the long-term cy­cles in lo­cal and off­shore mar­kets and how the val­u­a­tions of as­sets such as shares af­fect per­for­mance.

Over the past 30 years, there have been ex­tended pe­ri­ods of su­pe­rior re­turns in off­shore and lo­cal mar­kets, and th­ese have been fol­lowed by ex­tended pe­ri­ods of sub- par re­turns – noth­ing out-per­forms for­ever, Blount says.

From the mid- 1990s un­til the early 2000s, South African eq­ui­ties were char­ac­terised by poor re­turns, whereas global eq­ui­ties pro­duced great re­turns when mea­sured in ei­ther United States dollars or rands. Th­ese roles were re­versed dur­ing the 2000s: South African eq­ui­ties had a decade of ex­cel­lent re­turns and global eq­ui­ties had a decade of dis­mal re­turns in rand and dol­lar terms (see graph above).

The 1990s were a pe­riod of rand weak­ness and the 2000s a pe­riod of rand strength, but the move­ments in the cur­rency had less of an in­flu­ence on eq­uity re­turns than the move­ments in the share mar­kets them­selves, Blount says.

At the end of the 1990s, he says, off­shore share mar­kets had very high val­u­a­tions (share prices rel­a­tive to com­pany earn­ings), whereas South African shares had at­trac­tive val­u­a­tions, and th­ese drove the high re­turns from lo­cal eq­ui­ties of the next 10 years.

Val­u­a­tions, mea­sured in terms of price-to-earn­ings ra­tios (PEs) that show how cheap or ex­pen­sive a share or an in­dex is rel­a­tive to its earn­ings, are cru­cial to longer-term re­turns, Blount says. Cycli­cally ad­justed PEs use seven- year, or through-the-cy­cle, earn­ings.

Cur­rently, South African eq­ui­ties are on a cycli­cally ad­justed PE of 16.1 times, against a long-term aver­age of 15.7; global eq­ui­ties are on a PE of 16, which is in line with their long-term aver­age; and US eq­ui­ties are on a PE of 18.2, which is above their long-term aver­age of 16.5.

Al­though the lo­cal mar­ket is marginally more ex­pen­sive than global eq­ui­ties and cheaper than US eq­ui­ties, the val­u­a­tion dif­fer­ences are not com­pelling enough to mo­ti­vate a whole­sale switch to an­other mar­ket, Blount says.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.