Over the past decade, a combination of less than desirable stock market performance across much of the developed world and a persistently strong local currency has caused South African investors and their financial advisers to begin questioning the value that offshore investment has to offer as a component in the typical portfolio. However, there is a growing sense of optimism amongst local asset managers, regarding the value now offered by high-quality international companies and shares.
According to Paul Hansen, Director of Retail Investment Marketing for STANLIB, many South African investors who included offshore investments in their portfolio did so when international investment doors were first opened to them in the late 1990s. As fate would have it, this was at the very end of the almost 20-year offshore returns boom of the eighties and nineties.
Hansen explains that those investors who moved money offshore at that point, in search of the solid annual returns that had thus far been delivered thanks to a steadily depreciating rand and massive developed stock market gains, were largely to be disappointed. That’s because, what followed was a decade of mostly bad news for offshore investors: the South East Asian crisis of 1997; the Russian crisis of 1998; the meltdown of the TMT bubble in 2000, the 9/11 attacks of 2001; an assortment of corporate scandals and the recent financial crisis and resulting global recession. The only really ‘positive’ moment for offshore investors over the past 10 years was the brief period of growth when the rand collapsed late in 2001 – but even that was short lived.
Add to this, the fact that the South African equity market delivered consistently good returns over the same period and it’s little wonder that local investors are now sorely tempted to throw in the towel on international investment. But Hansen cautions against doing so.
“While the growing sense of disillusionment with offshore investment is understandable,” he says, “undertaking a mass ‘repatriation’ of offshore investments at this stage would be tantamount to throwing the proverbial baby out with the bathwater, because all the signs now point to a possible resurgence in offshore returns.”
According to Hansen, there is a growing sense of optimism amongst many local asset managers, regarding the value now offered by high-quality international companies and shares. While this is partly a natural consequence of these business having performed so poorly over the last decade, it is also the result of innovative ‘survival tactics’ that have seen many global brands setting up shop in emerging markets, most of which are now garnering significant investor favour.
“Add to this more promising outlook for international shares the virtual inevitability of a slide in the now very strong rand,” he explains, “and, all things being equal, you could have the makings of a partial repeat of the strong global returns enjoyed by offshore investors in those last two decades of the 20th century.”
Hansen’s view would seem to be supported by historical evidence. There have only been three times in the past 100 years when the US stock market showed a negative return over a 10-year period. In each of the previous two instances, this has been followed by periods of strong stock market growth, and it is unlikely that the recent period of negative returns will buck this trend.
“Taking all of these factors into consideration, there is no logical reason for investors who have weathered the global storms thus far to now do away with their offshore exposure,” Hansen concludes, “in fact the opposite is probably true and, within the context of a well balanced and optimally diversified portfolio, offshore holdings could well become some of the star performers over the next 10 years.”