2018 Investing Offshore - July 2018

2018 JULY: INVESTING OFFSHORE

Download PDF

Strategic reasons to invest offshore - July 2018

Back to contents
Coronation Insights

Coronation Insights

DIVERSIFICATION

Investors who restrict their universe to domestic assets miss out on more than 99% of the available opportunities presented by listed assets around the globe

By investing abroad, you also gain access to industries that are not present in South Africa (e.g. information technology, biotechnology, electronics, pharmaceuticals), in addition to a much wider opportunity set within industries. Our preferred global equity benchmark, the MSCI All Country World Index, currently comprises approximately 2 500 investable companies compared to roughly 100 that drive the returns of the local market. By diversifying your investment portfolio to include offshore assets, you also gain access to growth regions that benefit from mega-drivers such as industrialisation, urbanisation, digital advances and growing consumerism.

Figure 1: RELATIVE SIZES OF WORLD STOCK MARKETS, END-2017

From Figures 2 & 3 (below), it is clear that the distribution of wealth in the world is changing fundamentally, with many emerging economies becoming increasingly formalised. This deepening of the opportunity set has the potential to create significant wealth for the patient investor prepared to invest in these economies.

Figure 2: PROJECTED CHANGE IN WORLD GDP

Figure 3: EMERGING MARKETS TO DOMINATE THE WORLD

OPTIMISATION

An offshore allocation provides the attractive feature of reducing the level of risk required to achieve a specific rate of expected return. Studies on optimal portfolios recommend a minimum offshore allocation of 20% to 30% through the cycle for long-term investors requiring a return of inflation plus 4% to 5% in rand terms. This is the classic recommendation for retirement savers aiming to optimise outcomes for their future pension with which they would need to buy a basket of local goods and services. Investors with more diverse spending requirements, including a larger share of foreign currency denominated spending, or bequest motives (where multiple generations may live on different continents), can typically justify a larger offshore allocation.

MATCH YOUR LIABILITIES

It is worthwhile to remember that many items in a consumer’s shopping basket (from fuel to food to healthcare) are largely priced in foreign currencies as the inputs are either commodities (with prices struck in global markets), or heavily reliant on imported content. Viewed from this perspective, having adequate offshore exposure is merely a hedge against the long-term change in price of this part of your future shopping basket. Episodes of currency weakness will more than likely remain a strong driver of price increases into the future.

Don’t let the performance of the rand guide you

The performance of the rand has a significant impact on how investors perceive offshore investments. Based on historical experience, interest in global assets is low when the rand is strong but increases as the rand weakens. This may be a problem if investors inadvertently replace cheap assets with expensive assets purely based on sentiment.

While most investors expect the rand to be volatile, recent experience was unusual. After the rand lost half of its value between 2012 and 2015, it strengthened by 25% in 2016-2017 despite a very weak local environment. While domestic confidence improved in early 2018, the rand lost ground due to a rampant US dollar creating headwinds for all emerging markets. The sudden switch from local fundamentals to global investor risk sentiment as driver of the exchange rate serves as a reminder that investors should always invest with a strategic asset allocation in mind.

DECIDING ON YOUR STRATEGIC ALLOCATION LEVEL

This is a question best answered through a comprehensive financial planning process with the assistance of a competent adviser. We can offer the following as generalised guidance:

All investors can benefit from the portfolio optimisation benefits described above, making 20% the minimum suggested strategic offshore allocation for all long-term investors.

  • Pensioners and other investors who need to fund a long-term rand income from their investment portfolio should guard against having too much offshore exposure as rand movements can be volatile. Income-funding portfolios should typically not have more than 35% in offshore equities.
  • Wealthy investors, without immediate income requirements, have more latitude: up to 100% of their investment portfolios can be invested in offshore assets, depending on their objectives and tolerance for risk.