Financial Mail - Investors Monthly
BACK TO BASICS
It’s best to keep calm and focus on the fundamentals
Investing offshore has always been a prudent investment diversification strategy, given the relative size and concentration of the local stock market, and the weakness of the rand against major currencies and its volatility in relation to other emerging markets.
But today the case for boosting offshore exposure has never been greater. Political uncertainty and instability and a sluggish economy have created a poor environment for investment growth in SA.
“Dramatic rand depreciation over the past five years has eroded hard currency wealth in real terms, which, when combined with the fear and negativity around the elections and economic state, is driving demand for offshore investments,” says Victoria Reuvers, director and senior portfolio manager at Morningstar Investment Management.
Brian Butchart, MD of Brenthurst Wealth, attributes this poor performance to a decoupling of the local economy from the robust global growth experienced since 2009. “SA’s growth has decelerated while the rest of the world grew at an average of 3%.”
Populist policies around the nationalisation of land, health care and private retirement funds are further cause for concern among investors. “Some of this is politicking to get voter attention, but it affects investor, business and consumer confidence.” While the government has made some progress on the structural reforms needed to boost the economy, Butchart believes more is needed for SA to benefit from the next phase of global growth. “Until the government implements policies that attract foreign direct investment and creates jobs, local investors will increasingly look to global markets to deliver the returns they’re after.”
Investors should also take a long-term view of rand volatility to contextualise the importance of offshore diversification. “No matter how robust the government’s economic turnaround plans after the elections are, the country will still face multiple vulnerabili- ties. Further investment outflows and a wider current account deficit will pile on risk for a further downgrade, which will keep currency weakness risk on the upside.”
However, Reuvers doesn’t believe that making investment decisions based on political outcomes will serve investors well. “An offshore investment strategy should be based on strong fundamentals and attractive valuations. At portfolio level it also offers the opportunity to diversify and access markets and industries not available in SA.”
Mike Fannin, MD: Home Office at Carrick Wealth, shares these sentiments, stating that offshore diversification should always form part of an investor’s long-term strategy, not just in times of crisis or volatility. “Prudent investors are seldom caught by future shocks, changes, or potential risks because their diversification strategy insulates them.”
He believes that getting offshore exposure shouldn’t be a knee-jerk response. Such investment decisions could have dire consequences, as they can increase an investor’s risk exposure.
Reuvers says the key to success is to not overpay for assets. “We prefer to invest in unloved areas of the market which are overly worried about future events with uncertain outcomes, as they are priced full of pessimism.”
Brexit is a good example, given the unprecedented nature of the situation. Butchart says: “UK assets have been hammered due to the uncertainty surrounding the outcome, which has created wellpriced opportunities.”
In this context, Reuvers says it is pertinent to acknowledge that the UK economy is not the UK equity market. “About 70% of the FTSE 100’s earnings come from outside the UK, and investors must appreciate that the fundamentals of corporate Britain have been reasonably resilient. But given the complexity, many investors struggle to comprehend how to price Brexit into asset values. The fund flows appear to show that managed fund and exchange traded fund investors are … investing elsewhere, which is no doubt influenced by the noise of daily politics.”
While the economic relationship with the UK’s largest trading partners will remain unclear for some time, Morningstar is growing more positive on multinational UK equities. “We are more cautious towards UK domestic stocks and don’t see much appeal in UK fixed income. We also like the pound sterling at current levels, although we acknowledge that further downside risk is present.”
An offshore investment strategy should be based on strong fundamentals and attractive valuations