Investing off-shore: is it too late?

Maybe not, but tread with caution ?



CAPE TOWN - In one of my last columns of 2013 I suggested the idea of buying gifts of unit trusts or ETFs for your children, grand-children or god-children instead of ‘wêreld-se-goed’ which are probably discarded in a corner by now. I must confess my children were not all that impressed with the idea, but one day they will see the light. Celma, one of our Moneyweb readers wondered whether it wouldn’t be a good idea to invest in an offshore unit trust or ETF, of which there are several. On the face of it, this suggestion makes eminent sense.

As reported elsewhere on Moneyweb by Patrick Cairns, eight of the top ten performing unit trusts in 2013 were off-shore focused. And the returns were nothing short of astonishing, as this article shows. But as we well know, past performance is no indication of future performance and there are many factors that investors need to bear in mind before they venture off-shore. The most obvious of these says Terence Craig, CIO at Element Investment Managers, is the double whammy gained from the surge in global equity markets coupled with the rand’s loss in value.

Global markets rose by 30% while the rand fell 22% in a year, enhancing the returns, as is evidenced by the charts below.


USD ZAR
MSCI NA 30.38% 61.80%
MSCI World 27.48% 58.19%
MSCI Europe 26.08% 56.47%
MSCI Japan 26.84% 56.20%
MSCI Asia x J 3.15% 28.00%
Source: Sanlam International Investments

01-Jan-13 01-Jan-14 Rand depreciation
Rand dollar 8.47 10.35 22.2%
Rand pound 13.73 17.38 26.6%
Rand euro 11.15 14.43 29.4%
Rand yen 0.0974 0.0997 2.4% S
ource: Sanlam International Investments


Only those who believe in the Easter Bunny will expect a repeat of these returns this year. But does this mean that those who have not invested offshore have missed the boat?


To make an assessment of whether now is still a good time to invest offshore one has to consider the fundamentals of the SA currency, global equity fundamentals and global economic fundamentals, says Thomas Schlebusch, CIO at Sanlam International Investments.

Although the rand is now undervalued, further weakening will depend on both internal and external factors. Internally much depends on how Finance Minister Pravin Gordhan addresses SA’s twin deficits and economic weakness. Politics will also influence volatility. South Africa is one of the five emerging market countries that Deutsche Bank says “could be a political landmine.” Thus the rand could be affected by volatility and populist rhetoric ahead of the coming election.

He adds that externally, further recovery in developed markets as well as tapering and concerns around growth and governance issues in emerging markets, could see emerging market currencies weaken further, albeit at a slower pace.

Global equity markets are just seven weeks away from the fifth anniversary of the bull market, a fact that is making investors cautious. Bull markets don’t usually last more than four years, says Paul Hansen who runs the Stanlib Global Equity Feeder Fund. But the conditions that often precede a bear market - excess demand, booming house prices and rising inflation triggering successive interest rate hikes – are also not in place, he says.

In fact, despite the surge in global equity markets, valuation multiples in developed markets are still below their long term averages. On a PE basis some regions are starting to look a bit stretched, says Schlebusch. This could be justified should higher earnings growth and dividends come through – particularly in the US. Europe could still see some positive surprise on the back of credit growth, while “Abenomics” could fuel further growth in Japan, he says.

Of course South Africa is not the only country where elections and short term politics feed into market volatility. So watch out for the US fiscal debt ceiling in February as well as mid-term elections. In Europe the reform momentum could be limited by parliamentary elections in May that could strengthen the position of populist fringe parties. In Scotland the independence election could create some volatility, while in the UK manoeuvring is likely to begin in advance of the 2015 general election.

To go offshore or not?

If you are cautious and have a three- to five-year investment horizon then it’s not too late to invest. Current market fundamentals suggest that equities will continue to outperform bonds and cash, while developed markets are favoured over emerging markets, says Schlebusch.

Also sounding a cautionary note was Element Investments’ Craig, who says that if you do invest offshore don’t switch out of another unit trust investment to do so. Investors who chop and change generally lose.

In this environment of rand weakness Hansen advises making monthly investments over a lump sum investment. If there is a sharp recovery in the rand or a pull back in offshore markets, then add to the investment.

As for which fund to choose, well that’s up to you. Old Mutual’s Global FTSE All World Index Feeder Fund is a good low cost option. Another is Satrix’s MSCI World Equity Feeder Fund – though that doesn’t have a track record yet. Deutche Bank’s offshore ETFs allow you to target specific parts of the world, if you prefer.

On the other hand with some areas of the market looking more expensive than others, the actively managed unit trusts are able to be more selective in their search for value. For instance Allan Gray’s Global Equity Fund has investments in Korea and in companies that will fall outside the radar of the big index trackers.


