It pays to pretend you’re a foreigner, says Imara

Playing games in the equity market is not generally recommended, but in certain circumstances a game of ‘let’s pretend’ has the potential to deliver significant investment gains.

This unusual market tip comes from Imara Asset Management South Africa, part of the pan-African Imara financial services group and a company with a reputation for adding value by selective buying into market corrections.

According to Fund Management Director Chris Botha, canny investors can sometimes identify value opportunities by pretending they’re foreigners looking at our market from an offshore perspective.

The opportunity arises when both the Rand and the JSE come under pressure at much the same time.

This happened in September when the JSE suffered a 5% pullback while the Rand weakened to more than 11 to the dollar.

Local sentiment turned negative, but from a foreign perspective some positive buying opportunities were opening up, said Botha.

“Strong currencies can suddenly acquire a lot more Rand-denominated assets while the share prices of some good, well managed South African companies start to retreat into affordable territory,” he noted.

“A scenario that’s doom-laden for the locals becomes a value opportunity for the foreigners.”

Because global fund managers operate at scale, their ‘buy’ orders can exert considerable upward pressure on local share prices.

Locals who ‘think like a foreigner’ have an opportunity to buy into the dip and participate in the upside by anticipating selective buying activity from international financial centres.

Foreign inflows and resultant upward price pressure can also be influenced by South Africa’s status as a proxy for emerging markets in general.

Botha explained: “Unlike some other developing economies, it is relatively easy to enter and exit our equity and bond markets. Some global fund managers therefore use our market as a proxy for all emerging markets.

“Proxy status creates the potential for sudden and sizeable inflows the moment some big international funds suspect that emerging market assets are oversold.

“This adds to volatility, but creates significant upside the instant sentiment shifts in favour of emerging markets.”

Botha said buying into dips – whether or not you’re pretending to be a foreigner – has wealth-building potential for those who think long term.

He pointed out: “The strategy may not be suitable for nervous investors, but you can limit downside risk by only buying into companies with good management, good earnings potential and strong free cash flow.

“Foreigners flit in and out of our market when it suits them. We can be a victim of their mood swings or we can benefit. I prefer to look for the benefits.”