The JSE has significantly underperformed compared to global stock markets over the last few years. Political uncertainty – particularly concerns around land expropriation without compensation – has left investors with much to think about.
With all the negativity and uncertainty, there have been suggestions that investors should take the lion’s share – if not all – of their money offshore.
On the surface, this may sound like a compelling argument. In the three years through October 2018, South African shares have delivered a mere 1% growth in rand terms compared to the roughly 8% total return that global stocks offered in dollar terms annually (on average).
As humans it is natural to want to avoid disaster and to rather get in on the global game. Who would want to invest or stay invested in South African stocks that have gone almost nowhere?
But before you take your hard-earned money offshore now, there are some important points you may want to consider.
Buy low, sell high
No-one knows where markets are heading, but because the South African stock market has underperformed global equities, particularly in the US, local stocks are now cheaper relative to global stocks compared to where they were three years ago. Remember, you want to buy assets cheaply and sell them at a higher price. Several fund managers have in fact sold some of their global stocks to take advantage of opportunities in the local stock market over the last few months. From a relative return perspective, it does not seem like a forgone conclusion that investors should take most of their money offshore now.
Some local shares already offer international exposure
If you have invested in a unit trust that only invests in shares or are a pension fund member, you will likely already have a sizeable exposure to offshore markets because of the shares held in these funds. Pension funds can invest up to 30% of the fund directly offshore. Some companies that are listed on the JSE (for example Naspers and Richemont) earn most of their profits in offshore markets. A typical local pension fund could have more than half the portfolio exposed to international economies due to direct offshore exposure and the profits earned in international markets.
Personal circumstances matter
Direct offshore exposure of between 20% and 40% is probably suitable for most people, but personal circumstances should inform any decisions around an appropriate allocation. If you plan to retire overseas or want to send your children to an international university (and will have to settle future expenses in dollars, euros or other international currencies), you will likely need a much larger offshore component in your portfolio. But if you have bills that you need to pay in rand over the next 12 to 18 months, it is not a sensible strategy to buy dollars and invest offshore today as you would have to bring the money back to South Africa quite soon. If the rand should strengthen during this period, there is a chance that you will have a shortfall when it’s time to pay your bills.
You can’t predict future returns based on past performance
Statements suggesting that investors should have 80% or 100% of their investments offshore can be ambiguous. For people who took money offshore three years ago to invest in equities, this may have been a good strategy, but this does not mean that it will lead to similar results over the next three years. While some fund managers can’t shake their concerns following recent negative local market movements, others suggest that the outlook for local shares over the next five years is better than the outlook for offshore stock markets.
You may be getting biased advice
If an advisor argues that investors should be taking the bulk of their money offshore, they may be doing so because they work for a financial advisory firm that specialises in offshore investments and they may earn the bulk of their income from clients acting on such advice. The recent underperformance of the local market is a great marketing tool for firms advocating that people should take most of their money offshore.
The JSE represents less than 1% of the international investable universe. Going offshore allows investors to get exposure to sectors and firms that they would not be able to access in South Africa and is an essential part of diversification.
But going offshore should be informed by personal goals and circumstances, and efforts to construct a global portfolio best suited to these needs. When you find yourself wondering if you should move money offshore, ask yourself whether such a strategy will put you in a better position to meet future goals.
If the reason behind the move is the disappointing recent market movements, fear of missing out on seemingly better offshore performance or an emotional reaction to political uncertainty, tread carefully.
Remember, investing is a long-term game!
The information contained in this document does not constitute as advice. Should you need advice, please contact one of our friendly and capable 1Life high advice consultants.