To go offshore, or to stay domestic – the investing question that gets us hot under collars
Offshore investing has always been a loaded subject for South African investors, mostly because when you take your money out of the country you're taking a double risk – the risk that whatever asset you're buying might bomb, and the risk that the currency might swing sharply and cut the rand value of your investment. Over the last year or so, with the weakening rand and a strong performance from offshore markets, people who invested outside of South Africa have seen very juicy returns. The question is, given the run on the rand and various other factors, does it make sense to start investing overseas now? What if the rand strengthens? What if offshore assets falter when the Fed tapering starts? As always, heading offshore is a tricky decision, and there are plenty of conflicting opinions. In this interview, for example, NFB Financial Services chief executive Mike Estment finds himself disagreeing with Alec Hogg about offshore investing. Read it, and see if you can make up your mind about who is right. – FD
GUGULETHU MFUPHI: Markets have a habit of delivering very varied returns over cycles – advising investors to choose appropriate, correctly risk profiled investments to stay in the game is important. Mike Estment, Chief Executive of NFB Financial Services Group joins us now for some strategic thinking. Mike, getting into the details here it sounds as though, judging by the numbers that you've managed to gather over the last year, that foreign equity has been the place to be. That's seen a boom of around 35 percent increase over the last year.
MIKE ESTMENT: Yes Gugu, that's interesting because not only is it the underlying investments, but you're taking a currency view as well. We've had a tremendously interesting decade where the rand has been, I think, extraordinarily strong for a couple of very good reasons – the demand for resources that we export in the form of timber, produce, minerals, and allsorts. The South African markets delivered great returns, and it almost became sort of the inferred thing to go over the water, because you were making a mistake. What you are doing is you're taking a double-edged risk. You're taking a currency risk and underlying market risk, whilst – if you were in the JSE you'd be in Our Shares – who also have an exposure to international earnings and the like, and therefore currency, but it's dilute. It has therefore given us a fantastic return in the financial year to date of 35 and a half, nearly 36 percent, and has eclipsed South African Equities, which haven't had a bad run themselves (last day or so excluded). There's a lot of volatility towards the higher end – a record end of our market price earnings multiples, so they are expensive and definitely still around, so relative to overseas basis.
GUGULETHU MFUPHI: You mentioned the word 'volatility' there and that's one thing we know for sure occurs on the markets. Is it sustainable? There's all this talk about tapering. We're probably tapered out by now, but once that kicks in what impact could we see?
MIKE ESTMENT: Well, tapering is an adrenalin injection. It's kind of the market, the regulator, the central bank, and the states particularly, saying we're going to tap paper out of the market. We're going to leave the cash in the market and make it look for other things. Now if those other things happen to be cash, they can earn half or less than half a percent in dollars, sterling, or euros. They could earn a dividend on a share in a quality company, a leading company with growing earnings, and therefore invest in the markets. Now that's the stuff of bubbles, so you can go and apply your money into those asset classes. If you're doing it for the right reason and you have a long-term horizon, that's smart. If you're doing it for the wrong reasons and you're speculating, it's desperately dangerous. Again, you have this globalisation and the small village, and we kind of hear at five in the morning what China and Japan have done, Oz we know of as well and we're somewhat able to trade in those markets – electronically. The speed and the responsiveness of the market is scary. Equities are not for sissies. They're for good long-term quality investors that have a long-term horizon and they're probably going to deliver exactly what's on the can.
ALEC HOGG: But if you got clever or lucky, if you were able to shift between the different asset classes you would really be shooting the lights out. It was interesting. Foreign equities, according to your figures, are up 36 percent this year. Last year property was up 36 percent, so you're still saying 'go into foreign equities' even though they've had an enormous run.
MIKE ESTMENT: Well, that's a currency and a market return whilst the local property market was earnings, which was in the form of taxable distributions…
ALEC HOGG: The point being, you guys all thought that the rand was a one-way bet. You're talking again as if the rand was a one-way bet. Maybe it isn't. Maybe we have quantitative easing. I know I'm a minority of one saying this, but when you have currency that is not being expanded at the rate that the American currency is being expanded – economics 101 says to me 'supply of something rises and the supply of the other one doesn't rise', then the price actually weights. It's almost as though the whole market is saying the rand is once again a weak currency. Get out of the rand and buy offshore. We did that once before and we took an awful bath in South Africa.
