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Don’t be surprised if emerging markets, including SA, outperform in the medium term


Reyneke van Wyk is partner and Head of Investment Management South Africa at investment group Stonehage Fleming.

Informed investors who have followed a phased approach of investing surplus capital offshore have enjoyed significant additional growth to their investment portfolios and overall wealth. However, not all investors who invested offshore during this time have had the same experience. In light of the severe current pessimism in South Africa, it is prudent to remind investors of some of the key pitfalls of offshore investing.

SA equities and the rand have outperformed global markets and currencies for long periods in the past 20 years. Indeed, there have been lengthy periods where the local equity market significantly outperformed the S&P 500 in dollars on a rolling 10-year basis.

While the historic differences are volatile for sure, this is also true when investing more broadly in emerging markets. For that assumed risk, at one point, you could have been compensated with a differential in excess of 360%.

Further, there were times when a 10-year investment in the S&P 500 yielded a negative return, while having held the JSE All Share Index (ALSI) was markedly positive. In particular, the period following the technology bubble in 1999 and 2000 resulted in negative returns for the S&P 500 over the following 10-year period. There was a similar picture for the MSCI World Index (ACWI) compared with the South African equity market in US dollars.

The expected global economic recovery, China (and most of Asia) coming through Covid relatively well, very low interest rates, expected US dollar weakness and stronger commodity prices may be tailwinds for emerging markets (EM).

Within EM equities, the TOP 40 index in SA is at its cheapest level in 10 years relative to Emerging Market peers after foreign investors have sold $4.5-billion of SA stocks year to date. However, the South African market is cheap for reasons familiar to all of us. The intention of this article is not to make a strong investment case for South African assets relative to offshore assets, but rather to highlight that emotionally externalising assets can potentially be detrimental to investors.

Predicting future returns is very hard, and at Stonehage Fleming, we prefer to spend more time on factors we can control, such as basic risk diversification principles and understanding what we invest in, to minimise any permanent loss of capital.

When investing offshore, investors need to remember the most important principles — be careful of following the herd, stay away from investing capital that might be required in the short to medium term and watch out for investing for the wrong reasons.

When investing offshore, it is essential to do so with capital that is surplus to sustaining your desired standard of living (and likely business interests) in the medium term – say five to seven years (being cognisant of the investor’s unique circumstances).

It can be very painful to externalise assets for the wrong reason and when everyone is panicking, only to return the assets once the markets have calmed and the rand has strengthened again. It is also important to invest offshore for the right reasons.

The primary reasons to invest offshore have received much airtime, but are worth revisiting:

  1. Diversification of risk; to improve risk-adjusted returns in the long term via accessing different types of assets; and
  2. A broader and improved opportunity set.

The rand is a structurally weak currency and should continue to weaken in the long term. However, this should only be an ancillary benefit from offshore investing, as the rand can (also) strengthen and remain strong for long periods.

A practical example: an investor who invested one lump sum offshore in 2001/2 when the rand was very weak, had to wait about 10 years for the rand to get to those levels again, all while South African equities performed very well during this honeymoon period of our democracy. If the investment was made with capital required during this period — and/or for the wrong reason, such as to (only) benefit from the weaker rand trend — then the investment could have resulted in a very unpleasant loss of capital and opportunity. However, if the investment was made with long-term surplus capital, invested for the right reasons and invested following a phased approach rather than investing one lump sum, the same investment turned out very well in the long term. BM/DM


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