Investing Offshore

2019 Investing Offshore - July 2019

2019 July - INVESTING OFFSHORE

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Investing offshore - July 2019

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Coronation Insights

Coronation Insights

For long-term investors, we consistently highlight the benefits of having appropriate levels of international exposure through the cycle. While it may be tempting to increase or decrease international holdings for temporary reasons (such as current sentiment, specific currency expectations or recent returns), having exposure to foreign asset classes is not about timing. Instead, it is an allocation that should be made with strategic reasons in mind. In this issue, we discuss these strategic reasons for investing offshore, share our international investment philosophy and approach, and look at the various options to gain offshore exposure with Coronation.

STRATEGIC REASONS TO INVEST OFFSHORE

1. Diversification

South African investors who restrict their universe to domestic assets not only miss out on opportunities in industries that are not present in South Africa (e.g. information technology, biotechnology, electronics, pharmaceuticals), but also on a much wider opportunity set within those industries.

By opening up their investment universe, investors gain access to a more diverse opportunity set as well as to better businesses with high expected earnings growth rates, at lower multiples (as demonstrated by the 5-year forecast for revenue growth and forward price-earnings multiples in Figure 1 below).

FIGURE 1 - GLOBAL COMPOUNDERS VS LOCAL COMPOUNDERS

Furthermore, by diversifying their investment portfolios to include international assets, they gain access to growth regions that benefit from mega-drivers such as industrialisation, urbanisation, digital advances and growing consumerism.

From Figure 2, it is clear that the drivers of global growth are predominantly outside of our own borders. By adding global diversification, investors are able to enhance their outcomes

FIGURE 2 - THE ECONOMIES ADDING THE MOST TO GLOBAL GROWTH IN 2019

Asian economies lead the way, accounting for 63% of the growth mix

2. Optimisation

Allocating money internationally enables investors to reduce their level of risk required to achieve a specific rate of expected return. Studies on optimal portfolios recommend that long-term investors, who require a return of inflation plus 4% to 5% in rand terms, have a minimum international allocation of 20% to 30% through the cycle. This is the classic recommendation for retirement savers who are aiming to optimise the outcomes of their pension savings with which they would need to buy a basket of local goods and services. Investors with more diverse spending requirements (including a larger portion of foreign currency denominated spending), or bequest motives (where multiple generations may live on different continents) can justify a larger international allocation (i.e. more than 30%).

FIGURE 3 – RISK-RETURN FRONTIER SINCE 1950

Asian economies lead the way, accounting for 63% of the growth mix

3. Matching your liabilities

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. Having adequate international exposure is a hedge against the longterm 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.

The performance of the rand significantly impacts how investors perceive international investments. Historically, 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. It is important that investors always invest with a strategic asset allocation in mind.

Don't let the performance of the rand guide you