People should be aware of their own blind spots when it comes to making decisions about foreign investments. South African investors are close to a lot of political noise and it evokes a lot of emotions.
At a recent PSG investment webinar portfolio managers and wealth advisors addressed some of the blind spots with regard to foreign investments. (Blind spots are generally seen as a lack of insight or awareness about a specific area of one’s behaviour.)
PSG Wealth advisor Marzel Swart cautions against making decision based on emotions.
After the recent unrest in KwaZulu-Natal and parts of Gauteng there was a lot of talk about investing fully offshore.
However, that is one of the blind spots to be wary about since the discussion remains relative to each individual’s circumstances.
PSG Wealth manager Morné Oosthuizen says personal circumstances change. It is quite possible that many young South Africans will end up working or living abroad.
“The question is whether the parents and grandparents will still need a large rand return or will their need for foreign currency returns increase.”
Oosthuizen says the diversification between rand, dollar or euro investments then becomes more important.
“That is because our circumstances can change to such an extent that we will need both domestic and foreign investments. For years we have seen currency investments as a long term investment, but now we will reach a point where we need income from other currencies.”
People often look at the amount of money they have when deciding where to invest. However, they should consider their entire balance sheet. “The average South African [relatively speaking] is going to retire with a paid-up mortgage, a pension fund amount, or business interests that can be sold.”
That means the individual’s biggest assets are in SA. Their pension fund is restricted to a 30% offshore exposure and most of the advice over many years has been to limit offshore discretionary investments to between 30% and 40%.
Tian Ebersohn, portfolio manager at PSG, says South Africans are part of the world economy and we are becoming world citizens. “We increasingly see people who either want to move abroad or have children there, and although they stay in SA they would want to visit their children.”
To live in SA, a rand return is then important. However, the rand is continuously depreciating against other currencies and South Africans will be able to do less and less with the rand abroad.
“Therefore it is very important to protect your income or the buying power of the rand against depreciation, and foreign exposure will offer that protection,” says Ebersohn.
JSE shouldn’t be ignored
Hennie Fourie, PSG Wealth advisor, says whether one wants to or not, one cannot completely ignore the JSE.
“Most of our wealth is locked into retirement annuities or pension funds. Most of us have retirement savings and within these products the local share exposure always makes up the biggest part of the product.”
He says the JSE still counts among the top 20 biggest exchanges.
This means fund managers do have the option of investing in multinational companies that are invested in the JSE.
The nature and structure of the JSE is such that the top four companies dominate our stock exchange. “They determine the direction of our exchange,” says Fourie.
Ebersohn warns against this domination because of the concentration risks. He refers to Naspers which makes up almost a fifth of the bourse. Its exposure to the Chinese market through its holding in Tencent and changes to government regulations can result in significant movements in the share price.
The diversification plan
That is why diversification is important. South Africans do not get exposure to the large international companies that are known as ‘the disrupters’. This includes the large technology companies such as Apple and Amazon.
Swart advises investors to always consider their asset class allocation when making investment decisions. If there is a sufficient share exposure in the portfolio the discussion about local or offshore becomes less relevant.
“The most important thing is to ensure that you invest in the share market and that you are invested in good companies who have the ability to adapt to the changing environment.”
When deciding on investing offshore it must be for the right reasons and not only because we have no confidence in the rand or the country.
The blind spots
Fourie notes that there isn’t a strong correlation between share markets and the economy or politics.
“We have seen that even though we are still in the thick of the Covid-19 pandemic, our market and foreign markets are at record levels. Markets are forward-looking and the expectation is that things may improve in the future.”
He adds that it is important to stay in the market, because to sit on the sidelines and wait for the economy to recover will be too late. Share markets recover before the economy recovers.
Listen to Simon Brown’s interview with Prandhana Naidu from Melville Douglas in this MoneywebNOW podcast (or read the transcript here):