Another chapter in the offshore debate

Gareth Stokes, FAnews Online Editor

If you thought timing the local equity markets was difficult, you should try your hand at investing capital offshore. Your decision is influenced by two factors, asset allocation and currency risk. For years South African investors have allowed fear to in

Should they have known better? It’s difficult to lambaste an investor for taking steps to preserve capital. What we can condemn is the timing of and motivation for the decision. Any professional planner will tell you that major changes to your asset allocation must be implemented over a period of time. You need to plan your offshore diversification rather than unleashing your entire offshore allowance at the first sign of rand weakness.

Strong rand, weak international equities

The best time to move funds offshore – specifically into equities – is when the rand is strong and offshore equity prices weak. Most analysts agree that now (mid-2009) is as good a time as any for South African investors to diversify offshore. International equity markets are littered with value opportunities in the wake of the global financial crisis while the rand is particularly strong. An investor that acts during this window of opportunity should benefit from the long-term declining pattern of the local currency and the ongoing recovery in offshore equities.

“Every investor’s circumstances are unique, but at the moment many South Africans should consider offshore investment for long-term capital growth, rand hedging and better international diversification,” said Kari van Rensburg, a director of Sandton-based Deutsche Securities. Recent rand strength is likely to be short-lived. According to Van Rensburg the rand has weakened in the last five years – by 25% against the dollar and more than 45% against the Euro!

The good news is you can pursue offshore diversifications strategies without using your foreign exchange allowance. Investors can purchase one of five international exchange traded fund (ETF) products offered by Deutsche Securities. These products track a variety of international share indexes like the Eurostoxx 50 (Euro-zone), the FTSE 100 (Britain), the MSCI Japan Index (Japan), the MSCI US Index (United States) or a spread of international markets via the MSCI World Index. If you purchase a FTSE 100 ETF you gain exposure (in the correct proportion) to the constituent shares in that index. You can buy and sell these ETFs through any JSE-registered stockbroker and without Reserve Bank permission. “Many advisers may be advising clients to look offshore, but not all of them will highlight the advantages of fee-efficient ETFs,” said Van Rensburg.

Should we worry about flat-lining developed economies?

Deutsche Bank’s ‘house view’ is that the rand will slip to R10/US dollar, R12/Euro and R15.10/pound by the end of 2010. While we agree that the rand will devalue over time against a basket of international currencies we remain concerned about the long-term performances on some international equity markets. The US Dow Jones Industrial Index, for example, is trading at 1996 levels. That means a lump-sum investment in an index tracker in 1996 would show zero capital appreciation! The situation in Japan is even worse. The Nikkei 225 hasn’t returned to the peak value reached in the late 1980s! Is this concern with equity performance valid?

Price trends on some international indices are seriously testing the wisdom of investing for the long-term. How can you motivate a long-term investor in the face of 30 plus years of sideways market movement? Fortunately the problem is confined to developed and low-inflation economies. Japan’s economy has been strangled by decades of near zero inflation. Markets in the US and Europe will avoid a similar fate as massive fiscal stimulus packages re-kindle inflation, lending rates and eventually growth.

At this point in time South African investors who move funds offshore (or into offshore benchmarked investment products) should find that the benefit from rand hedging will outweigh the risk of slower developed market growth. “South Africans who believe the rand risk is to the downside have an opportunity to hedge this risk and simultaneously achieve portfolio growth,” said Van Rensburg.

Editor’s thoughts:
If you want to diversify offshore then the time to make the move is when the local currency is strong. A quick look at a graph of the rand versus the dollar, Euro or pound confirms a long-term declining trend. And that means your offshore portfolio should grow in real terms even if equity performances are staid. Have you considered investing in offshore exchange traded funds? Which international market do you prefer? Add your comments below, or send them to gareth@fanews.co.za