Episode 005 - Investing Globally

I wrote an article for FinWeek the other day, with regards to Investing globally. For their final print they only took a piece of what I wrote, so I decided to share the whole thing. Have fun!

Getting to grips with Global Investing

The South African stock market is a concentrated one, with the top five stocks in the FTSE/JSE All Share Index (Alsi) accounting for around 43% of the index's entire market capitalization. The concentration risk which local investors have to deal with is therefore huge.

The performance of South African fund managers is usually determined by their active bets on these large stocks. Being underweight in a bull market or an overweight in a bear market can sometimes end careers.

This raises a vital question about diversification. The Alsi's concentration risk is double what investors face on the Nikkei in Japan, and almost four times more than that of the S&P 500 index. From those statistics alone, South African investors should appreciate the need to invest offshore in order to diversify their portfolios and avoid so much concentration risk.

On top of this, as the stocks on the JSE represent only around 1% of listed companies globally, if you are not investing outside of South Africa you are missing out on the other 99%.

Investing offshore not only helps investors spread the risk but gives you an opportunity to tap into market industries and sectors that are not well represented on the JSE. A perfect example is the Sygnia 4th Industrial Revolution Fund, which provides local investors with a way to invest in offshore companies active in the new technology and innovation sphere. These companies are market leaders in sectors like drones, 3D printing and robotics, which are completely absent from the local market. They are businesses with the potential to transform the global economy, and without considering investing offshore you would have no exposure to them.

How to invest in international markets

The most direct way of investing offshore is through an offshore stockbroking account. Picking stocks or asset classes yourself without a clear investment view and process can however be a daunting task. Particularly moving from a small investment universe like South Africa to a global environment is not easy.

Any rand investment offshore also needs to be approved by the South African Revenue Service (SARS), which can take time. This is not only about the inconvenience, but the fact that timing is everything when investing. The better you are able to avoid delays, the better your chances of getting the exposure you want at the time the best opportunity is offered.

That said, there are advantages in investing directly. If you decide to liquidate your offshore positions you can either get your cash converted back to rands or keep it in hard currency, allowing you to invest in other foreign currency-denominated products that are not available locally.

A cheaper alternative to the direct route is investing in exchange-traded funds (ETFs) and rand-denominated funds. These provide a much easier way to get offshore market exposure although they do limit the investor to whatever offshore products are currently available in South Africa. For these products, the investment is in rands and the payout is also in rands, into a local bank account. The main advantage of this is that there are no limits for the investor as they do not have to get clearance from SARS. The fund manager takes care of this.

A particularly attractive option for local investors is the many international index-tracking products available on different platforms in South Africa. These give investors an opportunity to track offshore markets easily, efficiently and cheaply. ETFs that trade on the JSE are especially simple to access, as they can be bought and sold as easily as any liquid local share.

For example, Sygnia has an ETF listed on the JSE that tracks a composite index of the 4th Industrial Revolution companies. Also available in Sygnia’s range is the Sygnia Itrix MSCI World ETF, which offers exposure to developed markets. These give South African investors a way to invest in established multinational companies in economically stable countries. Sygnia also offers ETFs that track the MSCI Japan, MSCI US, S&P 500, FTSE 100 and the EURO STOXX 50 indices.

A number of local providers have also expanded their offerings into other international asset classes. These include global bonds and global property. The Sygnia Itrix Global Property ETF, for example, tracks the S&P Global Property 40 Index that includes some of the largest listed real estate investment trusts (Reits) around the world.

For many investors, choosing which way to access offshore markets is determined by the amount being invested, as the minimum amounts required to invest directly are too high for many individuals. You also cannot use the convenience of a debit order to invest directly offshore.

Considering the rest of Africa

Outside of the large international markets, countries in Africa like Nigeria, Morocco, Egypt and Kenya also offer interesting opportunities for South African investors. While these markets can be volatile, they offer high growth potential and positive diversification benefits.

An important consideration when investing in the rest of Africa is liquidity. It may be easy to put money in to many of these countries, but it can be difficult to get it out. A number of these markets also carry unfavorable credit ratings, but at the same time this means they offer yields far superior to those of stable and developed countries. They have to offer these higher yields to attract foreign investors.

In addition, the abundance of natural resources in Africa represents an opportunity for South African investors to expose their portfolios to different drivers of risk and return. A composite of the top 30 listed companies in Africa outside of South Africa returned 5.5% over 2018, compared to the -8.3% return from the FTSE/JSE Top 40. This indicates how the rest of Africa can provide a benefit in diversifying your portfolio.

Global factors

When making a decision to invest offshore, there are a number of factors to consider this year that may influence your returns. The first is interest rates in the US. The chairman of the Federal Reserve, Jerome Powell, has said the Fed can 'be patient' when it comes to hiking interest rates this year, which should be positive for stock markets.

The second factor is a slowdown in exports from China due to the continuing trade dispute with the US. If China's economy continues to slow, this will have an impact on global growth, and emerging markets particularly.

The oversupply of Oil will also play a factor as global inflation will likely remain subdued if the price of the commodity stays low. Certain political events such as Brexit will also have an impact on your offshore investment.

These factors show that investing offshore is not without risk. The idea is not to avoid risk entirely, but rather to diversify the risks that your portfolio faces. This is particularly worth thinking about in an election year, when even more focus will be placed on how state-owned entities are handled (Eskom and SAA in particular), and with the debates about the nationalisation of the South African Reserve Bank and land expropriation without compensation coming even more to the fore. Investors also need to consider the ruling party's desire to introduce legislation that will require asset managers to invest a percentage of their funds into infrastructure projects and state-controlled companies.

Lastly, investing offshore does protect your investment against a depreciating rand as you are hedging currency risk in your portfolio. While this is an important consideration, it is never wise to use your offshore allowance to speculate on the rand-dollar exchange rate. Short term currency movements are extremely difficult to predict. It is therefore always more prudent to rather use your offshore investments to diversify your portfolio, spread risk across different assets, countries and sectors, and reduce your exposure to South Africa's country-specific risks.