South Africans often wonder whether they should invest overseas. When considering your overall portfolio or balance sheet, you will probably find that all your interests, your investments, your business, and/or farm are based in South Africa and therefore denominated in rands. This is a major problem.
From a portfolio management point of view this remains sub-optimal. South Africa is classified as an emerging market and represents less than one percent of all investable markets. Conversely this means that more than ninety-nine percent of the available universe of investments has been ignored.
A further problem with emerging markets is that although at times they can show strong growth, they all tend to be very volatile. Circumstances can change quite rapidly as emerging markets mature and become sophisticated. Mature markets develop structural problems of their own and are growth challenged.
By moving some assets into mature markets (the United States or Europe), you gain the safety of diversification. Furthermore, you gain the opportunity to choose from a much wider asset class.
Of course, there are detractors, such as the government with its exchange controls that discourage you to invest overseas.
Luckily, there has been a steady relaxation of exchange controls and it is much easier now to rebalance portfolios.
Investing overseas is a complex matter. There is a huge investment universe to choose from. There are approximately forty thousand mutual funds and ten thousand large capitalisation stocks. Opportunity ranges from stocks to bonds, mutual, hedge funds and thousands of derivative products.
Each investment opportunity needs to be studied to determine its place and appropriateness in terms of characteristics of risk and potential return.
Also, unlike South Africa, overseas countries have different markets.
The U.S., for example, has a number of stock exchanges that have different trading methods and services. The main U.S. markets are the New York Stock Exchange (NYSE), and the NASDAQ (The National Association of Security Dealers Automated Quotations).
The NASDAQ is typically home to high-tech companies and is totally computerised. Trading takes place by computers without a trading floor, similar to the system used by the JSE.
The NYSE is home to the old economy smokestack-type companies and operates in the old-fashioned way, where brokers and specialists trade on the floor of the exchange.
Obviously if you are searching for investment bargains (with concomitant reduction in risk and volatility), you shouldn’t look only in South Africa. You will find bargains on the JSE and you will find bargains on Wall Street.
But you need to search everywhere. Don’t wait for the next currency crisis before you adjust your portfolio. Do it now!