The continuing rally in global equity markets has rewarded unit trust investors who heeded fund managers’ advice, following the financial crisis in 2008, to invest in these markets.
The strong depreciation of the rand has also benefited those who invested in offshore equities at least a year ago.
The MSCI World Index gained 7.87 percent in United States dollars over the quarter to March 31, providing investors with a return of 12.53 percent in US dollars over the year to the end of March, Ryk de Klerk, executive director of PlexCrown Fund Ratings, says.
The rand has fallen 17 percent against the US dollar over the past 12 months, he says.
Nick Curtin, analyst at Foord Asset Management, says the rand’s depreciation against the dollar provided a tailwind of about 20 percent for rand-denominated global funds over the year to the end of March.
Funds in the global real estate sub-category were the top performers on average over the year to the end of March, with a spectacular return of 39.14 percent in rands, according to ProfileData.
Global equity general funds also provided an average annual return above 30 percent.
If you did not diversify into offshore markets a few years ago, when fund managers’ advised, is it too late to do so now? And if you are in offshore markets, should you stay, or are the good times over?
The managers that Personal Finance canvassed this week – Investec Asset Management (IAM), Old Mutual Investment Group South Africa (Omigsa), Foord and Coronation – are all of the view that there is still life in foreign markets.
Peter Brooke, head of Macro Solutions at Omigsa, says two to three years ago there were three good reasons for you to invest offshore. One reason had to do with diversifying your portfolio (see “Add foreign flavour to your portfolio”, below). Another reason was that the rand was expensive and was expected to depreciate.
The currency has depreciated strongly, and investors who were not exposed to foreign markets over the past year at least have lost out on the big devaluation and the boost that it gave to returns, Brooke says. There may be some further depreciation, but at a slower rate, he adds.
Curtin says the rand remains at risk of further depreciation as a result of rising labour costs, which hamper South Africa’s economic competitiveness, and, in the short term, waning investor sentiment.
Brooke says the third reason to be invested offshore is that offshore investments are likely to offer a better return than those in South African markets.
After the 2008 financial crisis and the ensuing recession in 2009, fund managers advised that it was a good time to invest in offshore equity and property markets, because prices had fallen so low. Since then, these markets have moved higher – and not only on the back of higher earnings from shares, Brooke says. There has, in fact, been a re-rating of share prices on global markets, which has resulted in prices relative to earnings moving higher, he says.
Whereas global equity markets were previously very cheap, they have steadily been getting more expensive, especially over the past year, Brooke says.
Max King, a strategist at IAM, says equity markets have caught many investors by surprise this year, absorbing disappointments and bad news with only the briefest of corrections.
Investors are starting to get the message that there are compelling reasons to buy shares, King says.
Earnings forecasts were relentlessly downgraded in 2011 and 2012, and investors took a dim view of the prospects for shares, he says.
Although growth in developed markets was held back by governments’ austerity measures, com-panies were able to increase their revenues at a rate faster than these markets’ economic growth, he says.
This year, with a return to double-digit economic growth looking likely, equity valuations (prices relative to earnings) have begun to look more attractive. This, together with the prospect of double-digit earnings, has provided a compelling reason to buy equities, King says.
Despite the fact that offshore equities are no longer as cheap as they were, Brooke says Omigsa still thinks they offer better value than South African equities, and its funds continue to have the maximum exposure to offshore equities permitted by their mandates. From this point of view, it is probably not too late to invest in offshore equities, Brooke says.
Omigsa is investing in offshore property, offshore equities and emerging market debt, he says.
The Bank of Japan’s intention to buy back massive amounts of government debt could have further positive spin-offs over the next two years, not only for the Japanese stock market but also for global property shares and emerging market bonds, because investors in the Japanese bonds that will be bought back will look for new investments.
Curtin says Foord also thinks that foreign investments are still relatively attractive.
The Flexible Fund of Funds, Foord’s worldwide multi-asset portfolio that is unfettered by the prudential investment requirements for retirement fund investors, is almost 60-percent invested in foreign markets, with a strong bias towards equities.
Despite the question marks over short-term economic growth, Foord believes the rally in equity markets will continue until the end of this year, Curtin says.
Growing confidence that the US economy is recovering, increased liquidity as a result of the Bank of Japan’s debt buy-back programme and interest rates that are close to zero will support the rally, he says.
The team that manages Coronation’s Global Managed Fund (a global multi-asset high-equity fund) also believes that global equities are still the most attractive asset class, and the fund’s 70-percent exposure to equities reflects this view.
