It is natural to feel uneasy about your finances during times of uncertainty. However, one should be wary of making decisions based on short-term events.
The rand’s volatility and the uncertain economic and political climate in South Africa have local investors looking to increase their offshore allocations. Many clients have asked us if this is the right move. Our view is that investing offshore should always form part of your long-term diversification strategy. As with all of investment decisions, your personal circumstances and risk tolerance should be taken into account.
South Africa comprises only just over 1% of the world’s market capitalisation
By investing offshore, you can diversify your risk across different economies and geographic regions providing the potential to earn returns from a wider set of opportunities.
Allan Gray and our offshore investment partner Orbis share a common founder and investment approach, adopting a bottom-up driven, fundamental research process as we scour the globe for the best investment opportunities for our clients – which are often in areas disliked by others.
A good example is emerging markets (EMs), which appear distinctly out of favour at present with most global investors. This represents a big swing in sentiment from 2011 when fund managers’ relative exposure to emerging markets had reached historical highs.
Big swings in sentiment are often what causes share prices to deviate from intrinsic value, and today, Orbis’ research concludes that EMs are fertile ground for long-term investors: not despite being deeply out of favour, but because of it.
Orbis is currently seeing attractive opportunities in China, Russia and Korea, with around 30% of the Orbis Global Equity Fund currently weighted towards emerging markets.
The risk that matters
While EM shares do come with additional risks, often related to economic or political instability, the risk that really matters to investors is not near-term uncertainty, but the possibility of a permanent loss of capital, which is most pronounced when one pays more for an asset than it is worth.
You don’t have to sacrifice quality when investing in EMs. If you look to capitalise on swings in sentiment that aren’t associated with changes in fundamentals you may find quality shares with stellar growth prospects trading at reasonable prices.
JD.com, China’s second largest e-commerce player and its largest retailer, is a good example. Its operations are comparable to Amazon’s, it holds a 20% market share and has grown the number of monthly active users faster than any of the other quality, high-growth internet businesses such as Facebook, PayPal and Alibaba. However, it trades on roughly half the valuation multiple of Amazon.
On the other hand, while Orbis is wary of current US (and other developed market) stock market valuations, it has still been able to identify a number of attractive opportunities, particularly in the technology sector in companies such as Qualcomm and Motorola. These businesses have been out of favour for company-specific reasons, and now trade on meaningful discounts to Orbis’ assessment of intrinsic value.
Tips for investing offshore:
- Offshore investment should form part of your overall strategy of diversifying risk in your portfolio.
- Take a long-term view and do not try to time the market.
- How much you decide to take offshore should be based on your own investment objectives, risk tolerance and personal circumstances.
- Carefully choose an investment manager who you trust and who has experience and a proven track record.