South Africa is a volatile environment, with unexpected cabinet reshuffles, a series of downgrades, and erratic weather changes, ranging from flash floods to droughts – it’s no wonder local investors are eager to safeguard their money overseas.
But will investors really earn more from investing outside of South Africa?
In order to establish whether local or international investments achieved greater returns, Consilium investigated a range of bond and equity indices over the last 10 years.
They looked at earnings trends, as this has proven to be the best indication of growth, and the returns were converted to US dollar for continuity.
Local vs. International bonds and equities
To set the scene Jacques Pretorius, chief investment officer at Consilium Capital, explained that the rand has weakened by 107% (from R6.60 to R13.70) over the last ten years against the US Dollar. And this, of course, does not bode well for local investments.
Once tallied, the results from their investigation were in line with these assumptions.
“Looking at the broader equity and bond indices, it is apparent the US was the clear winner. US equity gained 112%, while US bonds returned 65%. These two indices beat European equity and bonds, which were only able to produce a total return of 20.9% and 46.7%, respectively,” Pretorius explains.
In other words, over the last decade investments in the United States outperformed European investments.
So how did South Africa fare?
Adjusting for the dollar, the local market had a return of 26.7% in equity, beating European equity, but only an 11% return in bonds – the worst of the three markets.
“So yes, it is clear that South African investors need to be offshore, but the data shows that investors would have had to be focused principally in the US,” says Pretorius.
Performance among emerging markets
On a positive note, South Africa nonetheless outperformed other emerging market economies, which only produced a return of 10.6% over the same period.
“This has been helped by a very mature institutional base, which keeps demand for rand assets elevated. Financial markets in the country are deeper, more mature and efficient than emerging market peers,” says Pretorius.
But just because South Africa did not outperform European and US investments overall, does not mean local equities have nothing to offer.
Local Index outperformed global counterparts
Consilium looked at the performance of the INDI25 Index, which includes the top 25 industrial companies in the country, like Naspers and SAB.
“The INDI25 outperformed even the S&P500 with a total return of 143%. South African listed property did reasonably well, returning 87.9%, while the Midcap Index, which is a proxy for SA incorporated, returned 52.6%. For completeness, the FINI15, which includes large financial institutions, gained 34.4% and the RESI20 resource index lost 59.9% over the 10-year period,” said Pretorius.
Therefore, South African investors whose focus lay with the INDI25 Index would have done better to remain in the local market because this index outperformed all the major global markets.
The importance of diversification
Michael Yuille, CEO of Northern Cross Wealth Management, believes that regardless of certain markets performing better than others, it remains pertinent to broaden your scope.
“My suggestion is always to spread investments as much as possible, so I would suggest investing both locally and internationally. The three rules to investing are diversification, diversification, and diversification,” says Yuille.
He agrees that the rand’s devaluation against the pound and the dollar had an impact on investments over the last decade, and he advises, “International markets will provide better returns overall, but don’t have all your eggs in one basket.”
Dave Elzas, CEO of the Geneva Management Group, also believes that diversification is the most prudent approach.
“You tend to concentrate your risk when investing in only one geographic location or one asset class,” he explains.
According to Elize Botha, managing director of Old Mutual Unit Trusts, "We are currently bullish on long term growth assets and we are particularly positive about global equity. We do believe that no single asset class performs all the time and we are still strong proponents of a well-diversified portfolio."
Pretorius insists that it’s important to note that historical performance is not necessarily an indication of future growth, and this needs to be kept in mind when making investment decisions.
“Given political and more specifically policy uncertainty, which could well lead to a further downgrade of SA’s rand-denominated sovereign debt to sub-investment grade, it is wise to remain diversified,” he concurs.