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Offshore investment hotspots

Simon Brown’s thoughts on Russia, China bulls and Brazil.

MARC ASHTON:Welcome to the MoneywebOffshore Investing podcast, today I’m joined in studio by Simon Brown from Simon, thanks for joining us.

SIMON BROWN: Thanks, Marc, my pleasure

MARC ASHTON: First question, are South Africans becoming more familiar with the ability to invest offshore using products like Webtrader?

SIMON BROWN: I think they are and if we go to 2001 when the rand crashed to 13.61 against the dollar there was a lot of panic but a lot of people just moved money into an offshore bank account and didn’t know what the heck to do. We used a lot of the dual-listed, the Sasols, the Richemonts and the like, that was really the vehicle. We’ve got local ETFs that have come through, ETNs, we’ve started to pick up traction on that but I think there really is a sense – and it’s been a slow, over the last ten or 15 years – a sense of that we can actually do this properly, we can go and get ourselves a proper international brokerage account and really do this properly. Certainly it is gathering momentum, I think more and more people are becoming cognisant of it and I think more and more people are becoming less scared of it. The first time I opened an offshore brokerage account was a terrifying experience … [I thought] who are these people? I think it’s become a whole lot easier and I think slowly we’re getting there. I think a lot more people are taking the opportunity …. We’ve got what, 450 shares on the JSE, the US alone has probably got 10 000 in total across their exchanges.

MARC ASHTON: So one of the obvious themes for the year has obviously been that of Russia. The theme for the podcast today is around hotspots and Russia has obviously been the country to watch: it’s been the fallout from the Ukraine, the sanctions between the West and Russia, and there’s a lot of negativity towards the country at the moment. If you look at the ETF that’s listed there, it’s down 33%, impacted by oil and sanctions are coming through. If there is a hotspot in 2014 it’s Russia. Does this potentially offer an opportunity for bold investors?

SIMON BROWN: It does, it’s the iShares MSCI Russia Capped ETF, code ERUS. I think it does – I think the operative word there is ‘bold’. If we run through some of it, is it majorly expensive, it’s on a price-to-book of about 1.5, a PE ratio of about ten. What we’ve seen is a collapse in the ruble recently, which has made it cheaper. Remember, you’re investing out of a US account, so you’re looking at the US dollar versus the ruble. That collapse in the ruble has certainly seen it become a lot more cheaper. Your risk is further downside in the ruble as well. We’ve had Vladimir Putin, the president of Russia make some plans around trying to protect the currency, I don’t think those typically worked very well, your speculators have got way more capital than your emerging economies have but I think we’re looking at an economy that is energy-based and whilst we’re seeing a huge amount of volatility at the moment in energy prices, particularly oil, to a lesser degree gas because of the fracking revolution. So certainly I think we’re getting a lot more interest happening there but is oil going to likely stay at, say, $60 or maybe go to $40 for a protracted period of time? I can’t see that happening. Ultimately, could we still be at this level in a year … I can’t see oil being $60 in three years’ time. So it comes for a brave investor but your bravery, if it works, brings your rewards.

MARC ASHTON: South African investors are obviously familiar with the likes of Sasol, for instance, but maybe give us some ideas of the components that will allow them to trade the energy side of the ETF?

SIMON BROWN: Well, that ETF, the two big ones, Gazprom and Lukoil but between them are 30% of the ETFs, so immediately you’ve got your two, one in the gas, one in the oil space, so two energies. Remember, their gas is going into predominantly Western Europe through the Ukrainian pipeline, that’s the troubles we’ve had in Ukraine. That demand is fairly inelastic and although we’ve seen pressure on the gas price that pressure really happened over the last couple of years but not so much in Europe because Europe hasn’t got all the fracking, it hasn’t got vast quantities, it’s got no oil, some in the North Sea in Scandinavia and the like. So you’re immediately getting yourself 30% exposure to two of the largest energy companies in the world.

There are some financials at number three, a consumer staple company, which would be a Pioneer or a Tiger Brands but probably brands you wouldn’t recognise because they’re Russian brands. Then nickel mining coming in at number five. So you get your strong energy underpin at 30% and that’s just from your top five, and then you get that bit of diversification around it. So you really are looking at energy/the Russian economy. I always say, there has been talk, folks are saying “ah, it’s really bad for Russia”. Sure, maybe it is but what we find is that markets recover, companies recover and bounce back as a rule

MARC ASHTON: One of the other hotspots is obviously China, we’ve seen obviously there’s the clash with Japan at the moment, there is the issue of it flexing its muscles throughout the Eastern Pacific, you’ve got the interaction with the US in terms of it’s become the second-biggest economy out there, they’ve just opened up their equity market. It’s a big bet, you’re either a China bull or a China bear, there are the issues around shadow banking that’s now worrying a lot of people about putting further equity investment into China. Maybe a starting point there is are you a China bull?

