As long-term investors, our clients are well aware that diversification is one of the most effective ways of managing risk. Diversification becomes more important as an investor inevitably grows older, but the drawback is that it lowers the overall return on an investment portfolio. For younger investors, of course, creating wealth is the main aim and that requires taking risks and following a more focused strategy.
In South Africa we are very aware of investment opportunities outside our borders as we are a small economy on a continent that remains classified as “emerging”. In the bad old days regulations kept us from diversifying our wealth overseas and we had to do the best we could locally, but that has changed. Today an investor may take R1 million offshore without much fuss every year and up to R10 million with SARS and Reserve Bank approval. So, where should you invest your money?
There are always two factors to consider before you invest: one is the objective valuation of the investment you want to make, i.e. how cheap or expensive is it relative to its potential; and the other is the investor sentiment regarding that investment, a very subjective and emotional decision.
If we look at investment in South Africa, those two factors driving your decision are poles apart. On the one hand, investment in South Africa is very cheap, offering good value for money (see graph). On the other hand, if you look at the fundamentals of the country and the political talent (or lack thereof), you have to understand the negative sentiment towards investing here.
If you look at the USA, the economy has been very strong (see graph) and the share market is at all-time highs. This makes the USA investment environment very expensive so that it arguably offers little value, but the investor sentiment is very positive because there are talented people managing strategic sectors of the economy and you can be confident that the government will not take away your rights to ownership. The US is also on the cutting edge of innovation and the incubator for companies that will rule the world we live in over the next 50+ years.
China is also an emerging market but unlike South Africa, their economy is huge. Unfortunately, China is a one-party state and the government can make or break any company without going through an independent legislative process. This has caused the equity markets in China to fall to relatively cheap levels, therefore offering good value, but the uncertainty regarding the political will has dampened investor confidence. Also unlike South Africa, China is very innovative when it comes to technology and without the political sword hanging over their heads, Chinese companies would have been a fantastic place to invest in, given current valuations.
It is important for us to remember that change is an absolute certainty. Just like a new day dawning every 24 hours, or the full moon rising every 30 days, so will the investment cycle produce new opportunities every now and then. Over the longer term the behaviour of the broader asset classes like equities, bonds, property and cash can be seen as quite predictable, but the movements within these asset classes necessitates the continuous updating of a portfolio. These changes make it crucial for any investor to use a financial planner to marry their personal circumstances to their asset allocation over time.
So, to answer the question as to where to invest your money: the answer will differ from one investor to another and will also change for each investor over time.