It is a good time to invest offshore - because of the current strength of the rand and because the shares of many blue-chip foreign companies are available at more reasonable prices than two years ago.
This is the view of a number of South Africa's investment experts.
But the experts caution that in the short term the rand may strengthen even further, causing short-term currency losses; and, because of uncertainty, you must diversify your investments across and within asset classes, across regions and across currencies.
Urvesh Desai, the international portfolio manager at Macro Strategy Investments, Old Mutual Investment Group, says your major initial risk is a continued strengthening of the rand. As a result, you should phase in foreign investments.
He says there is no fundamental reason (barring a South African-specific event) the rand should weaken drastically or soon, as long as there are low interest rates and growth fears in the developed world.
He says the current situation could last as long as two years.
The experts say a further lure to invest offshore is that blue-chip global company shares are cheaper than they have been for many years.
Charles de Kock and Chantal Valentine, investment strategists at Coronation Asset Management, say the reason for the relative cheapness of good-quality global equities is that internationally investors fear that equity markets are fragile.
Consequently, good-quality, world-class companies that are not listed on the JSE can now be bought at reasonable prices.
Although all agree this is an opportune time to invest offshore, by using either rand-denominated investments (you invest in rands and receive your returns in rands) or your R4 million once-off foreign investment allowance, you must proceed with caution.
Prieur du Plessis, the chairman of financial services company the Plexus Group, says you must plan carefully, taking account of your liabilities and living expenses.
Other things to take into account include:
- The reasons.
You must have sound reasons for investing offshore and must match your investments to those reasons. Your reasons could be tactical, such as temporarily parking your funds abroad to take advantage of later rand weakness, or strategic, such as investing in growth assets for long-term returns.
- The products.
You should also be cautious in your choice of products. For example, an inflexible life assurance investment may severely hamper your ability to make adjustments to your overall investment portfolio at a later stage.
- The right assets.
Once you have selected the offshore asset class, do your homework and select those portfolios or instruments that have the best returns historically.
Du Plessis says it is often better to leave the choice of asset class to fund managers. "They have their finger on the pulse and will make the necessary adjustments as circumstances and market valuations change," he says.
Desai says offshore investment decisions should be made with a five- to 10-year time frame in mind.
"Today's dog may become tomorrow's star performer," he says.
ANALYSTS FEAR INVESTORS COULD BE ENGULFED IN A CURRENCY WAR
You can ascribe the strength of the rand to the effects of what some analysts consider to be the early stages of what could turn into a full-scale currency war.
Locally and internationally, the big debate is whether or not a global currency war has already started and, if so, how it will affect your investments.
The finance ministers and central bankers of the world's biggest economies are currently meeting in South Korea, discussing how to avert a currency war by ensuring that exchange rates are set by the markets instead of being determined by artificial interest rates and other interventionist measures by the major economic players, such as the United States, China and Japan.
In simple terms, a global currency war is when countries depress the value of their currencies to stimulate export-driven economic growth in order to get out of or avoid a recession. Typically, other countries respond by placing trade barriers on the goods exported from that country.
Desai says a weak currency is "potentially a way of siphoning off economic growth from other countries and stopping them from siphoning off your growth".
Du Plessis says the world economy is in danger, and the "next global financial storm might soon envelope you and your finances".
The depreciated Japanese and US currencies and the already weak Chinese currency are leaving the rest of the world "out in the cold", undermining economic growth, particularly in the euro zone, Du Plessis says.
Andre Roux, the head of fixed interest at Investec Asset Management, says that from a global perspective there are no real beneficiaries in a currency war.
"Over the long term, restrictions to capital flows have the very real potential to damage the allocation of capital, harming world growth in an already fragile environment," Roux says.
De Kock and Valentine, investment strategists at Coronation Asset Management, say the current situation will not last.
US interest rates will not stay at zero forever and the Chinese will be under pressure to allow the yuan (renmimbi) to appreciate or they will face trade tariffs, they say.
But De Kock and Valentine say they have no idea when there will be a return to normality. When it does happen "the flow of money could reverse quickly and the now-strong currencies will be under pressure of capital outflows".
EXPECT LOWER PERFORMANCE GENERALLY
Investment markets are going to be a lot less exuberant for quite some years, Sandy McGregor, the equity and fixed interest portfolio manager at Allan Gray, says.
And you can blame it on the baby boomers, the generation born shortly after World War 2. Boomers are either in or approaching retirement and have discovered, particularly in the wake of the global credit crunch and the subsequent recession, that they have not saved enough for retirement.
Repaying debt and saving have become the order of the day, with the result that deflation has become a major factor in the global economy.
As a result, McGregor says, there has been a fundamental change in the world economy that could be with us for many years.
Policymakers, such as those in the United States, who are attempting to revive economies by keeping the cost of borrowing as low as possible to stimulate spending, are finding that consumers are not taking the bait, McGregor says.
The US is following a dangerous path in attempting to put Humpty-Dumpty together again by keeping interest rates low and continuing to build a fiscal deficit, he says.
"American policymakers are obsessed about not having recessions," McGregor says. But he says that recessions are important, because they help to clean up inefficiencies in the economy and this results in stronger future growth.
Locally, he warns that the current situation is not so much of rand strength but of dollar weakness. This is also reflected in the dollar's weakness against the euro. The reason is that investments are being allocated away from the dollar.
The result can be seen in the prices of gold and oil being comparatively flat when measured in euros rather than in dollars.
These factors will affect the entire investment judgment process. The experience of Japan is quite chilling, showing how powerless governments are to stimulate economies.
He says your answer is to have a diversified portfolio and to buy equities in global companies.
UPSIDE AND DOWNSIDE
There are both pros and cons to having a strong rand, Adam Ebrahim, the chief executive of Oasis Asset Management, says.
So far, Ebrahim says the debate on the currency has concentrated on the negative aspects, such as declining exports and consequent job losses as exporters attempt to be more competitive, which in turn is widening the gap between rich and poor.
China, with its weaker currency and cheap labour, has been the major beneficiary of the stronger rand, making it the "manufacturer of the world", he says.
While South Africa has benefited from China's demand for resources, China's weaker currency means that more South African jobs will be exported to China, Ebrahim says.
The negative effects of the strong rand can harm the economy over the short and the long term.
The upside of a strong rand is that South Africa has become wealthier and the cost of capital has declined. This has allowed for increased capital spending, on things such as infrastructure, at affordable levels.
The stronger rand has also contributed to lower inflation - to the benefit of consumers - and has pushed up the value of South Africa's financial markets, Ebrahim says.
RISK MANAGEMENT
Plexus Asset Management's suggested current portfolio risk/return classification:
- Ultra-conservative:
basket of mature-market currencies; global inflation-linked bonds.
- Conservative:
basket of mature-market bonds (short- to medium-dated).
- Moderate:
foreign global flexible funds; gold bullion (NewGold exchange traded fund); individual defensive listed stocks such as British American Tobacco and SABMiller.
- High:
basket of emerging-market currencies; emerging-market bond index.
- Very high:
basket of mature-market equities.
- Extremely high:
basket of emerging-market equities.
CURRENCIES TO INVEST IN
You should invest in a basket of currencies rather than being negative or positive about particular currencies, Du Plessis says.
Plexus Asset Management's preferences at the moment are (in order of preference): Swiss franc, Australian dollar, Canadian dollar, euro, Chinese yuan, Japanese yen, United States dollar, a basket of emerging-market currencies, and the rand.