MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19 environment and what form a global market recovery will take.
Given the softness of the rand, how feasible is offshore investing right now?
The returns you will achieve on offshore investing as a South African, depends on the value of the currency when you take your money offshore, and when you bring it back. Ideally you want to go offshore when the rand is strong, and bring it back when the rand is weak. If you look at the current value of the rand as measured by Purchase Power Parity (PPP) models, the rand is currently very weak. Therefore, from a timing perspective, adding to offshore investments now is not favourable, given the level of the rand. The rand may in the short term depreciate further, but over time it is more realistic to expect the rand to revert to levels close to its base value on a PPP basis.
We also have to consider the valuation of the different asset classes we aim to invest in, in order to judge if right now is a good time to invest offshore. With the recent decline in global equity as well as global property markets, these two asset classes look attractive from a valuation perspective. The macro-outlook for global equities is a lot more favourable, but a lot will depend on the global management of the current coronavirus crisis. An investor should not consider allocating to equity as an asset class unless he or she has an investment horizon beyond five years. Over this period, it is very reasonable to expect that a vaccine would be found and used globally. Therefore, the current crisis provides a good opportunity to enter risky markets. At the same time, global interest rates are at levels close to zero. Therefore, allocating to global bonds or cash at this point is not attractive, other than to reduce volatility. Future returns will be affected by the speed at which the global economy recovers, but for now, a significant global slowdown is already reflected in equity markets. Finally, global high yield bond strategies should be treated with caution in this environment, as some banks are currently undergoing significant stress, especially due to smaller businesses being impacted severely in this period of global lockdowns.
What have asset managers been doing in the offshore investing space during the COVID-19 market crash? Are they taking a more conservative offshore approach by reducing exposure to riskier assets and increasing exposure to cash and bonds?
The speed of the bear market in equities and properties have caught most institutional investors off-guard. It is also difficult to make drastic decisions when there is almost no information to base that on. Therefore we think, as it is impossible to measure, that longer-term investors probably did not change their asset allocation in this period of higher volatility. In the past week, markets have been less volatile as the degree of fear, as measured by the VIX, has reduced somewhat.
This provides a good opportunity to assess valuation. For long term investors, rotation away from cash and bonds, where yields are close to zero, into riskier asset classes is starting to make sense. You may get the timing wrong by being early, but eventually, this crisis will pass, and stock markets will reflect that eventually.
Historically, markets do recover from crashes, the experts say. What kind of recovery are you expecting in global markets this time, and do you think markets will rebound before COVID-19 completely disappears?
If we look at previous crises, even though they are all different, the stock market reacts long before the news headlines do. This time it is likely to be the same, but it is impossible to know, and perhaps foolish to forecast. One must also distinguish between economic recovery, which will certainly take time and market recoveries, which can happen in a matter of days or weeks.
Are there lessons around the topic of diversification that we can learn from the present COVID-19 market crash?
For South African investors, there are a few lessons. We are very vulnerable to global shocks, so investors need to maintain a reasonable investment allocation outside of South Africa.
Liquidity is also important, as Swedish investors in corporate bond funds recently found out. Your investment is not a low risk unless it is also very liquid in a crisis.
The future is uncertain, so I think the biggest lesson is that you must know your investment horizon. If you are a long term investor, you should be able to walk away from your investment and come back a decade later, without making a single decision on its management.
If market shocks force you to change your asset allocation or risk, you are probably a trader rather than an investor, and your results may be much more extreme because of your own actions.
Going forward, how should a solid offshore investing strategy be crafted?
Offshore strategies should balance the risk and return available from different asset classes, based on longer-term expectations. Global equity, diversified across regions, should provide long-term growth through the market cycle, above inflation. Bonds and cash are used to reduce risk in the short term, but care should be taken, as global bond yields are too low to justify a significant allocation.
Global property should, in our view, not make up a significant portion of a global portfolio, but in a smaller weight, can aid diversification. Alternative asset classes such as private equity, hedge funds, venture capital and real assets can also be considered if you have the expertise to select these.
Above all, a focus on liquidity and risk management is crucial to ensure that when market shocks occur, you are in a position to benefit from the recovery. Having some cash on hand is the ultimate luxury, because when markets panic, the long term investor would rather buy risky assets than sell them.
Lastly, asset allocation is the primary driver of long-term returns, so it is more important to get your asset allocation optimised for your risk tolerance than trying to select asset managers you believe will outperform.
And lastly, South African investors should be careful with the rand at its current levels. Any recovery in the rand will likely not be driven by local politics or our economy, but by the global appetite for yield. The rand has weakened to extreme levels before, in 2009 and 2016, and subsequent recoveries were not due to any local developments.