Roy Cokayne

Investors have been warned about the potential negative consequences of investments in offshore equities and have been advised to look at South African shares, particularly the listed property sector, for long-term inflation-beating returns.

Ian Anderson, the chief investment officer at Grindrod Asset Management, said yesterday that it was questionable whether offshore equities would generate long-term inflation-beating returns, despite South African investors in offshore equities in developed markets last year achieving returns exceeding 50 percent.

His caution about investing in offshore equities stemmed from what had happened previously to the rand after periods of rapid depreciation, when it rapidly reversed that trend.

Anderson stressed that he was not a rand bull and Grindrod Asset Management’s view was that the rand would probably weaken in the first half of this year in the run-up to the general election.

“We can’t see a substantial turnaround in foreign investor sentiment towards South Africa until after the election.”

Anderson said investors who bought the Standard & Poor’s 500 index in rand at the end of 2001 lost more than half their capital in a 15-month period.

“At that stage, because of substantial rand depreciation, it became an easy sell to encourage investors to go offshore. Asset managers in their forward-looking statements for 2002 in January were predicting reasonable markets and a much weaker rand because that is what happened in the previous year,” he said.

Anderson said it took 11 years for these investors to make back their money, but if inflation was added, they probably still did not have inflation-beating returns from their offshore equity investments.

He said local stocks generated earnings of about 5 or 6 percentage points above inflation, but had generated earnings of about 18 percent to 20 percent a year if commodity stocks were stripped out of the earnings growth of the local market over the past few years.

By contrast, the US market had generated earnings of between 4 percent and 6 percent a year since 2009.

“You don’t get a lot of earnings growth from the offshore market, but you certainly do from the South African market.

“So if you as an asset manager want to protect your investor against South African inflation, we would advocate significantly higher exposure to South African equities and significantly higher exposure to South African listed property,” he said.

He forecast that some of the second-tier listed property funds were likely to be the target of consolidation this year.