IS IT TOO LATE FOR YOU TO GO OFFSHORE?

IS IT TOO LATE FOR YOU TO GO OFFSHORE?

Best time is when Rand is strong and foreign markets are cheap 

Many South African investors may be repeating the mistake of going offshore at a bad time, although this doesn’t mean you should not be invested offshore if you are there already. But the local and global economic outlook is cloudy, and you need to be careful not to get caught in the turbulence. 

Spoked by South Africa’s political situation and the prospect of the country being downgraded by international credit ratings agencies, investors have been disinvesting from local financial markets and taking large stashes of money offshore. 

Such a move, however, may well prove to be badly timed because, despite some recovery since its low point in January, the rand is still weak. 

Investment experts advise that the best time to invest offshore is when the rand is strong and offshore markets are cheap. 

Currently, neither offshore share markets nor the local market are obviously cheap and many asset managers are advising only one things: diversification. 

BAD TIMING 

South African Reserve Bank statistics show that money moved out of South Africa for the 16th consecutive quarter, reaching an alarming pace in the fourth quarter of last year as political events knocked investors’ confidence. 

Investors are moving money strongly from local to international funds on the platform, resulting in offshore funds “growing at a furious pace.” 

The problem with this recent trend is that the rand reached is weakest level to the United States dollar, at R16.80, in January, following the firing of former Finance Minister Nhlanhla Nene. 

The rand has depreciated to well below what is regarded as its fair value when its purchasing power is taken into account 

Taking money offshore when the rand is strong and then having the local currency weaken can boost your offshore returns in rand terms. Doing the opposite will diminish your returns.

OFFSHORE OUTLOOK FAIR 

Another obvious time to invest offshore is when markets are cheap and the economic outlook is good. By many forecasts, the economic outlook is currently not good and foreign share markets are not particularly cheap. 

Most major regions are expected to expand at a slower pace this year relative to the growth rates observed in 2015.

US economy is facing external risks and its growth is softer, while the European Central Bank and the Bank of Japan eased monetary policy further in the first quarter of this year in response to “serial disappointment” over growth and inflation in those regions. 

It remains a low-growth, high-debt, low-inflation, low-interest-rate world and this is likely to be the case for some time. 

The central banks’ easy monetary policies have been effective to some extent, but inflation is the missing ingredient. 

Central banks such as the Bank of Japan and the European Central Bank are looking at other monetary policy measures, and in the US the Federal Reserve is likely to raise rates very slowly, he says. 

The world is trapped in economic purgatory: between growth heaven and depression hell. Growth is not good enough to break into heaven but the liquidity afforded by the central banks ensures the world does not go into a depression. 

It is likely to result in equity markets surging back and forth as data about economic factors becomes available, creating more volatility in your investments. 

Adding to the woes of the global economy, China’s transition from an economy driven by massive infrastructure spending to a more consumer-driven economy is injecting a lot of volatility into equity markets. The most obvious effect has been the plunge in the price of commodities.

Despite the gloom pervading global markets, OMIG is predicting a 5-percent-a-year real (after-inflation) return from offshore equities, versus a 4.5% real return from local equities. 

In 2001, when the rand was so weak relative to the US dollar, it was easy to make the case for South African equities, because shares on the local market were cheap relative to their expected earnings. The FTSE/JSE All Share Index was on a relatively low price-to-earnings (PE) ratio of 10, while the offshore market was on a PE of 25 at the time. (The PE ratio of a share indicates how expensive or cheap a market or share is relative to what you can expect to earn from the share and how quickly you will recover your investment.) 

The gap between prices relative to earnings is not as obvious now. The local market is on a PE ratio of about 19, while the US market is at a similar level and Europe is a bit cheaper. 

TAKE CARE AND DIVERSIFY 

The combination of the volatility resulting from the global economy, the news from China, and the local political situation and rand weakness means that South African funds face extreme volatility, which is likely to endure for some time. 

You need to be careful about how you pick shares or funds, as the ground shifts a lot every day. 

Given all the uncertainties in the global and local markets, this is no time to be too brave. Rather, it is a time to protect your portfolio by diversifying your investment. 

The time to be brave is when the markets are relatively cheap. 

Reference: 

Laura du Preez – Weekend Argus