MIKE ESTMENT: Yes, I think you make a very good point. That's not the statement I made. The statement I make is that the market has returned in international equities – 36 percent. If you add currency, the equity return, and the dividends distributions in that stock, it's not to say that the rand is going to continue weakening. I might have a particular personal bias, but from a professional perspective, it's 'what are you doing? Are you taking money overseas to politically hedge yourself against calamity in Africa maybe? Are you overexposed to South Africa or Southern Africa?' Then think about overseas. The probability of the company with those vast amounts of savings in the company's balance sheets with the dividends, distributions, and special distributions that they're doing, the appetite for investors overseas, and consumers overseas getting back on the bandwagon. They've had a tough five or six years. If it was a retail business that I was investing in, would I invest in a South African one or a global one. The global one is going to be right up there. It's big, it's chunky, it has lots of cash in the bank, it can go and acquire, and it can be good for the underlying share price, and probably for earnings as well.
ALEC HOGG: Presumably, you're saying that the trend that we've seen in the last 12 years of the South African economy outperforming the British and virtually all European economies, and the United States economy – 12 years in a row… Is it going to reverse?
MIKE ESTMENT: It might – yes.
ALEC HOGG: Because of quantitative easing?
MIKE ESTMENT: No, markets are cyclical Alec, and I think that people kind of get onto these things at the last leg. It's because the South African listed property market did so well last year that the guys have jumped in there this year at the dinner parties and they've been disappointed because their yield has only been seven or eight percent – if I remember the numbers correctly. If you took the actual return, the cash flow out of the story, you had nought, so the yield on those property companies was seven or eight percent.
ALEC HOGG: I get it, but we have a rand that has been at 6.50 three years ago and has now gone to nearly 10.50 against the US dollar. By following that trend, aren't you perhaps making the same mistake? We're thinking strategically, aren't we?
MIKE ESTMENT: Again, strategically I would be making a decision to invest overseas because I have a loaded base here. I have my company in South Africa, I have my salary here, I have my share options here, and I have property here. Maybe overseas is attractive because it became desperately unattractive and has been sort of the last go-to place for the last number of years. If I wanted to diversity strategically, then overseas makes sense. The counters and the quality of the counters make sense. It's a much wider market so I'm not constrained by one airline, five banks, and the investable universe is so wide that I would probably think…
ALEC HOGG: I guess the only problem is whether you're going to retire here. If you're going to retire in rand surely, you should be building up your asset base in rand, or are you going to retire overseas? Is that not a question you need to ask yourself when you think about these foreign investments?
MIKE ESTMENT: I don't think that Swiss, French, or UK investors investing in the American, Australian, Chinese, Indonesian, or the Vietnamese markets are thinking about retiring there. They're diversifying.
ALEC HOGG: But what do they know – what do the Swiss know about the Korean market?
MIKE ESTMENT: Probably as much as we do.
ALEC HOGG: Well, we don't know…certainly, the Koreans would know more than we would know.
MIKE ESTMENT: Surely, but I think answering your question directly – I'm not going to be investing in the UK only, and although I might invest there and then retire, if I chose to, to Australia or the USA… Living in the currency and saving only in the currency where you think you are going to spend your last days with a bit of silver hair – I don't know that it makes that much sense. I think diversification is greater than the place you live.
GUGULETHU MFUPHI: Mike – very quickly – in order to avoid Alec's dire situation that he's painting for us… Does that mean that hedging is the best option?
MIKE ESTMENT: I think that's spreading and diversification is indeed the option, and the use of the word 'hedge' is a tricky one for us in the profession because there are hedge funds and things like that. Going into investments with your eyes wide open, being well-advised, talking to people – it could be an accountant, an attorney, a trusted friend, someone on television at lunchtime, or a professional in the industry makes a lot of sense. Making sure that the agenda suits you would make a lot of sense. There is no single answer to that question.
ALEC HOGG: Check the costs. We were nailed – as South Africans – during this whole international expansion, through massive costs in the way we've been nailed in many ways, through the cost. If you're going to take money offshore, be sure that you're not being taken away there.
MIKE ESTMENT: Absolutely.
GUGULETHU MFUPHI: Some advice coming from you, Alec.
ALEC HOGG: Why not? We're all give it away today, aren't we. We're strategically thinking.
GUGULETHU MFUPHI: Strategically thinking… That was Mike Estment, Chief Executive of NFB Financial Services.