The offshore conundrum

SA INVESTORS: ALWAYS LOOK FOR BALANCED EXPOSURE

Investors should avoid waiting for the market to improve, instead use any time to invest in a diversified portfolio abroad.

The recent announcement that South Africa has entered a recession appears to have largely reversed the optimism that took hold of the country following the change in leadership at the beginning of the year.

While the global economy will likely retain above-trend growth rates into 2019, concerns have risen over increasing threats of a global trade war, alongside pockets of emerging markets stress in the face of gradual policy tightening from the US Fed. Many local investors ask the question of whether 100% offshore exposure is a winning long-term strategy and if this is the case, why bother with South African exposure?

However, South African investors can’t ignore the fact that their liabilities are predominantly rand-based and therefore investing 100% of their assets offshore would expose them to unpalatable currency risk. The impact of the currency on the global versus local equity returns at different times is clear in the table above.

In the period just after the 2008 global financial crisis, the South African equity outperformed global equity spectacularly, delivering more than three times the global returns. The rand was also strong during this period.

During the second period, investors were expecting an economic recovery that never seemed to materialise and in South Africa, political woes reached a crescendo when finance minister Nhlanhla Nene was fired – prompting the rand to weaken.

Returns over this period for global equity were much better than local equity. In the third period, from then to 2017, again one would have wanted local equity over global equity – a period during which the rand was strong.

These periods demonstrate the significant impact the rand has on the returns we experience from global investments as South African investors.

In recent months, the threat of a global trade war and mounting pressure on emerging markets has impacted heavily on emerging market currencies.

Having fallen to a two-year low earlier this month, the rand has began to strengthen again off the back of an emerging markets rally and a retreating US dollar. Had you rushed your assets offshore with the decline of the local economy, your investment would have been hard hit in just this week alone with the rand’s recovery.

So, how do you know when the timing is right to take your money offshore? You don’t. Instead of trying to time the market, investors should be looking towards portfolios that give them balanced exposure to capitalise on both local and offshore opportunities. A portfolio that’s globally diversified but subject to well-considered thematic, structural and tactical investment considerations – and that considers an investors’ specific needs – is best suited to meet their targeted risk-return objectives.

Zain Wilson is an Old Mutual Investment Group portfolio manager