Your Share of the Pie – International Investing For South Africans
International markets have been attracting South African Investors for decades. Drawn by the potential for high returns, the diversification benefits from low correlations with emerging markets, strong foreign currencies and as a form of political insurance many South Africans want to invest overseas. Many already have.
In April last year I wrote a column for this newspaper entitled “You can only gain from a good foreign currency strategy”. Everything said then still holds true and investors would have made significant gains if they had invested in the currencies discussed.
Problematically most South Africans have the vast majority of their assets in South Africa and they are therefore denominated in Rands. South Africa is classified as an emerging market and represents less than one percent of all investable markets. Conversely this means that more than 99 percent of the available universe of investments is ignored.
A further problem with emerging markets is that although at times they can show very strong growth, they all have a tendency to display extreme volatility. Circumstances can change quite rapidly as emerging markets mature and become sophisticated.
By moving some assets into mature markets (the United States or Europe), you gain the safety of diversification. Furthermore, you gain the opportunity to choose from a much wider asset class. Excellence and performance is not confined to a specific corner of the world. Superb managers work day and night wherever they may be and capitalise on every opportunity they find no matter where it is. If you search worldwide, you will find more advantageous prices than if you stick to only one country.
Of course, there are detractors, such as governments with exchange controls that discourage or forbid citizens to invest overseas. This, in itself, is a warning and should convince you.
Trevor Manual once said that South Africans would rather lose money on the Nasdaq than make money on the JSE Securities Exchange. With respect, this completely misses the point. As a country still striving to complete the democratisation process and with a tax regime based on worldwide income, exchange controls have overstayed their welcome. Furthermore, how can we plausibly argue the viability of South Africa as an investment destination when we do not have the courage to completely scrap exchange controls.
Our government is on record, however, of saying that the scrapping of exchange controls is not a matter of if, but when. The abolishing of these laws would send a powerful signal to the international investment community.
Investing overseas remains a complex matter. The investment universe is huge. There are approximately 40 000 mutual funds and 10 000 large capitalisation stocks. Opportunity ranges from stocks to bonds, hedge funds and thousands of derivative products.
Each investment opportunity needs to be studied to determine its place and appropriateness in terms of characteristics of risk and potential return.
Also, unlike South Africa, overseas countries have many different markets. The US, for example, has a number of stock exchanges that have different trading methods and services. The main US markets are the New York Stock Exchange (NYSE) and the National Association of Security Dealers’ Automated Quotations (NASDAQ).
The Nasdaq is typically home to high-tech companies and is totally computerised. Trading takes place via computers without a trading floor, similar to the system now used by the JSE.
The NYSE is home to the old economy smoke stack – type companies and operates in the old – fashioned way, where brokers and specialists trade on the floor of the exchange.
Notwithstanding the difficulty and trepidation of investing abroad, globalisation increases daily. Foreign and local markets are increasingly integrated and investors who do not educate themselves and who are unfamiliar with international investments will find themselves at a growing competitive disadvantage.