By: Duggan Matthews, Chief Investment Officer at Marriott
“Should I invest offshore?” is a question many South African investors are grappling with today. The prospect of buying shares in less familiar companies on international stock exchanges and in foreign currency often creates uncertainty in the minds of investors.
Marriott offers five reasons to help put your mind at ease when deciding whether to invest offshore:
Offshore investments don’t need to feel foreign
Many offshore companies have brands that transcend national boundaries: Unilever soaps, Colgate-Palmolive toothpastes, Coca-Cola’s beverages and Nestlé chocolates can be bought in supermarkets all around the world. These brands are household names in South Africa too, despite being listed on first world exchanges.
It’s sensible to diversify
Financial assets, unlike lifestyle assets (home, car, etc.) and skills, are relatively easy to export. Considering that we typically derive our salaries from South African businesses and have all our lifestyle assets in a relatively small and volatile economy, investing offshore makes good financial sense when it comes to safeguarding our financial futures.
The chart below illustrates the relative size of stock markets around the world:
Currency fluctuations are diluted in the long term
Over the short-term, currency movements can create volatility when investing offshore but over the long-term the primary driver of returns are re-invested dividends, and capital appreciation. For example, if you assume a 10% p.a. total return for 10 years in US$ and the Rand strengthens by 20% (R14.50/$ to R11.60/$) your investment will still have doubled in value when converted back to Rands. In essence, the more time you give your offshore investments the less you have to worry about currency fluctuations.
Better quality companies
Companies listed on first world exchanges usually have bigger balance sheets, longer track records, more customers and stronger brands. Consequently, the operational risk inherent in these businesses is a lot less than South African alternatives.
Take Nestlé for example. With over 2000 brands and more than 10 000 products, Nestlé sells over 1 billion products daily, making its products among the most prolific in the world. Nescafé is the world’s best-selling coffee and accounts for over 40 percent of the instant coffee market. Consumers globally drink on average 5500 cups of Nescafe every second of every day. Other examples of Nestlé brands include 5.2 billion packets of Maggi Noodles sold every year and 650 Kit Kat fingers consumed every second of every day.
Although there are many well-run South African listed companies, none can equate to Nestlé in terms of size, track record, global diversification and number of brands. Investing offshore opens the door to companies of superior quality, increasing the certainty of a satisfactory investment outcome.
The returns are likely to be better
Not only are the risks likely to be lower but the returns should be better. Despite being an emerging economy, South Africa is struggling to achieve real GDP growth (growth above inflation) in higher than 1%. This is well below the current global real growth rate of approximately 3.5%. Thus, real dividend growth from large, global companies will likely exceed SA businesses.
Over the long-term dividend growth drives capital growth as illustrated below:
Marriott believes the answer to the question “Should I invest offshore?” is “Yes”, although it is important to take into account the personal circumstances of each individual. Not only does it make good financial sense, considering the risk of having all of one’s net wealth invested in a small, developing economy, but offshore investments also offer better prospects for good returns over the long-term, and with less risk.