Now’s the time to make that offshore investment

offshore investmentBy Renée Bonorchis

Johannesburg – Local might be lekker, but with the rand dollar at levels of R6 and below for over two months, it’s a good time to invest offshore, according to market experts.

The Association for Collective Investments, which monitors the unit trust industry, said this week that private investors earmarked more than R1.3 billion for foreign currency unit trusts in the December quarter, which “could be the first indication that local investors are taking advantage of the strong rand to invest offshore”.

Di Turpin, the chief executive of the association, said that while it was too early to talk about a new trend, the inflows were in marked contrast to previous quarters, when private foreign investment had been neglected.

“With the local market in a mature stage and, overall, far from cheap, investors seem to be looking for new opportunities offshore,” she said.

“It is significant that virtually all of the private investment went into equity funds with the stake in the fixed-interest funds being cut.”

Craig Pheiffer, the chief investment officer at Sasfin Frankel Pollak, agreed that an offshore portfolio should go more for equities, which were expected to do better than bonds this year because many of the world’s large central banks were expected to raise rates, thereby knocking bonds.

As for which economies to look at, Pheiffer advocated about a 50 percent weighting in the US, with the UK, Europe and Japan making up the rest of the portfolio.

Charles de Kock, the head of asset allocation and strategy at Old Mutual Asset Managers, said the US should show better returns in dollar terms in the year ahead. He forecast potential global returns in dollars to come in at about 3 percent for cash, 2 percent for bonds and 7 percent for equities.

Local returns should outstrip these numbers comfortably, with cash expected to return 7 percent, bonds 8 percent and equities 10 percent or more.

However, as Pheiffer said, offshore investments should make up a part of every well-balanced portfolio.

The Association for Collective Investments added that institutions had stepped up their offshore investment, with just over R1 billion flowing into unit trusts. Of this, R660 million went into equities and most of the rest into fixed-interest funds.

Total assets of the foreign collective investment schemes were R46 billion, with the number of funds totalling 321.

Paul Hansen, the director of retail investing at Stanlib, said the Morgan Stanley Capital International world index, which is often used as a benchmark, managed a 15.2 percent return in dollars last year.

The best sector was utilities, followed by energy. The worst was information technology, which grew a dismal 3 percent.

Other US indices, such as the Russell 2000, the Standard & Poor’s 600 and the New York Stock Exchange index, hit record highs last year, but most of these were due for a correction, said Hansen.

However, the Standard & Poor’s 500 was still about 29 percent off its all-time highs, leading Hansen to believe that there could be an upside on this index in the next six to 18 months.

Factors that would buffet offshore investments, according to most, included the US’s budget and current account deficits, the dollar’s probable weakness, the oil price and China’s demand for commodities.

Global interest rates remained low, making South Africa’s higher rate attractive, but forecasts suggested that US rates would be sitting at about 3.75 percent by year-end.

Globally, bond yields have mostly fallen, but Stanlib said 55 out of 56 economists were calling for bond yields to rise. They did the same a year ago and were wrong; maybe this year it will happen.

But with global inflation subdued, Hansen said bond markets remained happy.

Hansen said US equities typically had loads of cash on their balance sheets, so investors could expect to see share buy-backs or large dividend payouts. The reinvestment of those dividends would be key to making large returns over time.

Stanlib advocated that offshore portfolios be neutral on cash, underweight on bonds, neutral on equities and overweight in alternative investments, which could include assets such as property.

Source: Business Report


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