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From the outside looking in

16 March 2018 Azad Zangana, Schroders
Azad Zangana, Senior European Economist and Strategist at global asset manager, Schroders.

Azad Zangana, Senior European Economist and Strategist at global asset manager, Schroders.

A global investment perspective on SA investors’ state of affairs.

South Africa has seen a flurry of political change in recent weeks, resulting in an air of investor optimism and strengthening of the rand, proving that markets don’t wait for change to happen on the ground; they react to changes in direction and outlook. Given this “new dawn”, how should local investors be shifting their allocation between local and offshore assets?

This was one of the topics discussed at the third annual Schroders Investment Symposium this week, where local investors gathered to gain insights from international experts into the developments and challenges that asset allocators are facing in a rapidly changing industry and economic environment.

Speaking at the symposium, Azad Zangana, Senior European Economist and Strategist at global asset manager, Schroders, said that while the positive sentiment around SONA, the National Budget Speech and President Ramaphosa’s new cabinet continues to dominate South African news agendas, local investors would benefit from taking a step back and reviewing the general outlook for emerging and global markets.

“Looking first at the rand, when compared to other currencies based on their trade weighted index, it sits squarely in the middle. This means that valuation metrics show a reasonably cheap currency, but there are cheaper currencies elsewhere; such as the Mexican Peso, which understandably carries a great deal of risk at the moment given it its proximity to the States and uncertainty around Trump’s policies.”

Moving on to how South African equities compare to other markets, Zangana says that South Africa is reasonably attractive in terms of value, currently priced cheaper than the MSCI Emerging Markets Index, however, South African equities show weaker performance than the MSCI World Index.

“While we’ve had a few years where the South African equities market has done well - especially in domestic terms - when considering the last decade, you’ll see that the JSE FTSE All Share Index has underperformed the MSCI World Index in rand terms, where the JSE FTSE All Share Index returned 175% and the MSCI World Index returned 202%.

“In terms of onshore versus offshore, because South Africa’s market is so concentrated in a few sectors – resources and commodities especially – it’s important for local investors to look at the rest of the world in order to create an appropriately diversified portfolio.”

As such, Zangana says that the answer to the correct allocation between local and offshore assets lies in healthy diversification. “Very few markets or indices around the world – aside from maybe the US due to the sheer scale of the country – have enough diversification to warrant only investing in local assets, especially if an investor takes a long-term view.

“So while it may be a good time for South African investors to increase their local exposure, it definitely doesn’t mean they should sell out on all foreign exposure,” he concludes.

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