There are a number of persuasive arguments in the watertight case for investing offshore, including diversification, which is a key principle of sound investing as it reduces political, currency, interest rate and many other idiosyncratic risks. Further, it permits exposure to industries not listed in South Africa.
However, Rowan Williams-Short, chief investment officer of Nedgroup Investment Advisers (United Kingdom), warned at a national Nedgroup Investments road show this month that South African investors should avoid international emerging markets, including China (even though headline-grabbing articles may make it seem tempting) when investing offshore.
Williams-Short pointed to historical evidence of the equity-market performance correlation between emerging markets rising significantly (or becoming highly correlated) when trouble brews in any one emerging market. This essentially means that in these trying periods all emerging markets come under pressure — and this has tended to be so even when there has been no fundamental justification for such a correlation.
By way of example, Williams-Short discussed the Mexican peso (currency) crisis of 1995, when the South African all-share index lost 13% in one month, and the Asian crisis of 1998, when the all-share index lost 39% and the all-bond index 26%.
Williams-Short went on to discuss a number of sobering Chinese investment realities, distinct from Chinese economic performance, including:
- China was the only equity market that delivered negative returns in 2005;
- China’s economy remains centrally controlled; for example a maximum PE multiple for initial public offerings (IPOs) was set in December 2001, with the obvious result of earnings manipulations;
- the 10-year average return of all Chinese IPOs since 1993 is -2,9%;
- the percentage of Chinese IPOs whose stated return on capital peaked in the year preceding the listing is 100%; and
- the annual new power-generating capacity needed to sustain China’s economic growth rate exceeds the entire current capacity of the United Kingdom!
Given these risks and that South Africa makes up only 0,5% of the world’s gross domestic product and 1% of the world market cap, and emerging markets in turn less than 10%, why should South Africans risk their non-South African assets on other emerging markets?
The short answer, according to Williams-Short, is that they shouldn’t. Certainly Nedgroup Investments’ suite of FSB-approved global funds avoids emerging-market equities and bonds.
“If this transpires to be an opportunity cost, so be it; a real cost would be much worse. However, if China continues to grow and voraciously consume commodities, then the South African all-share index and local investors should do just fine; if not, South Africans would be well placed by not being invested in emerging market economies,” stated Williams-Short.
In conclusion, Williams-Short advised South Africans looking to diversify offshore to consider developed-economy equity markets, pointing to the fact that the S&P 500 rating is the most attractive in 10 years and the FTSE 100 the most attractive in 16 years.