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Offshore: Making the right choices

29 May 2006 Louis Rossouw, Momentum Wealth

With local capital markets having run very hard for very long combined with a stubbornly strong Rand there is a growing consensus that offshore investments are offering good value.

The question is not simply whether, but also how and to what extent, to diversify offshore. During the early years of the new millennium there was literally an offshore feeding frenzy among local investors. Since then, the local market has been a stellar performer, and the Rand has more than regained the ground it lost prior to January 2000. Flows into offshore investments have slowed dramatically. And yet, from a valuation perspective, going offshore now makes more sense than ever!

Why diversify offshore?

The sun also sets. The local market will not continue to outperform most others. Three years into one of the strongest bull markets in history, the JSE is looking fully priced and taking money off the table makes intuitive sense.

We remain a small, emerging market! The South African equity market represents a mere one-third of one percent global market capitalisation. There is a very large opportunity set in the other 99,67%!

Relative value. Three years ago the South African market was attractively valued relative to most others. That valuation gap has all but disappeared. Our markets forward p:e ratio is currently above 15, compared to 14.7 for the US S&P 500 and 12.9 for the Eurostoxx 50.

The Rand. The Rand has doubled in value relative to the US Dollar over the past four years, and with a yawning trade deficit a significant outflow of portfolio investments could see it retreat sharply.

Diversification. Our market is not only small, but also dominated a few sectors. With only eight stocks representing over half of the JSEs market capitalisation, investors run a major concentration risk.

Investment opportunities. There is a wealth of talented investment managers and new ideas in the global market. Many investment strategies and themes are simply not possible in a small market such as ours.

Golden rules of offshore investing

Investing is not a zero-sum game. It is not a question of local or offshore, but rather local and offshore the respective weightings might however change over time.

Your investment should reflect your objectives. The greater your exposure to foreign currencies (e.g. regular travel, a taste for imported goods, saving for childrens overseas studies etc.) the more you should hedge against the Rand depreciating against them.

We already live in a high-risk, high return environment. Invest in dissimilar countries and industries.

Try not to lose money in the base currency. Rand depreciation will work in your favour over time unless it is negated by losing money on overly risky underlying investments. Consider defensive investments rather than going for broke and ending up that way.

Beware of expensive fads. Entrust your money to proven managers via transparent, easy-to-understand products.

Seek both alpha and beta. Absolute returns matter in tough times, but so do relative returns in bull markets. This implies having both absolute return products (e.g. hedge funds) and index-tracking products in ones portfolio.

Have realistic expectations. Remember that returns in stable, low-risk environments tend to be less spectacular than in emerging markets.

Louis Rossouw
Head of Asset Consulting
Momentum Wealth

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