Are some South African investors developing an inverse relationship with offshore markets? Could some of us be subject to a strange, contrarian compulsion to get into markets just as the smart money gets out? Or perhaps we ring the changes by coming onshore just as the smart money goes off?
The questions are prompted by intriguing investor behaviour in late May, but symptoms go back at least six years.
Remember the late 1990s when many unit trust investors raced to join the US equity bull run just before it came a cropper? Then, in 2001 and 2002, some rushed offshore to cash in on chronic rand weakness only for the rand to go on steroids.
In late May, more contrariness seemed to be setting in.
The dollar strengthened. Chartists suggested the greenback might be bucking its three-and-a-half-year trend of weakness against sterling, the euro and emerging currencies. Our currency fell below R6.45 to the dollar, a significant barrier for chartists. Simultaneously, oil prices eased down 15 percent from previous highs, suggesting global stock markets would soon perk up.
At much the same time, the first speculation surfaced about how many more rate rises US Federal Reserve chairman Alan Greenspan had under his belt – just two or maybe three or four. If the end really is in sight for the cycle of US interest rate rises, the Dow Jones could well surge.
On the face of it, these developments suggest that a South African investor should be leaving funds offshore or in locally based international asset swap funds. Alternatively, an investor who is underweight offshore might review allocations with a view to strengthening offshore positions.
Logically, unit trust companies should have witnessed a slowdown in the rate at which clients were bringing their investments back home. In fact, the reverse happened. Some funds witnessed a spurt in repatriations.
Investor reasoning appeared to be that rand weakness in May created a “profit” versus levels at Christmas. Those who had been waiting two or three years to cut and run decided this was their chance.
Some may have accepted a sizeable net loss over three years in return for a relatively small five-month “windfall”.
Of course, there’s always a chance these skittish investors might not be perverse at all. Could this be a case of third time lucky? They got the US bull run wrong, they lost their previous bet against the rand, but surely they can’t get their timing wrong three times in a row. Or can they?
Unfortunately, that old inverse relationship might be coming through again.
It’s exasperating but the signs are not good. Or, to put it another way, the signs are good for offshore markets … but not so good for those who have just sold.
For example, one respected US analyst has just forecast a 25 percent gain for US equities over the next six to 12 months. For South Africans invested in US equities, any gains would be compounded if dollar strength continued.
For over a year now, one of the country’s largest unit trust companies has been advising clients to use rand strength as an opportunity to diversify offshore as a long-term strategic option. Recent rand weakness was confirmation that this advice was sound rather than a signal to bail out.
If you are underweight in offshore investments and missed last year’s opportunity, it’s not too late.
Offshore investors have greater choice than ever before. Equity funds, bond funds and currency funds have recently been joined by South Africa’s first international listed property fund, with exposure to property rentals and markets in 13 countries.
Even the offshore black hole for investor cash, the Japanese property market, is looking good. Unless, that is, you feel a strange compulsion to look the other way. In which case, you may miss this remarkable turnaround and several other promising developments in offshore markets.
By Paul Hansen
Paul Hansen is the director of retail investing at Stanlib
Source: Business Report
Photo credit: alexander amatosi via Visual hunt / CC BY-ND
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