South African investors should put some of their savings in offshore markets in order to take advantage of the opportunities not available in South Africa, as well as for diversification and risk reasons, it emerged at Stanlib’s second investment cnference in Cape Town on Monday.
This was particularly true now, when the rand appeared to have reached its peak value against most benchmark currencies.
Richard Timberlake, chairperson of London-based multi-manager Investment Manager Selection, said he had a “firm belief” in investing in the “huge opportunities” that existed in the rest of the world, given that many unique companies were found outside of one’s home country.
Being small stock exchanges, the JSE and LSE could not offer some of the choices found in the US.
“Look at the likes of Microsoft and Google in the US,” he noted. “Nowhere else are there companies like these. Also in the US, one can gain exposure to rapidly growing industries like dentistry and homecare that are set to thrive on the ageing of the baby-boomers’ generation. One can even invest in rats — there is a company supplying lab rats for experimentation.”
He stressed that it was not true that if one lowered one’s risk through diversification such as that offered by the international market, then one’s returns would necessarily be lower.
“International investing means one can increase returns, since faster growth can be found in some offshore markets like Asia,” he remarked. “Chinese growth, as well as that of India, Brazil and others, will outpace developed country growth in the coming years, making them extremely attractive for investment.”
In fact, it was now more important to look at the potential growth of the sector to be invested in than to consider the geographic location, said Timberlake. This was true because of the growing correlation of returns across global equity markets (apart from Japan).
Also important was the amount of time for which one invested — a minimum of three to five years was required to deliver a good return, while resisting the “group psychology” to sell at the sign of the slightest underperformance.
He pointed out that Europe’s best-performing asset manager, Anthony Bolton with 25 years at the helm of Fidelity’s Special Situations Fund and the manager of Fidelity’s European Fund until recently, actually underperformed his peers in seven years out of the 25.
Timberlake also believed investment style — growth or value — and market capitalisation — small or large cap — to be key to getting good investment returns. Each of these four categories out-performed or under-performed each other depending on the economic cycle.
Meanwhile, Terence Mahony, fund manager at IMS, told the conference that now
appeared to be the time for South Africans to invest offshore because the rand
strength of the past two years looked to be finally running out of steam.
Measured in US dollars, the South African equity market had posted the worst performance of all emerging markets in the first six months of 2005 due to rand
weakness, declining by 11%. By contrast, South Korea, Hungary, Indonesia and Brazil had all recorded 11% gains and Turkey recorded a 39% rise.
Providing the company’s view on investment options, Mahony pointed out that global liquidity had begun to dry up in the past year, due mainly to the United States Federal Reserve’s interest rate hikes. This meant global risk was rising, as the two were negatively correlated.
At the same time, this meant weaker growth for developed countries in the second half of 2005, with leading indicators already pointing to this, as did the flattening US Treasuries yield curve. Analysts expected corporate earnings growth to be slower in the next six months and possibly flat in 2006, he revealed.
The good news was that US inflation appeared to be in check, while the European Central Bank had already begun to loosen its monetary policy, setting the stage for the US Federal Reserve to end its tightening cycle. Eurozone growth could start picking up soon, he believed, while Asia ex-Japan represented “excellent value”.
Currently IMS was underweight on the US and UK markets, neutral on Europe, and overweight in Japan and Asia, he disclosed. The overall portfolio was 3% cash.
The group’s forecasts were for more of the same — which Mahony characterised as either “boringly bullish” or “happily bored”.
IMS was looking for the oil price to remain around current levels over the short- to medium-term, while the dollar would remain relatively strong against the euro, trading in the 1,15 — 1,25 range.
“2006 is likely to be very similar to 2005,” he concluded.
“We are going through a period of global stability with a relatively benign outlook. There is greater political freedom and transparency globally and global economic vitality, building a solid foundation for improving living standards and prosperity.
“This low-return environment brings less risk as well. We are seeing equity returns of 8%-9% this year, while bonds should return 4%-5%.” – I-Net Bridge