By Zain Wilson, Portfolio Manager at Old Mutual Investment Group.
The recent announcement that South Africa has officially entered a recession, following two consecutive quarters of negative growth, appears to have largely reversed the optimism that took hold of the country following the change in leadership at the beginning of the year. While the global economy will likely retain above trend growth rates into 2019, concerns have risen over increasing threats of a global trade war, alongside pockets of emerging markets stress in the face of gradual policy tightening from the Fed. This current state of affairs has prompted increased interest among many South Africans in offshore investment.
In fact, many local investors ask the question of whether 100 percent offshore exposure is a winning long-term strategy and if this is the case, why bother with SA exposure? Given the current environment we find ourselves in, this is an increasingly popular assumption.
However, the bottom line is that South African investors simply cannot ignore the fact that their liabilities are predominantly rand-based and therefore investing 100 percent of your assets offshore would expose them to unpalatable currency risk. The impact of the currency on the global versus local equity returns at different times is clear in the table below:
In the period just after the Global Financial Crisis in 2008, SA Equity outperformed Global Equity spectacularly – delivering more than three times the global returns. This was also a period during which the rand was strong. During the second period, investors were expecting an economic recovery that never seemed to materialise and in South Africa political woes reached a crescendo when our Finance Minister Nhlanhla Nene was fired – prompting the rand to weaken. Returns over this period for Global Equity were much better than Local Equity. In the third period, from then to last year, again you would have wanted Local Equity over Global Equity – a period during which the rand was strong.
These periods were picked deliberately to coincide with major turning points for the rand, which demonstrates the significant impact the rand has on the returns we experience from global investments as SA investors.
In recent months, the threat of a global trade war and mounting pressure on Emerging Markets has impacted heavily on Emerging Market currencies, including the rand. Having fallen to a two-year low earlier this month, the rand has started to strengthen again off the back of an Emerging Markets rally and a retreating US dollar. Had you rushed all your assets offshore with the decline of the local economy, your investment would have been hard hit in just this week alone with the recovery in the rand.
So how do you know when the timing is right to take your money offshore? The answer is that you don’t. Instead of trying to time the market, investors should be looking towards portfolios that give them balanced exposure to capitalise on both local and offshore opportunities. A portfolio that is globally diversified but subject to well considered thematic, structural and tactical investment considerations – and one that takes into account an investors’ specific needs – is best suited to meet an investor’s targeted risk-return objectives.