What investors need to be aware of when gaining exposure to offshore markets

Investing offshore brings a SA investor currency risk and market risk, explains Wendy Myers of PSG Wealth. ‘It’s important to understand those risks, take a step back and look at your portfolio holistically.’

CIARAN RYAN: Offshore markets have experienced a fair amount of volatility since the start of the year. The prospect of rising US interest rates and increasing Russia/Ukraine tensions have hit the equity markets. Of particular concern is the fact that Russia and Ukraine are key suppliers of commodities from metals to soft commodities like wheat.

To explore this in detail, we are joined by Wendy Myers, who’s head of securities at PSG Wealth. Welcome, Wendy. These are troubling times for equities, are they not, with rising interest rates across the globe and the Russia/Ukraine conflict looming large at the start of 2022? Where does this leave equities?

WENDY MYERS: Thank you, Ciaran. Yes, I think it’s certainly a time of immense volatility and, before we talk to where this leads equity, it’s important for us to consider what we experienced in 2021. I don’t know if anyone knows this, but it’s a staggering $17 trillion that was added to global wealth during that calendar year, and the US contributed $14 trillion of that.

So what does this mean, certainly for US markets? It means that there’s obviously rising inflation, and with that rising inflation the US Federal Reserve is required to manage both higher prices and inflation, so it is forced to respond to this. The response has been to increase interest rates on March 16. I think it’s important to note that this is the first time interest rates have increased since 2018, so this is a significant change to the markets that we are used to, especially when considering investing offshore and most notably in the US.

CIARAN RYAN: Okay. So what does that mean for investing in 2022? How can we take that away and put that in the bank?

WENDY MYERS: Well, I think interest rates aren’t the market’s best friends. Naturally the rising cost of borrowing impacts the average consumer, and that will naturally impact the returns from a stock perspective. We often consider growth stocks – stocks that are highly impacted by interest rates – because these types of companies make large investments into growing revenues, so any increase in the interest-rate cycle has a big impact on their returns – and naturally on the stock returns to the average investor.

What we’ve seen so far this year is that we’ve experienced offshore negative markets in 2022. This has most notably been experienced in the US and Europe. Interestingly enough, the UK is broadly unchanged, but that’s because they are quite strongly exposed on the commodity side and we’ve seen quite a strong commodity run.

CIARAN RYAN: Okay. One of the things that we have seen at the start of this year is volatility. We’ve seen the Nasdaq and the S&P 500 dropping quite sharply at the beginning of the year, with a bit of a rebound over the last couple of weeks. So how is market volatility affecting value stocks and growth stocks?

WENDY MYERS: Well, you know, value stocks and growth stocks are two terms we use for the type of stocks you want to invest in. As I’ve mentioned, growth stocks are those sort of high-growth, high-capital stocks that are impacted by increased interest rates; value stocks tend to outpace growth over the years. I think we find that certainly this calendar year value stocks have performed extremely well. The main reason for this in the US in particular is that the economic performance has certainly outpaced pre-pandemic levels, and this is what’s driving these value stocks. The driver of this economic output is mostly because households have excess cash. If you remember, the US was very pro providing fiscal stimulus and payments to US families, and this has increased spend by the US consumer.

I think from a growth-stocks perspective we’ve seen significant pullback here, and fundamentally it’s due to concerns around interest rates and how that will impact these growth stocks’ returns. Typically these growth stocks perform extremely well when interest rates are near zero, and the expectation is that those interest rates will continue, obviously with the fact that increased interest rates are on the horizon. This means that growth stocks have been negatively impacted from the value perspective.

CIARAN RYAN: Right, and growth stocks tend to perform better when interest rates are low. So with the interest-rate cycle turning in the opposite direction, could we expect value stocks to outperform growth stocks?

WENDY MYERS: That’s what we are expecting most definitely in the short term, yes.

CIARAN RYAN: Okay. Does it still make sense for local investors to invest offshore, given the turmoil that we’re seeing in international markets?

WENDY MYERS: Absolutely. I think offshore investment remains a very important part of our diversified portfolio. The argument in favour of offshore investment continues; it remains unchanged. I think it’s important to note that South African investors in particular require diversification from a currency and geographic perspective. Obviously also investing offshore enables South African investors to invest in industries that aren’t available locally; so that’s another benefit to consider.

CIARAN RYAN: What else should investors be aware of when it comes to gaining exposure to offshore markets?

WENDY MYERS: Well, I think they need to be very conscious of the fact that there are benefits to offshore, but it’s not risk-free. So investing offshore, as I’ve said, brings a South African investor currency risk and market risk. I think it’s important to understand those risks before the South African investor invests offshore. It’s important to take a step back and look at your portfolio holistically. Typically a lot of investors focus on a split of 50% between local and offshore, but that’s obviously very unique to each individual’s personal situation. Some investors tend to prefer investing locally via feeder funds, and that’s absolutely fine.

But in some cases certain South African investors are optionally into investing in offshore stocks, which is great. It’s important to note that this could have situs tax implications, so I think it’s very important to consider approaching a financial advisor before you delve into investing offshore in equities.

CIARAN RYAN: Wendy Myer, head of securities at PSG Wealth, we’re going to leave it there. Thanks very much, Wendy.

WENDY MYERS: It’s a great pleasure. Thank you for inviting me today.

Brought to you by PSG Wealth. 

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