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The relaxed foreign exchange allowance for South Africans will have many retail investors taking a serious look at investment opportunities offshore. Diversification of an investment portfolio should be the main aim. But, broadly speaking, which offshore markets should investors be considering? The basic choice is between developed and emerging markets – and that subject has seen expert commentators swaying like pirates on a ship, inspired perhaps by a little too much rum.
A year ago it was all about emerging markets. The advice then was good but maybe over-influenced by the financial crisis in so many developed countries: collapsed property markets in the United States and Britain, many banks having to be bailed out with taxpayers’ money and sovereign rescue packages in Europe. Emerging markets looked a far more inspiring place and money from the stricken developed countries flowed into emerging markets, including South Africa.
But late last year and early this year there was a notable mind shift among institutional investors and commentators. It went along the lines of maybe the economic crisis in developed markets hadn’t been that bad and there are early signs of recovery. And the most compelling investment argument was that – probably because of the earlier economic problems – equity prices in many developed markets were looking attractive. So quite suddenly sentiment shifted from “pricey” emerging markets to “value” in developed markets.
It was a classic pendulum swing. But now the expert views are, at least in some quarters, becoming a little more tempered. Something along the lines of there’s better value in developed markets but don’t abandon or ignore emerging markets. What do we make of that? Is it just the pros trying to cover all bases – or has the pendulum of opinion settled somewhere near the centre?
The important point investors must remember is that economic growth doesn’t always translate into equity performance. Over the long term it should. But developed market equity prices are depressed, perhaps for good reason, and those markets might take a long, long time to come back.
Similarly, we know economic growth in many emerging market countries is going to be strong – much stronger than the recovery in developed markets. But the same might not be true of equity market performance.
So ideally investors should diversify between developed and emerging markets. Just one point to remember: SA is an emerging market, so local equities should count as part of your emerging market exposure.
A year ago it was all about emerging markets. The advice then was good but maybe over-influenced by the financial crisis in so many developed countries: collapsed property markets in the United States and Britain, many banks having to be bailed out with taxpayers’ money and sovereign rescue packages in Europe. Emerging markets looked a far more inspiring place and money from the stricken developed countries flowed into emerging markets, including South Africa.
But late last year and early this year there was a notable mind shift among institutional investors and commentators. It went along the lines of maybe the economic crisis in developed markets hadn’t been that bad and there are early signs of recovery. And the most compelling investment argument was that – probably because of the earlier economic problems – equity prices in many developed markets were looking attractive. So quite suddenly sentiment shifted from “pricey” emerging markets to “value” in developed markets.
It was a classic pendulum swing. But now the expert views are, at least in some quarters, becoming a little more tempered. Something along the lines of there’s better value in developed markets but don’t abandon or ignore emerging markets. What do we make of that? Is it just the pros trying to cover all bases – or has the pendulum of opinion settled somewhere near the centre?
The important point investors must remember is that economic growth doesn’t always translate into equity performance. Over the long term it should. But developed market equity prices are depressed, perhaps for good reason, and those markets might take a long, long time to come back.
Similarly, we know economic growth in many emerging market countries is going to be strong – much stronger than the recovery in developed markets. But the same might not be true of equity market performance.
So ideally investors should diversify between developed and emerging markets. Just one point to remember: SA is an emerging market, so local equities should count as part of your emerging market exposure.