SIMON BROWN: I am a China bull and you’re right, you are either bullish or bearish. I am a China bull, there are a lot of issues around China, you mentioned shadow banking as one of them, the political and economic structures we see in China. But there are two key things that I think are important, one is that they’ve done the whole infrastructure build, we talk about these ghost cities, the point with infrastructure is you build it and then they will come.

China has just taken it to an extreme and built a city for a million people and there are only 10 000 people. But the second part of the transition of China is now that creating that middle class and within that middle class will be some rich and some poor but most will be good old fashioned middle class and they’ve got the trains and the roads and the universities, all standing and waiting. They’ve taken about 350m people out of rural areas into cities; they want to do another 350m. You look at that and you can’t be anything but massively bullish on China as a consumer nation. Their political system gets complaints round it. We’ve got a democracy we fought for, democracy is the big thing. The point is their political structure actually gives their leaders a lot more flexibility – perhaps the wrong word – but a lot more in terms of managing the process. If they don’t like what’s happening in shadow banking, forget trials and all of that sort of thing, they just crack down on it, as they’ve done with gifting and we saw Richemont take the hit. Gifting, which we would probably call bribery, was big and they didn’t go through the court and the legal system, they just basically sent a memo to officials and said no more, and it stopped almost overnight. So that gives them that level of control. So I’m a massive, massive bull on China.

MARC ASHTON: One of the questions that’s going to come up from listeners will be that there are a lot of ETNs that are listed in South Africa that do give you access to different parts of the world, including China. What’s the difference between ETNs that are sitting here and the opportunity to trade the ETF?

SIMON BROWN: I think there are a couple of points and the first is cost, the ETNs that we have sitting locally are sitting at total expense ratios of around 0.84% and upwards, in fact. The ones we got from BlackRock, iShares, are sitting at 0.61%, call it 0.25% a year and we look at that and we think what’s 0.25%, compound that over the rest of your investment horizon and that becomes massively, massively significant.

What we’ve also seen is that a lot of the local ETNs are actually investing into the Hong Kong Stock Exchange, they’re buying those shares of Chinese companies, Tencent is an example. BlackRock is doing the same but they’ve also got the opportunity, they’ve got the mandate to actually go into the Chinese Exchange and get access that way. I mentioned Tencent, that is in the BlackRock ETF, which is called iShares MSCI China ETF, code MCHI, their biggest holding is Tencent, which is oddly enough a company we know incredibly well because of Naspers. But if you look at it it’s amazingly diverse, it’s Tencent, it’s China Mobile and then a couple of banks bringing up the rear, one of them being ICBC, which is obviously a significant shareholder in our own local Standard Bank.

MARC ASHTON: A closing question for this, as the theme was hotspots, any other hotspots investors should be looking at around the globe that may interest them?

SIMON BROWN: I think there are a couple of interesting ones, Brazil is one that always interests me, they’re one of the BRICS, they’ve had a market that’s done pretty much nothing over the last year, it is perhaps a little bit expensive in terms of price/earnings and price-to-book ratios. They had the World Cup last year and they’ve got the Olympics coming in 2016, those are huge deals in a sense there and Brazil is a giant economy. I was doing some research on GDPs and Brazil is in the top ten in terms of GDP. I think we forget that, it’s absolutely humungous.

The other one which pops up from time to time is Israel, Israel is weird in the sense that it’s definitely a hotspot but a lot of tech stuff is coming out of there. Waze is an Israeli firm, that’s where it originated from. Israel’s largest stock is a company called Teva Pharmaceuticals, which is doing a lot of work in the cutting edge of pharmaceuticals. So it’s almost like a …I want to say an entrepreneurial type of country sitting in this space.

MARC ASHTON: Simon, thanks very much for joining us in studio today and talking offshore investments.

** This is a sponsored education series focused on offshore investing. The content is sponsored by Standard Bank Webtrader and Moneyweb is the content creator.


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