To go or not to go?
Candice Paine

Is recent rand strength due to the prospect of another looming interest rate hike? Or is it because of a rumoured large merger or acquisition which will see buckets of direct investment flow? Whatever the reason, you've been given a second chance to invest offshore if you haven't already done so. Rand volatility has seen the currency go from R6.81/$ at the beginning of the year to a low of R8.17/$ and back to below R7.70/$ this year alone. In total we are down over 13% ytd to the USD. Against the euro, our biggest trading partner, we've lost 22% ytd. Analysts believe the weakening will resume, so should we take advantage of this interim reprieve?

To go or not to go offshore with your money is a key question? We all know that as a South African investor, offshore assets offer diversification and reduce overall portfolio volatility. These characteristics should be hygiene factors for any long term investment, and not the reason to be there. So what else? Most offshore assets are an explicit currency hedge for South Africans. By the principle of purchasing power parity, countries with higher inflation rates can expect their currencies to depreciate and those with low inflation can expect them to appreciate. Some market analysts are seeing the rand a lot weaker by year end.

The South African share market is one of the most concentrated markets in the world. SA has approximately 200 companies with a market cap over $50m versus over 14 500 names globally. The JSE is dominated by resource stocks followed by financials. Some areas of enormous global growth and opportunity are scantly represented or not at all on our stock market e.g. biotech, oil, bio-fuels and technology. To dilute your resources holdings and expose your assets to the largest global growth areas, you would need to hold equity assets offshore.

And then there is our ignominious label of 'emerging market'. Even though we haven't engineered our very own emerging market crises, every time one of the others do (Asia 1997, Russia 1998, Argentina 2002) we feel it. Specifically, our equities tend to fall, bond yields rise and the currency depreciates. Holding assets in a developed market currency that may actually rise at these times would benefit any portfolio.

But there is another whole school of thought on offshore investment which states that, because SA is largely driven by global macroeconomic factors, most of what transpires offshore is reflected in our listed company earnings anyway. For example,  inflation globally is largely being driven by the rising oil and food prices and South Africa and its companies are not immune to this. So why invest in other markets when the same 'invisible hand' at play in those markets is working in ours too? To amplify this thinking is the fact that increasing economic globalization (through trade, capital flows and the rise of technology) has seen an increase in correlations between economies and stock markets, which has the net effect of reducing diversification.

These are some of the more interesting debates around the merits of offshore investing. In spite of all these different viewpoints, offshore assets definitely still reduce overall portfolio volatility in Rand terms. And the current rand strength really does look like a limited time opportunity for investors to rebalance their portfolios with some foreign assets!