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Investment Strategy
Friday, August 1, 2008
Making cents

The current weakness of the rand is driving many investors offshore. But if you need your investments to generate income, it’s not advisable to have too much of your portfolio invested in other currencies. This is according to Marius Fenwick, a financial advisor with Mazars Moores Rowland Financial Services.

“If you need income in rands, the majority of your investments should be in rands.  If your priority is capital appreciation, you can take more offshore exposure. But if you rely on income, you should increase your exposure to the currency you live with,” he points out.
Currency movements are notoriously hard to predict and can be extremely volatile: short-term corrections can be extreme. For example in 2002, the rand depreciated heavily to approximately R12,20 to the US dollar. But then, within a short space of time, it over-corrected to R5,70.
“These spikes can run for three years or more; and many investments placed offshore in 2002 and 2003 have still not recovered their rand value today. If you’ve banked on offshore investments to provide income and the rand starts appreciating, you might run out of liquidity locally due to the capital depreciation in the currency of your overall investment portfolio.”
Mazars believes the rand will continue to depreciate over the long term because it’s still over-valued. South Africa’s trade deficit is unhealthy, and the cost of doing business here is increasing. As a result SA equities are expensive relative to offshore shares and this is driving away international investors. Then there are the political issues, energy issues and inflation also impacting negatively on the currency.
Income considerations notwithstanding, offshore exposure is an important part of any portfolio. To begin with, it enables investors to spread their risk. “If your local investments are underperforming, your offshore investments might not be, particularly when offshore returns are converted to rands,” says Fenwick.
Then there is the fact that South Africa makes up only 0.5% of the world economy. “It’s short-sighted not to have exposure to other economies, particularly developed economies. Investing in Europe, Japan the UK and America can bring more stability into a portfolio.”
Nevertheless, over the last 30 years the JSE has outperformed offshore stock exchanges in dollar terms. So there’s definitely a case for investing in SA and other emerging markets, despite the expected increase in volatility.
“If you want to make money and you can handle volatility, the JSE is a good place to invest. You’ll probably make more than in offshore investments over the long term, even in dollar terms. But it will be a rough ride and your investment horizon should be at least 13 years. This is because equities start demonstrating the same low levels of volatility as cash over this period, and start outperforming both cash and bonds,” says Fenwick.
While some of its clients have 70% - 80% of their portfolios invested offshore, Fenwick says that most investors should aim for 30%-40%. If they need income, he advises them to restrict it to 30% and below. The exception to this is younger investors. “If you’ve got time on your side you can, and should, increase your offshore exposure.”
 

Copyright © Insurance Times and Investments® Vol:21.7 1st August, 2008
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