Offshore equity an attractive choice

Using offshore investments to diversify one’s revenue stream is becoming a common practice and will gain momentum in the coming years.

Anil Thakersee, Portfolio Manager at Old Mutual Investment Group SA (OMIGSA), says that locally, the big theme in the past months has been the weakening of the rand. At current Rand-to-Dollar levels, the rand has already made a substantial move, so there is not much more to be gained via rand depreciation.

However, he points out that the important benefit of diversification, combined with the more attractive value of international equities, means that offshore exposure remains critical in this environment, regardless of currency weakness.

Thakersee goes on to say that the current macroeconomic themes at play in the global investment arena are not new ones and include big government, the hunt for yield and emerging market growth. These themes are underpinned by high levels of public sector debt and the need to contain fiscal outlays in the developed world.

This indicates that current easy global monetary policy has little scope to normalise for the foreseeable future, especially now that Japan has joined the club.

Quantitative easing (QE) globally continues to be a key equity market driver as central bankers support risk assets through the provision of liquidity to the system. Further, interest rates are likely to stay low to support global growth, meaning that investors will continue to be pushed towards risk assets and higher-yielding assets.

There are a number of options available to the investor when considering an international investment. Andrew Newell, Head of Business Development at Cannon Asset Managers, feels that it is vital that thorough due diligence is undertaken and that investors have a clearly defined strategy on their road to achieving their goals.

Newell adds that when it comes to global asset classes, Cannon Asset Managers recommend equities and property ahead of cash and bonds, although this preference is not as obvious as it was over the last few years given that these asset classes have enjoyed a healthy run.

"Let’s start by considering the less attractive asset classes. We feel that cash is on a road to nowhere. Interest rates are almost zero and we see this persisting for the foreseeable future and is definitely not an acceptable option for investors.

Sovereign bonds, particularly those issued by developed market governments, often are perceived to be a safe-haven but they currently carry considerable risk and low yield. These bonds are issued by countries that have debt-laden, fragile balance sheets and sluggish economies. Investor capital has flowed into these assets resulting in excessive pricing which has left them highly undesirable as investments,”.

Corporate bonds are a better prospect as the issuing companies generally exhibit strong balance sheets and better credit attributes. However, this has not gone unnoticed and the added attention means that prices are starting to rise. Nonetheless, corporate to government debt are prefered.

While property is not a slam-dunk investment, it does hold a certain level of appeal. The yields on property are better than those of cash and bonds, while property also has the ability to keep pace with inflation in the form of rental increases. Views on the outlook for inflation seem to be split: our view is that the risk is tilted towards the upside, which is negative for bonds.

This brings us to our favoured offshore asset class: equities. Although equities have enjoyed a healthy run, we still see pockets of very interesting opportunity. We would continue to exercise caution when looking at the usual suspects of China and India, but believe that countries that investors should consider include South Korea, Brazil, Indonesia and Eastern Europe.