Tony Twine
The relaxation of foreign exchange controls on South Africans has opened a world of opportunity previously forbidden. Unhappily, it has also unleashed a world of mystery on relatively innocent South Africans, many of whom had only had the domestic capital markets as their benchmark for investment performance.
Wealthy South Africans, and those who aspire to becoming wealthy, can now hedge their domestic investment bets with investments in offshore assets and portfolio management schemes. But with the world’s major economies generally in states of very low inflation, are there adequate returns for South African investors?
On the assumption that South Africans investing abroad would want to enjoy the fruits of their investment back here, the performance of foreign investment opportunities should be converted into rands in order to assess and compare their performances.
For example, let us examine the rand value of R100’s worth of equity investments in each of the stock exchanges in New York, London, Tokyo and Johannesburg in January 1994. The graphs on the left show the values of the investments in rands, if the selected equities performed in line with the Dow Jones, the FTSE, Nikkei Dow Jones and Johannesburg Stock Eexchangeall share indices respectively.
There can be little doubt that investment in either the New York or London stock exchanges would have been a worthwhile venture indeed for any South African over the five-and-a- quarter-year period under review. Tokyo would have returned very much the same rand returns as Johannesburg. The weakness of the Japanese stock market since 1994 has been counterbalanced by a steadily appreciating yen/rand exchange rate.
By the end of March 1999, the R100 invested on the JSE would have grown to R128,30, at a fairly tame compound rate of 4,9% per annum. The capital growth in Tokyo, with changes in the exchange rate, would have been marginally worse, yielding R127,80 at a growth rate of 4,8% per annum.
On the other side of the world, things would really have been happening in terms of capital growth. The R100 invested in New York would have been worth R454,40 if repatriated at the end of March 1999. This reflects a spectacular growth rate of 33,4% per annum, sustained for more than five years. That’s quite a hedge!
Not to be outdone by Wall Street, the returned amount from London would have been R476,80, yielding a growth rate of 34,7% per annum. Clearly the diversification of domestic risk through foreign investment opportunities would have been worthwhile, but you would have had to choose with some insight to hedge into New York or London, rather than Tokyo or, even worse, Bangkok and Kuala Lumpur.
Very few South Africans have the time, knowledge and wealth to manage the risks and opportunities associated with local equity market investment. Adding an international dimension compounds the difficulties of the exercise.
When in doubt, find somebody who knows what they are doing. In this case, it would be in the form of a foreign investment fund and its management team. There are many attached to local banking and financial institutions, all of whom compete among each other and with offshore equivalents.
Hedging against poor economic performance, including the occasional plunge in the exchange rate of the rand, seems very sensible now that such activity is legal. By the way, don’t cry about the rand opportunities in New York and London – if you had made the investment in 1994, they would probably have been illegal.
Tony Twine is a director of consultancy firm Econometri