REF : Money Web - Author: Sasha Planting

Goldman's comment on emerging markets

RPT-ANALYSIS-Fed's bitter medicine may help heal emerging markets - RTRS

REF : By Sujata Rao "LONDON, Jan 3(Reuters) - If the medicine tastes bad, it's probably doing you good. Emerging economies might console themselves with that thought when they're suffering market cramps and haemorrhaging capital as the U.S. ends its monetary stimulus. The Federal Reserve will begin winding down, or tapering, its $85 billion-a-month money-printing programme this month, and emerging markets are seeing foreign investment pull back as a result. Last year, around $30 billion fled emerging equity and bond funds tracked by EPFR Global, provisional data shows. That is a blow, particularly for so-called deficit countries such as India or Turkey, which rely on foreign inflows to plug balance-of-payment gaps. The hope is the volatility induced by tapering will prod governments into reforms that ultimately reduce their sensitivity to shifts in global capital. "Policymakers are under pressure to implement reforms that were put on the back burner. Tapering is at least getting that narrative going," said Manik Narain, a strategist at UBS. "It's too early to position for it, but if we do get reform it could be the start of the rebirth of emerging markets." The Fed's $3.7 trillion expansion of its balance sheet was a mixed blessing for developing countries. Economic growth was pumped up by record-low borrowing costs and hundreds of billions of dollars in stock and bond market investments. But with so much easy money coming in, most governments got away with very little labour reform, privatisation, productivity gains or improvements to power and transport infrastructure. Progress in those areas will be key to attracting longer-term investment in manufacturing or services. WHAT REFORM? Past emerging-market crises - India in 1991, Mexico in 1994, Russia in 1998 and Turkey in 2001 - led to reforms that transformed those economies. Mexico and India are ahead of the game this time. Punished by investors for messy politics and current account deficits, India has begun to shrink budget deficits, cut some subsidies and raise energy tariffs. Expectations of reform after the Indian elections due in mid-2014 have helped the rupee INR= rise 11 percent from record lows in mid-2013. Energy-sector reform kept the Mexican peso's 2013 loss versus the dollar to 1.6 percent MXN=, compared with 10 percent-plus falls elsewhere in Latin America. But analysts say elections in a range of countries this year will discourage unpopular reforms for now. Any proposed changes in Russia or South Africa could be hampered by healthy prices for their oil and metals exports. "(The volatility) has spurred reform in some countries, but it's not EM-wide, that's for sure," said Christian Keller, head of EEMEA research at Barclays in London. Capital Economics told clients that policymakers had an opportunity to undertake supply-side reform, but it feared that "incumbent governments may try to boost re-election prospects by pushing ahead with populist spending plans, causing current account deficits to widen further." 'LET'S GET ON WITH IT' Considering all that possibility and taking a longer-term view, a quick end to money printing is probably not a bad thing Brazilian central bank governor Alexandre Tombini may have spoken for many emerging-market policymakers when he recently called U.S. policy "normalisation" a "net positive". The sooner the Fed withdrew its stimulus, the better, he said. That is unsurprising. The Fed's money printing gave central bankers headaches, by fuelling explosive spending and debt, property bubbles, price and currency inflation. As domestic interest rates were cut to levels well below what was justified by fundamentals, current account gaps blew out. Brazil's deficit, for instance, is running at 3.5 percent of annual economic output, up from 1 percent in September 2009. "Policymakers are focusing on short-term volatility, which means they are too busy to focus on longer-term issues. The later the tapering the bigger the imbalances," said David Hauner, head of EEMEA fixed income strategy and economics at Bank of America Merrill Lynch. As tapering progresses, markets will be able to better reward reformers and punish the laggards, by focusing more on country-specific factors, Hauner said, adding: "The best for emerging markets will be: 'let's get this done, have the U.S. Treasury yields repriced to 3.50 percent or so and let's move on'."

