If you want true wealth, be a global investor
Many South Africans are sticking too close to home, experts say
Wealthy South Africans have more than 83% of their investments concentrated locally and many are missing the benefits of being true global investors.
David Nathanson, a global equity specialist at Bellwood Capital, says that most of the nation's high-net-worth individuals are not global investors, and aren't enjoying the options and flexibility to which they should be aspiring.
"When your home country represents less than 1% of world economic activity and is subject to capital controls, you can't divide the world into local versus offshore and place the two groups on an equal footing," he says.
Rather, to be truly wealthy you need to be a global investor and not have a lifestyle that is overexposed to the political risks of any one country.
Dan Brocklebank, head of Orbis Investments UK and offshore partner to local investment house Allan Gray, says that investing involves taking decisions about the future under inherent uncertainty. Therefore, even the best investors make mistakes. That is why they should always diversify their holdings to spread the risk, he says.
There are over 8000 listed companies globally in total, or about 2000 if you focus on the larger and most marketable ones. This compares with about 160 or so South African stocks.
Choose stocks carefully
Brocklebank says Allan Gray recently analysed how much of their investments South Africans should hold offshore. It concluded that, based on an average South African household's spending habits, investors should hold at least 30% to 50% of their total investment portfolio offshore.
But, he says, you can hold as much as 95% offshore if you believe there are good opportunities in these markets.
But what's the outlook for offshore markets relative to local markets?
Speaking at the Allan Gray Investment Summit recently, on the topic of where South African investors are likely to find growth over the next decade, Kevin Lings, chief economist at Stanlib, sketched a gloomy picture for economic growth in South Africa, which is plagued by poor business confidence, lack of clarity on policy, high government debt, joblessness, problems with the education system and corruption.
But he warned that global financial markets are changing and looking particularly unrewarding.
To find good investment growth you need to identify market trends and carefully select the stocks that will deliver.
According to Lings, developed countries such as the US, Europe and Japan are facing demographic challenges with ageing populations, and are reaching the limit of their resources to produce further growth in future.
The US economy is currently in very good shape and a viable investment option, but economic growth there is not what it used to be, largely due to population changes with a huge rise in the number of over-55s, which doesn't necessarily bode well for the US and the world economy, Lings says.
Older employed people do not spend in the same way as younger people do, he explains. An economy is way better off employing a 35-year-old than a 70-year-old because younger people spend their salaries on new houses and cars and engage aggressively with the economy, which boosts economic growth. A 70-year-old worries about the cost of parking at the shopping centre, he says.
But older people do also need healthcare, and this is already the best-performing industry in the US, Lings says.
Longer term, there may be good investment opportunities in emerging markets, such as sub-Saharan Africa and India, that are able to unlock the "demographic dividend" that comes with a younger population, Lings says.
He warns that investors should be wary of governments that have built up substantial debt over the past 10 years.
Alex Lyle, head of global asset allocation at Columbia Threadneedle, expects reasonable and synchronised growth from all major regions in 2018 and forecasts a healthy growth in company profits in the current year. But there are many risks to offshore investments, including Brexit, protectionism, Italian politics, China and North Korea.
Lyle says within equities, Columbia Threadneedle has a preference for Japanese shares.
Company profits in Japan continue to surprise on the upside and despite strong performance over a number of years, Japanese
equities have become cheaper relative to their global counterparts. However, the political situation in Japan needs to be monitored, he adds.
Lyle says Columbia Threadneedle is still finding high-quality global companies in the US and in China.
But while managers focused on offshore markets may take note of these big trends that can benefit companies, they often focus much more narrowly on the specifics of an individual business.
Andrew Wheatley-Hubbard, a portfolio manager at BlackRock, says behind every stock is a company. Investors should focus on the fundamentals of the companies to determine which are best able to deliver good returns, he says.
One global company BlackRock likes is DHL, which has an irreplaceable network and is set to benefit from the growth of
Brocklebank says stocks in which Orbis held significant positions at the end of last quarter included Mitsubishi and Facebook.
Mitsubishi, the Japanese company with an array of businesses from coal to convenience stores, is a good business trading at a highly attractive price given Orbis's long-term investment horizon, Brocklebank says.
While Facebook is obviously not without risk, Orbis believes the world's leading social networking website, which also owns WhatsApp and Instagram, seems well positioned to grow profits faster than the market over the next five years, as it develops ways of earning money from advertising on WhatsApp and Instagram.
Nick Kirrage, a portfolio manager at global asset manager Schroders, says Schroders likes banks that are trading at cheap valuations relative to their history and are better prepared for downturns. They have tangible assets on balance sheets and have cleaned up their governance, he says.
Be careful how you measure your returns
It is not a good idea to measure returns from offshore markets in rands, especially when you live in an emerging economy with a volatile exchange rate, says David Nathanson, a global equity specialist at Bellwood Capital.
"Many South African investors have a mindset of measuring their returns in rands - they assume rand strength is their risk when investing offshore, and that rand weakness is good for their offshore investments," he says.
"As a result, they only see offshore investing as an attractive option if the rand falls, and as a bad decision if it strengthens."
A global investor living in South Africa should see this country as one of many investment destinations, instead of viewing offshore investment as a success or failure based on what the rand does.
Sygnia portfolio manager Rian Brand agrees that basing an investment strategy on the short-term movements of the rand is not a good idea.
At the start of March, the rand was trading at under R12 to the dollar. Cyril Ramaphosa had just taken over as president, world economic growth was positive, and sentiment towards emerging markets in general was good, Brand says.
Since then the Brent crude oil price has climbed to over $70 a barrel, the dollar has strengthened and fears about a potential trade war have scared investors away from emerging markets, he says.
In the face of all this, the rand couldn't hold on to its gains.
From around R12.50 to the dollar at the start of May, it has retreated all the way to its current levels of around R13.80.
Although this volatility in the rand has left investors confused, it should also serve as an important lesson: trying to predict where the rand is going next is just about impossible. Even the professionals struggle, because there are just too many things that can have an impact, Brand says.
He adds that it's more important to have a solid, long-term offshore strategy in place to help you meet your investment goals.
"Investing internationally should be about diversification and gaining access to companies and industries that you can't find on the JSE, not simply about trying to benefit from currency movements."