Globalization has changed the way we shop, eat, communicate, travel and generally live.
As economies and societies integrate, the world is shrinking and, in turn, leads to more opportunities for businesses and investors. Globalization has made investing-only-in-home markets less relevant.
Growing evidence shows that investing beyond home frontiers can help add significant value to one’s portfolio, and this, by spreading risk and enhancing returns.
Achieving true diversification
Research indicates that investors can achieve true diversification by investing across geographies, thus boosting their investment risk-reward profile.
A fair question would be – Given the performance of South African markets, why consider global investments? SA financial markets have provided investors with strong returns over several years, often with a lesser degree of volatility than in offshore markets; both developed and emerging. However, we are now seeing a growing realisation amongst South African investors on the benefits of investing abroad, prompting greater interest in offshore opportunities.
Better value offshore?
2013 was a successful year for offshore investing in SA.
A key factor was the strong performance of the MSCI World Index relative to the JSE, which underperformed in comparison. Although the JSE still demonstrated good performance, this was overshadowed somewhat by the stronger performance in world markets.
In terms of valuations, SA stocks remained expensive in comparison to global equities, leading to a growing perception amongst investors that there is better value offshore than locally, especially after several years of strong performance in the domestic market. Asset valuations, particularly in equities, are seen as more attractive in the US and parts of Europe, Asia and South America, than in SA.
Breadth of opportunity
Major reasons for SA investors being increasingly attracted to offshore markets include the need for greater diversification away from the relatively small domestic market; exposure to a much larger investment universe, i.e. a wider selection of asset classes and sectors; the potential to benefit from attractive valuations and faster growth; and access to state-of-the-art research provided by global investment teams.
Overweight in asset classes
Some investors may not feel comfortable with offshore investment as they lack experience with a particular asset class or are not familiar with international investments.
As a result, they may be overweight in asset classes with which they are most comfortable, leading to a less diversified portfolio.
According to a 2014 Global Investor Sentiment Survey, investors in South Africa and Italy showed the greatest interest in investing abroad; with 85% South Africans believing the best opportunities exist beyond their borders. Feedback from the survey shows that investors in SA believe that Asia had the best equity opportunities for that year and has over the long term.
Asset allocation and diversification
An important factor for both institutional and private investors is the sovereign and political risk that exist if one is invested too heavily in one country.
It is essential for investors to maintain a well-diversified portfolio in line with their overall investment objectives, risk appetite and investment horizon.