Coronation is also investing in listed property companies (seven percent of its Global Managed Fund), because, it says, they are still attractively valued despite the recent strong performance of global property shares.
Tony Gibson, who manages Coronation’s World Equity Fund of Funds, says the flow of money out of equities and into bonds that has occurred over a number of years is reversing, and this will support equities despite the recent rallies and record highs in the US.
The economic and geopolitical risks remain high and, consequently, you should expect heightened volatility, Gibson says.
King agrees that many risks remain, but says they are all well known and accounted for in equity prices, enabling markets to take flare-ups in their stride.
As 2013 progresses and economic growth picks up and equity markets move higher, investors should start planning for another bumpy patch as a precondition for a more positive long-term outlook, King says.
ADD FOREIGN FLAVOUR TO YOUR PORTFOLIO
A key reason to invest offshore is to diversify your investments, Peter Brooke, head of Macro Solutions at Old Mutual Investment Group South Africa, says. Diversifying enables you to invest in businesses, industries and currencies not represented in South Africa.
Paul Hansen, head of retail investing at Stanlib, says when you consider diversifying, determine how much exposure you already have to offshore assets through your investments and your retirement fund. Then consider your time horizon and clearly understand the issues concerning the rand, he says.
A few years ago, when managers said it was a good time to invest offshore, the rand was trading at R6.50 to the United States dollar; it is now at R9.19. Hansen says the rand still appears to be on a downward trend, but it could break out of the trend at any time and appreciate to, for example, R8.50.
If the rand strengthens against the major currencies after you invest offshore, your investment will show a loss in rands until the rand weakens again.
Hansen says if you need to diversify into offshore markets with the rand at its current level, you should consider investing a set amount each month.
Brooke says investors who enjoyed the recent good returns from offshore equities, should check that they are not overexposed to these assets relative to their investments in South African assets.
TROUBLED RESOURCES SECTOR DRAGS DOWN LOCAL MARKET
A gloomy outlook for resources is one of the main reasons asset managers expect offshore equity markets to perform better than the local market in the year ahead.
The resources sector dominates the fortunes of the local market, and this is why the JSE, as measured by the FTSE/JSE All Share Index (Alsi), ended the first quarter of this year 7.6 percent down in United States dollars, according to PlexCrown Fund Ratings.
As a result of the depreciation of the rand and the positive effect this had on shares with earnings in foreign currencies, the Alsi was up 2.48 percent in rands at the end of March.
The Alsi ended the 12 months to March with a return of 22.47 percent in rands, and South African equity general funds ended the year with an average return of 17.3 percent. Of the unit trust sub-categories for funds that invest predominately in South African markets, real estate was the best-performing sub-category over the year to March 31, with an average return of 33.21 percent, according to ProfileData.
Paul Hansen, director of retail investing at Stanlib, says resources shares are acting like a big brake on both the South African market and other emerging markets.
Hansen says there appears to be both an oversupply of commodities and a selling-off of commodity shares by investors. He says that gold shares have lost 23 percent and platinum shares 16.6 percent in the past four weeks.
It is “very murky out there”, and it’s impossible to say when the commodity cycle will turn, he says.
Clyde Rossouw, portfolio manager of the Investec Opportunity Fund, says the commodity boom between 2003 and 2007 created elevated commodity prices and profitability.
It is difficult to establish the levels to which share valuations and earnings need to revert in the “normal” commodity price environment that has prevailed since 2008, Rossouw says.
Cost control is an absolute imperative for the companies in this sector, he says.
In the industrial sector, shares such as SABMiller, Remgro and Naspers are highly valued, making quality stocks in South Africa relatively expensive, Rossouw says. Furthermore, he says the level of consumer borrowing is fairly worrying and has not been priced into retail shares – and neither has the continued vulnerability of the rand.
Local financial shares appear to be reasonably priced, but banks, in particular, appear vulnerable to a setback in the growth of unsecured lending or an increase in defaults, which could result from higher short-term interest rates, Rossouw says.
In its quarterly commentaries, Coronation notes that resource stocks have not only under-performed financial and industrial shares over three, five and 10 years, but they have also under-performed cash over these periods.
Coronation also says that retail shares were hit particularly hard in the first quarter, with the FTSE/JSE Food & Drug Retailers Index showing a total negative return of –10.4 percent.
Coronation expects future returns from local equities to be more muted, because the earnings of the average industrial company are already high.