Why you should stay invested offshore

Published Jul 18, 2015

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As an investor in global financial markets, you may well be feeling a little rattled: the quarter to the end of June ended dramatically, with Greece closing its banks amid a crisis over the repayment of its loan to the International Monetary Fund, and China’s stock markets falling 20 to 30 percent from their previous highs.

Many local equity and multi-asset unit trust funds have the maximum permitted exposure to international markets, and many investors who have heeded the advice of asset managers and financial advisers over the past five years also have relatively high exposures to these markets.

But if you are a long-term investor, asset managers suggest you put things in perspective.

Johan Strydom, the head of South African equities at Sanlam Private Wealth, says that, as an equity investor, you should hold your nerve and not overreact in the face of local and global volatility.

“Investing in equity markets is a long-term decision, and investors should not be influenced by short-term swings in sentiment.

“Markets go up and down over time, and this is currently a down phase. At a time like this, it is worth going back to basics and remembering that such pull-backs can give investors an opportunity to buy, particularly when taking a long-term view,” Strydom says.

Graham Tucker, the manager of the Old Mutual Balanced Fund at Old Mutual Investment Group, also advises that you put current events in perspective. He says that global equities remain Old Mutual’s asset class of choice, and the current volatility is likely to create investment opportunities.

Despite the headlines about the fall in the Chinese markets, Mark Mobius, the chairman of Templeton Asset Management’s Emerging Markets Group, says the China “story” is still intact, because the country’s economy is growing well. China remains an important global market to which you should be exposed, he says.

Despite a rescue deal struck this week, there is uncertainty about the future of Greece. However, Strydom says investors have already priced in Greece’s potential departure from the euro zone.

Tucker says the Greek crisis is unlikely to derail the economic recovery in Europe.

“The Greek stock market constitutes a meagre 0.03 percent of the MSCI All Country World Index. Against this backdrop and a number of other factors, Greece poses less risk today than it did just a few short years ago,” he says.

Tucker says the euro zone is currently in “a far healthier” condition, because Spain, Portugal and Italy are recovering, there are stronger backstops in place, such as the European Central Bank’s quantitative easing programme and the European rescue fund; and European banks have significantly less exposure to Greek debt.

He says the uncertainty about what will happen in Greece will create volatility, but Old Mutual continues to prefer global equities and, more specifically, European equities, and will look for opportunities to buy more of these shares in the current volatility.

Strydom says the Chinese equity market is the bigger issue influencing investor sentiment.

He says the 30-percent pull-back means that shares are now trading at a more reasonable price-to-earnings ratio (P:E) of 18 times. It has been 15 over the past eight years and 19 over the past 10 years, he says.

The P:E of a share or a market gives you an idea of how expensive it is relative to the company’s or the market’s earnings (profits), and it can be compared with its long-term average.

Strydom says the Hong Kong market appreciated by 140 percent between July last year and June this year. The market today is still 15 percent higher than it was at the beginning of the year. The Chinese market is still 80 percent higher than it was in June last year, he says.

It was no surprise that the market corrected after “periods of exuberance”, and the fundamentals for investing offshore have not changed, he says.

Global interest rates, one of the biggest drivers of global equity markets, remain low, and “we expect the US to be extra cautious regarding raising rates”, Strydom says.

Tucker says that, although the Chinese economy is still growing, the rate of growth is likely to slow.

There are some concerns that the market’s recent fall will spill over into the economy and cause an even sharper slowdown in growth.

But Tucker says the Chinese government has plenty of ammunition to stop a sharp decline in growth and has already reduced one-year lending rates and deposit rates, with scope for further cuts.

Tucker says Old Mutual is of the view that US interest rates may be increased in September, but expects that rates will rise slowly.

“We would not be surprised by a bout of volatility as the hike draws near, but we are not overly concerned about this, given the muted nature of the cycle and the extensive communication from the Federal Reserve around it.

“All things considered, in the medium to long term, global equity remains our preferred asset class. We are underweight in US equity in a global equity context, given its strong performance over the past few years, and maintain our preference for European and Japanese equity, where we see better value,” Tucker says.

Mobius says the decline in the Chinese market has bottomed.

He says three things contributed to the market panic in China:

* A rapid rise in the market last year that led to high valuations, prompting some investors to leave the market.

* A flood of initial public offerings (IPOs) that were very popular and resulted in huge profits being made. These IPOs went up 40 percent in some cases, and the new share issues drew money away from the rest of the market.

* The start of the Shanghai-Hong Kong Connect late last year. This investment channel allows investors in either the Shanghai or the Hong Kong market to trade shares on the other market using their local brokers and clearing houses. Mobius says that, although money moved into the Shanghai market, investors in mainland China were not initially encouraged to go into Hong Kong, so there was a difference between the performance of, and flows into, the two markets.

Mobius says the fall in China’s market is a natural correction after too much euphoria.

The Chinese government’s attempts to stabilise the market and stop the fall, using various measures, seemed to have had the opposite effect, he says. As the market continued to fall, trading in many stocks in China was suspended, bringing more uncertainty and fear.

Mobius says the situation in Greece also had an impact on market sentiment in China, because investors there are not isolated from global news, and international investors have been on edge about the situation in the euro zone.

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