Another look at offshore versus local
Asset Class returns per calendar year
A graphical format of various asset class returns such as this produced by Investec, provides a very clear picture of the range and variance of returns over any 12 month period.
At the same time, by colour coding the best and worst asset class in each particular year, we do see that returns occasionally bunch together, so that in 2002 to 2007, listed property was the star performer, while for the years 2003 to 2010, except for 2008, offshore cash was the worst performer.
What is not so obvious from this table is the fact that offshore equities produced a far superior return compared to local equities in the period 1991 to 2001, despite only being the top performer in 2 years, compared to 4 years for the local equities.
From the beginning of 1991 to end of 2001 offshore versus local would have been as follows:
• investment in foreign equities - a cumulative 1172%
As we all know this reversed completely over the following 9 years as global equities declined from their expensive levels to more attractive prices, while at the same time South African investors experienced the impact of a firming rand as it reversed from extremely oversold levels to far more expensive levels.
From the beginning of 2002 to the end of 2010 offshore versus local would have been as follows:
• investment in foreign equities - a cumulative loss of 15%
SA Equities relative to US Equities (S&P500)
The chart below reflects the price to earnings of the local JSE to that of the US market. It is quite clear that relative valuations oscillate around some mean (which will also naturally change with time).
At times local equities tend to be more expensive when compared to global developed equities and vice versa.
Since 1990, there have been 3 distinct periods when US equities were cheaper – 1994, 2005/2006 and at current valuations
These periods are indicated by the circled peaks on the chart below, where relative valuations move beyond 1 standard deviation.
Clearly investors have been very disappointed with the returns from offshore over this last decade, after a boon in the 1990’s. Investors at the time should have simply looked at such a relative valuation chart and they would have seen that offshore was expensive relative to local at the time.
The current scenario is however establishing itself as a wonderful starting point for excess returns from global equities over the next 10 years, given the relative valuations and the firm level of the local currency.
This is not to say that local investors should sell all local equities, but there is a sound case for a strong tilt to offshore.
Investment presentation in Jhb
There are a few seats still available. please contact Myrna on details below
Date: 15 February 2011
Ian de Lange
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