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Increasing returns abroad

Jun 06 2018 10:27
Simon Brown

Besides the need to obviate domestic market risk, a strong fundamental case exists at present for local investors to tilt their discretionary exposure offshore to capitalise on enormous long-term opportunity. 

It gives access to regions and industries not well represented locally.

The JSE, for instance, constitutes less than 1% of global capitalisation on offer, currently involving about 45 000 companies valued at around $82tr. 

The average high net worth investor in SA should have a minimum 30% of their money exposed to offshore funds, typically made up of 60% equities and a 40% mixture of property and fixed interest, says Paul Hansen, fund manager at Stanlib.

This can be easily encapsulated in a leading offshore flexible global fund such as the Stanlib Global Balanced Fund, PSG Global Flexible Fund or Foord International. 

On a currency basis, now is also a good time to tilt offshore, Hansen maintains. One reason is that the bear market for the US dollar has offered considerable scope. 

It’s still down 9% on a year ago relative to the euro, even though its recent strength has put pressure on the rand.

The geographical breakdown of most leading offshore equity fundS is currently 50% to 60% US, with the balance in Europe, Japan and emerging markets.

The US is almost a no-brainer, Hansen points out. “After a strong run-up last year, shares there are taking a breather, creating a good opportunity for long-term investors to invest further. 

Fair value for the S&P 500 Index is now around 2 800, which is about 5% above current levels. It generally rises 20% to 50% above fair value when sentiment is bullish.”

While conceding that the US equity bull market has run for nine years relative to the long-term average of four to five years, he is not persuaded that a crash is imminent. 

“It remains undervalued, the S&P 500 is still down about 3% to 5% since January, global inflation remains low, and so do interest rates. 

“Besides, with the US earnings season almost finished, most companies have beaten forecasts, having risen by more than 25% year-on-year, which is phenomenal with inflation around 2%. 

Only a third of that is from Trump’s tax cut, which means that earnings have still risen in excess of 18%.”

Nor is Hansen overly bothered about the trade war between the US and China and other recent flashpoints. 

“There’ll be further talks between the US and China on trade and there’s a strong probability that it’ll be resolved successfully, even though relations may worsen a bit before they improve. The US and China need each other fundamentally and I’d be surprised if matters seriously deteriorate.”

He is also comfortable about Europe, Japan and emerging markets at present. “Europe offers good value even though earnings growth at 6% is significantly lower than the US’s comparable figure. 

Part of that has emanated from the stronger euro relative to the dollar, but since January the dollar has gained 4.5% on the euro. 

“Japan also offers good value. It has the lowest forward price-to-earnings (P/E) of all the aforementioned regions, while the 10-year bond yield is 0.04%. 

It’s geared furthermore to the global economy, and when the global economy does well, it does well. There is also more of a growing bent towards the interests of shareholders than was the case in the past.”

Emerging markets also deserve a modicum of attention, and are particularly attractive at present, Hansen believes. 

“I would certainly have a tilt towards them. They’ve had a 10.8% correction since January, aggravated by weaker currencies. The MSCI Emerging Market Index is negative in dollars in 2018.”

An additional factor has been considerable selling of emerging market exchange-traded funds (ETFs) in the US, which have placed downward pressure on the likes of Tencent and Naspers*.

South Africa constitutes 6.7% of the MSCI Emerging Market Index. China leads at about 31%. 

Particularly pertinent in Asia, Hansen notes, are the high-growth technology stocks. Chinese drivers that have erupted recently have included Alibaba, which more than doubled in value last year, and JD.com, which rose more than 80%.

Mexico and Turkey have also shined recently because their real effective exchange rates have been more competitive than the average of the past 10 years. 

Hansen concedes that emerging market stocks are volatile, but points to volatility being a normal part of investing and that it can be useful for investors. “Warren Buffett said that, ‘Volatility is not the same thing as risk, and anyone who thinks it is, will cost themselves money.’”

The underlying point here is that different factors drive returns for different assets. The purpose of including uncorrelated assets in a good portfolio is that some might perform poorly when others perform well, and vice versa. 

And the purpose of good portfolio management is to enhance stability and thereby increase good risk-adjusted returns. 

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the June 2018 edition of FundFocus. Buy and download the magazine here or subscribe to our newsletter here.

investment  |  portfolio  |  offshore investing
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