Asia Coal-Prices drop toward $85/T in holiday-thinned trade - RTRS

China, Japan demand underpin coal prices But China's import demand may weaken in coming weeks Coal stocks at China's Qinhuangdao port rise By Fayen Wong SHANGHAI, Jan 3 (Reuters) - Australian thermal coal prices fell slightly in the past week as enquiries thinned over the holiday season, although demand from China and Japan helped keep prices above $85 a tonne. Australia's Newcastle weekly spot index fell to $85.63 per tonne on Friday from $86.30 on Dec. 28, data from the online trading platform globalCOAL showed. "The market was quieter last week because of holidays but demand in North Asia is pretty strong. The Chinese are buying and the Japanese are also in the market because their nuclear plants are down for maintenance," said a Singapore-based trader. In a sign of robust demand, shipments from Australia's Gladstone coal rose to a record 6.37 million tonnes in December, of which 2.08 million tonnes was shipped to China - up 16.6 percent from November. Thermal coal shipments from Newcastle port rose 11.6 percent to 3.85 million tonnes in the week to Dec. 23. However, import demand from China - the world's top coal consumer - may be hit in the coming weeks as rising stockpiles at ports and power plants, as well as shorter ship queues, suggest that a three-month long rally in domestic coal prices may start to weaken soon. Domestic coal prices at the top Qinhuangdao coal port in China rose to about 650-660 yuan ($110) per tonne on Dec. 30, from 635-645 yuan on Dec. 23, according to data by industry portal SXCOAL. "Stocks are building up at the power plants and Chinese miners are beginning to cut prices, so domestic prices might start to fall soon," said a Shanghai-based trader. Coal stocks at Qinhuangdao port rose to 5.407 million tonnes on Thursday, up from 4.63 million tonnes on Dec. 27, while ship queues waiting at the northern ports have also dropped, trade sources said. ($1 = 6.0506 Chinese yuan) ref: SPI www.spi.sanlam.co.za

ON THE RAND: 2014

Sovereign rating downgrade for SA forecast in year ahead SOUTH Africa’s sovereign rating is likely to be downgraded one notch after the 2014 election, probably in the second half of the year, financial research provider Nomura said in a report released on Thursday on the country’s prospects this year. Rating agencies Standard & Poor’s and then Moody’s were the most likely to act in this regard, it said. Nomura emerging-markets analyst Peter Attard Montalto said in the report that South Africa would face the same vulnerabilities this year that in the past had placed it on watch. These included rising debt levels, a current account that was poorly funded and "sticky" around 5%-7% of gross domestic product (GDP), and the prospects of further labour market strife, in particular violent unrest. "We see government debt levels rising to 49% by 2016 as a result of only a slow decline of the fiscal deficit from 4.4% of GDP in 2013 to 4% in 2014 and then only to 3.8% in 2015," he said. "Lower growth assumptions are also in play. As such we expect further (although smaller than previously) shifts up in the government’s debt profile at the budget in February. "On fiscal policy, we think about 80% of the tax hikes that we expect after the election will be spent plugging the gap of yet larger public sector wage increases, as well as boosting the social wage in response to poor vote-take in the election. A decision not to pay down the deficit would be an alarm signal to the agencies." On the current account, Nomura forecast the full-year deficit to remain at about 5.8% of GDP, but as this would occur alongside equity outflows by foreigners and a stalling of bond inflows, it would worsen the funding of the balance of payments. This would be of concern to the credit rating agencies. But Mr Attard Montalto said a downgrade was widely expected by the market and might therefore only have a short-lived effect. He said he thought 2014 would be a volatile year for South African assets, though it was not likely to bring major upsets. Economic growth was expected to recover slowly and — based purely on domestic considerations — the risk of the rand reaching R11/$ or improving beyond R9/$ was low, he said. While labour risk was likely to be higher, the defining issue would be political risk, Mr Attard Montalto said. This did not refer to the upcoming general election, which could be a fairly normal event, he said, but to the possibility of the National Union of Metalworkers of South Africa breaking away from the Congress of South African Trade Unions, and a break-up of the ruling tripartite alliance later. Nevertheless, Mr Attard Montalto said the relative stability of South Africa’s vulnerabilities, risk and macro economy should stand it in good stead in the year ahead. This was an important consideration when looking at South African credit compared with Turkey, which had a less stable risk profile. "With the exception of load-shedding risk and May rate hikes, we think the market is still broadly pricing in the (South African) risk outlook for 2014 and beyond on domestic idiosyncrasies," he said. Nomura has forecast growth of 2.5% for this year compared with the consensus of about 2.8%, after growth of 1.8% in 2013. Consumption expenditure is likely to stall as interest rate hikes begin and credit growth to households continues to slow. Growth in consumption of only 3.5% is forecast for the year, after 2.8% in 2013, while public sector investment growth is expected to grind to a halt as capacity constraints are reached. Private sector investment should recover to about 5.6%, from 2.8%. Nomura has forecast a hike in interest rates in May as the beginning of a two percentage point cycle over 18 months as consumer price inflation rises on a weak rand. On the labour front, it believed that "one of the biggest events of the year" would be a co-ordinated strike by the Association of Mineworkers and Construction Union in the Rustenburg platinum sector. Industry was likely to continue to face electricity shortages, especially in the first quarter, while the recovery of the economy was likely to increase pressure throughout the year. The biggest downside risk to growth was an earlier than expected hard landing of the Chinese economy, and "a faster crunch in consumption due to rate hikes and banking credit extension slowdowns". However, the risk of a hard landing in China was much lower than perceptions of it last year. China could grow at a slightly stronger rate of 7.4%, compared with forecasts of 6.9% through much of 2013, Nomura said. REF : SPI DAILY E-MAIL www.spi.co.za