Global investing

Globalization continues to work its way through our lives – it has changed the way we shop, eat, communicate, travel and generally live. As economies and societies integrate, the world is shrinking and this in turn is throwing up more opportunities for businesses and investors alike. By its very nature, globalization has made investing-only-in-home markets less relevant. There is growing evidence that investing beyond home frontiers can help add significant value to one’s portfolio by spreading risk and enhancing returns.

Research indicates that investors can achieve true diversification by investing across geographies, thus boosting the risk-reward profile of their investments. A fair question would be - given the performance of South African markets, why consider global investments? South African financial markets have provided investors with strong returns over several years, often with a lesser degree of volatility than in offshore markets; both developed and emerging. However, we are now seeing a growing realisation amongst South African investors on the benefits of investing abroad, prompting greater interest in offshore opportunities.

2013 was a successful year for offshore investing. A key factor contributing to this was the strong performance of the MSCI World Index relative to the JSE which underperformed in comparison. Although the JSE still demonstrated good performance, this was overshadowed somewhat by the stronger performance in world markets. In terms of valuations, South African stocks remained expensive in comparison to global equities, leading to a growing perception amongst investors that there is better value offshore than locally, especially after several years of strong performance in the domestic market. Asset valuations, particularly in equities, are seen as more attractive in the US and parts of Europe, Asia and South America, than in South Africa.

Breadth of opportunity

Major reasons for South African investors being increasingly attracted to offshore markets include the need for greater diversification away from the relatively small domestic market; exposure to a much larger investment universe i.e. a wider selection of asset classes and sectors; the potential to benefit from attractive valuations and faster growth; and access to state-of-the-art research provided by global investment teams.

Changing perceptions

Some investors may not feel comfortable with offshore investment because they lack experience with a particular asset class or are not familiar with international investments. As a result, investors may be overweight in asset classes with which they are most comfortable, leading to a less diversified portfolio.

According to the Franklin Templeton Global Investor Sentiment Survey 2014, investors in South Africa and Italy showed the greatest interest in investing abroad; with 85 percent South Africans believing the best opportunities exist beyond their borders. Feedback from the survey shows that investors in South Africa think that Asia will have the best equity opportunities this year and over the long term. And, after Asia, local investors are looking at North America to provide the best returns in 2014, despite their concerns about the large fiscal debt in the U.S.

For fixed income opportunities, they believe the best returns will be in the U.S. and Canada in the coming year, despite concerns around Fed tapering. After North America, South Africans think the best fixed income returns will be at home this year. Over the next ten years, investors believe South Africa and Asia will offer the best fixed income returns/opportunities.

Asset allocation and diversification

An important factor for both institutional and private investors to consider is the sovereign and political risk that exists if one is invested too heavily in one country. It is essential for investors to maintain a well-diversified portfolio which is in line with their overall investment objectives, risk appetite and investment horizon.

Summing Up

There is ample evidence that global diversification is important for investors. The increased volatility since 2008 has made investors realize the importance of this diversification. We clearly believe it makes sense to search globally for the best bargains available. By limiting the search to one’s home country, there is chance of missing out on valuable investment opportunities in addition to potentially losing the benefit of greater diversification. And finally, an investor is better off navigating the global investment world with an experienced guide!