Navigating global waters: unlocking offshore diversification

Kingsley Williams, Chief Investment Officer of Satrix*, highlights the importance of diversification to manage risks and seize investment opportunities.

Risk in investing is a feature, not a bug. It is, in fact, the reason we expect to earn higher long-term returns than provided by risk-free assets. When thinking about risk, investors should think equally about their investment term too. The longer we remain invested, the lower the risk generally becomes – a principle that the most successful investors have well understood.

There are many sources of risk that might concern investors currently – making the case for diversification as strong today as it ever was. Below we highlight some of these risks and the opportunities they present.

When the rates abate

Investors have been anticipating rate cuts from central banks as inflation has subsided.

While inflation has been challenging to tame, central banks believe it is now starting to come under control, and have recently made decisive moves to reduce interest rates. These cuts are expected to positively impact fixed income bonds and equities, reducing borrowing costs for leveraged companies and lowering the risk-free rate used to value companies.

Impact of Middle Eastern conflict on equities

Oil is a crucial commodity, influenced by many factors, including the coordinated supply of the Organization of the Petroleum Exporting Countries (OPEC), which represents almost 80% of the world’s proven oil reserves and about 40% of its production. Oil’s price significantly affects transportation costs and overall inflation, given its widespread use and role as a base ingredient in many products. However, new oil discoveries, such as those off the coast of Namibia, diversify supply and make the market more resilient to regional or geopolitical disruptions.

Global diversification: Africa and India

Global diversification is crucial for South Africans as our market represents a small portion of global investment opportunities. Emerging markets generally offer higher economic growth potential, often reflected in their equity markets and offset by typically higher interest rates. The US has benefited from low interest rates for over a decade, with its market led primarily by the innovative technology sector.

India, the fastest-growing large economy, has a substantial technology services industry and is priced at a significantly higher Price/Earnings multiple compared to the broad MSCI Emerging Markets Index. It is even marginally higher than the MSCI USA Index as it prices in future growth prospects. It’s an exciting investment market, but it should be part of a broader portfolio that also includes undervalued segments offering potential upside.

The tech bubble question

Nico Katzke, Head of Portfolio Solutions at Satrix* believes that valuations across the global tech sector, although seemingly stretched at present, are largely on the back of more solid fundamentals and real opportunities than was the case in previous tech rallies. Tech index proxies, like the Nasdaq, are dominated by large corporations with strong cash-flows investing in their capacity to service tomorrow’s applications in AI. Growth opportunities remain in this sector, and it is unlikely to wane in its importance in the economy of tomorrow. Building diversified exposure to global tech through time, and not timing entry, seems the best approach at present.

Benefits of offshore diversification

At Satrix, we advocate investing primarily through well-diversified asset class exposures, tracking broad market indices. We review asset classes for medium- to long-term performance to inform a strategically diversified asset allocation for our multi-asset balanced funds. We also target long-term drivers of excess returns within equities by tilting our portfolios towards well-recognised performance drivers, avoiding the temptation to profit from short-term market movements and noise.

Local investments in South Africa

South Africa stands at a critical point 30 years after democracy. The new Government of National Unity (GNU), led by President Ramaphosa, aims to revive economic growth through policy reforms and restructuring. As these efforts take hold, investor confidence could lead to a re-rating in our equity market, currently trading at a discount (13.3x) to its long-term average (15.4x). Against this backdrop, the rand is likely to re-rate, posing a headwind to offshore investments as they devalue in rand terms. A stronger currency would give the South African Reserve Bank more freedom to cut interest rates, supporting local bonds.

While uncertainties remain, excluding the home market from investments may not be wise. Balancing global and local investments offers a robust strategy to achieve financial goals amidst uncertainty.

Approaches to robust diversification

Investors can ensure a diversified portfolio through several approaches:

1. Outsourcing to a financial adviser: A financial adviser can construct an appropriately diversified portfolio.
2. Investing in multi-asset funds: Investment managers can diversify optimally across different asset classes and geographies.
3. Constructing a multi-asset portfolio: Building a diversified portfolio by investing in different specialist asset class funds yourself.

Each option should be weighed against one’s life stage, investment expertise, and the time and information available to make informed decisions.

*Satrix is a division of Sanlam Investment Management

Disclaimer

Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). The information above does not constitute financial advice in terms of FAIS. Consult your financial adviser before making an investment decision. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.

Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities and an authorised financial services provider in terms of the FAIS. Collective investment schemes are generally medium- to long-term investments. With Unit Trusts and ETFs, the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document.

For more information, visit https://satrix.co.za/products