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Should your money stay in SA?

SHOULD your money stay, or should it go now? If it goes there may be trouble, and if it stays it may be double, as a group of philosophers once hypothesised.

With the rand and local equities on the pricey side and commodity prices stumbling, investors have been encouraged to switch offshore.

"You have to ask yourself: if I wasn't in South Africa, would I have invested all my money here?" says Amelia Morgenrood, portfolio manager and director at PSG Konsult.

A well-diversified investment portfolio should of course have substantial overseas exposure, with some research showing that having 30% offshore is an optimal allocation from a risk-return perspective, says Craig Gradidge, director of Gradidge-Mahura Investments.

But should you, as some fund managers suggest, hike it to 50%?

Stay

Going on past performance, local investments have certainly delivered the goods.
 
A little more than 12 years ago, the Dow Jones Industrial Index (DJIA) was sitting at 11 500 points and the JSE All-share index at 5 000. Since then, the JSE has increased 600% while the DJIA has increased 5%.

A strong run in the rand has also helped to keep local returns sturdy.

"While we can understand why certain foreign markets might appear superficially attractive because they are in historically low territory (Japan being the prime example), we are not convinced that the economic growth drivers in all developed economies are sufficient to underpin those markets," according to Chris Gilmour and Trevor O' Callaghan of Absa Asset Management Private Clients in a recent note.

"Conversely, we believe that South Africa's exquisite positioning with respect to commodities makes it a sustainably desirable investment destination."

Despite the recent gyrations, Gilmour and O'Callaghan do not believe resources are looking tired. "(T)he global commodity super cycle is a large reason for the performance of the JSE over the last 12 years and we believe it still has a long way to run, largely predicated upon sustained strong demand from China and other developing nations."

They are also upbeat about the rand's part in keeping local investments attractive.

"While our interest rates remain substantially higher than those offered in developed economies, we should continue to attract 'hot money' inflows which in turn should continue to support the currency."

According to long term historical returns, the local market could see some upward movement. Over the past three years, the market’s average performance came in between 7% and 8% per annum, compared to its long term average of about 13% p.a. on a three-year rolling basis, says Gradidge. However, there’s no guarantee that this trend could correct itself soon.

The market’s current price/earnings ratio – a measure of how expensive the market is - of 16 times (compared to the historical average of around 12) looks high, and strong company earnings will have to come through to unwind it, says Gradidge. Ultimately it is earnings that drive market performance.


Go

For an investor looking to take money offshore, now would be a better time than at the end of 2001 or even 2008, says Mike Browne of Seed Investments.

This is in large part due to the rand, which is now deep in overpriced territory.

"If the rand does trade back to fair value (currently sitting at R8.71) over the next 10 years, investors would gain real increase of 3.5% per annum to their dollar returns - and 5.4% per annum, should fair value be reached in five years. Should the rand stay strong, investors should only expect the inflation differential (likely to be around 3% per annum for the next five years or so)."

Coupled with that, there are doubts about local share price performance.

Respected global investment manager GMO, which has about $108bn under management, recently forecast that blue chip companies in developed markers will deliver growth of 4.6% per annum over the next seven years, compared to 4.3% of emerging markets.

That may not sound like a big difference but if you add the expected rand weakness, it is clear that the local market will struggle to beat large caps in the developed market, says Vincent Heys, also of Seed Investments.

While the developed economies look worn out, much of the growth of their largest companies – particularly companies like Nestlé and Proctor & Gamble – comes from booming developing markets.

Morgenrood favours groups like Yum Brands, Tesco and Unilever. "These are good companies which trade on agreeable valuations."

Back home, local companies may get to find out exactly how good these behemoths are. A number of global giants – including Dangote Group (which could challenge PPC), clothing retailer Zara (competition to Truworths) and Walmart (a number of retailers) - may enter the local market.

Kagiso Asset Management head of research Abdul Davids is concerned that many of the domestic companies may not be ready to face world class com etitors.

"The 2000-2008 'honeymoon period' (when interest rates, inflation and the rand declined) has resulted in a degree of complacency amongst many managers and employee costs have spiralled. In addition, supplier concentration has caused retail selling prices to remain high despite deflationary pressures on input prices."

He thinks local industrial companies are facing unprecedented challenges in their attempts to deliver continued earnings growth to their increasingly demanding shareholders. This is due to "an absence of key macro stimulus, increased competition and slower economic growth (which) is inhibiting revenue growth, whilst cost pressures from rising utility price increases threaten to exacerbate the inevitable deterioration in profit margins".

 - Fin24
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