The Importance Of A Global Equity And Currency Strategy For South African Investors
Managing an investment portfolio is already a complex exercise made more so when adding an international component and the rapid integration of global financial markets, together with the growth in importance of emerging markets, has changed the structure of the investment management industry.
With all the changes and disruptions, however, many opportunities await the educated investor. It does involve a lot of hard work! You need to have a great insight into each country, their tax regimes for companies and individuals, the accounting rules and restrictions or incentives for foreign investors and an understanding of their foreign exchange controls and how these may change in the future. These are just a few of the myriad of factors that are welded into modern portfolio management and practice.
To begin your analysis you will need sources of financial information, trade journals, brokers reports, investment journals and visits to companies and their management teams. It is a bit tricky to do this as a hobby – as the saying goes, perhaps you shouldn’t try this at home. However, the difficulties and overwhelming array of choices should not dissuade you. Adding an off-shore equity/currency component to a South African portfolio is the most worthwhile and valuable change you can possibly make.
Firstly, you immediately reduce the risk and volatility of the overall portfolio. If any one currency or country enters a bear market you will be protected by a diversified portfolio. Also, studying other countries helps you understand your own and this in itself helps you make better investment decisions.
The best countries to invest in have less government regulations and interference and less government ownership, fewer trade unions, lower taxes and no foreign exchange control. They also have hard working, educated people who are honest and reliable and who have a high propensity to save. These countries also spend large amounts on research and development.
One of the most exciting prospects are investments in fledging stock markets in rapidly growing emerging countries. This asset class has the highest forecast return of all asset classes. Generally speaking Elephants don’t gallop. Mature economies and large corporations are just that – mature and slow. On top of this the mature economies like Europe and the US are in fact suffering a deflationary spiral. The hunt for growth is on.
Emerging markets are so much more attractive. These fast–growth markets have rapidly growing populations that new companies can exploit. Thankfully, many emerging market companies have listed securities on the NYSE so this is a very easy route for out-performance. The higher GNP growth, growth in international trade, privatisation, the embrace of capitalising and increasing acceptance as an asset class are other positive factors for emerging markets.
The addition of other currencies to your portfolio is also most important e.g. the performance of the New Zealand Dollar and the Swiss Franc against the South African Rand over the last few years has been nothing less than staggering. If you then pick choice companies on the New Zealand and Swiss Exchanges you add a whole new dimension to your portfolio. In New Zealand, agriculture and sustainable energy account for 70 percent of the New Zealand economy, so for every New Zealand Dollar you buy, seventy cents is invested in these sectors – sectors with great growth potential!