Travel towards the international horizon

With the rand at its weakest levels ever and not expected to make a dramatic recovery soon, is now the time to invest offshore?

The decision to shift money offshore during this volatile time is often influenced by what you think will happen to the Rand. Will it get even weaker or will it recover some – or even all – of its strength?

Consider international effects

But what South African investors should also consider is their investment returns and overall wealth in terms of hard currency such as US dollars, and not in Rands.

Investing locally has its advantages, but the gains made by local equity markets over the past seven years have essentially been flat when measured in dollar terms.

Because of structural headwinds, offshore is an essential part of a long-term investment strategy. It is important for investors to take a long-term view of their portfolios and remain focused on investment goals despite short-term under performance.

Risk mitigation

Spreading investments across different countries - including asset classes, industries and currencies - is an effective way to produce better risk adjusted returns. Investors with well diversified portfolios would be less affected by market volatility, which is why you can always make the case for multi-asset, balanced, portfolios.

Local investments offer limited opportunities due to the structural risk inherent in local equity markets. The top five stocks make up 40% of the JSE All Share Index (ALSI), whereas five stocks only make up 11% of the S&P500, resulting in significantly lower risk.

There are 2 500 investable stocks globally versus an effective 100 stocks in South Africa.

High concentration

This high equity concentration means local markets are more susceptible to risk and volatility. The factors that made South African equity returns so strong in the past 15 years have dissipated, with the likelihood of weaker returns going forward.

Investing offshore should, however, be seen primarily as a risk mitigation strategy rather than a search for exceptional returns.

A hard ride

The current bull market, entering its seventh year, and a slowing global economic environment will see forecast returns below that of the recent past. As a result, offshore equities will see single-digit returns with a low growth outlook while certain developed markets will perform better than others.

Offshore investment options go beyond equities, and there are other asset classes that provide offshore exposure with less volatility. As such, it is worth considering not only different geographies but various asset classes as well.

Economic outlooks

As the rand continues to come under pressure against major currencies, investors with a considerable portion of their portfolio offshore will gain from the currency hedge.

The Rand may strengthen in the short term, but there are no economic fundamentals to support a medium to long-term improvement in the currency. After touching R13.80 to the dollar in 2001, the Rand went on to recover in the interim, before reaching an all-time low of R14.02 to the dollar at the end of September this year.

The currency strengthened during the intervening 14 years due to a strong local economy driven by increased demand for commodities and social grants which supported consumption and 3,5% real wage growth.

Muted growth

However, prospects for the local economy are not encouraging and muted growth is expected over the next five years.

South Africa has benefited from growing trade with the rest of Africa and the continent has now become its largest trading partner. Africa’s economy is heavily reliant on commodity prices. Chinese demand for commodities will never again be as strong as it previously was, due to the rebalance from an investment led to a more consumer centric economy.

These factors seen in unison mean the probability of our currency strengthening moderately in the medium term is low, and strengthens the case for offshore investing.