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Views Article – Sharenet Wealth

World

Global Citizens

Let’s for a minute imagine we time-traveled some 5-odd years back to March 2014. Take further liberty and imagine 3 different citizens: an American (Donald), a South African (Cyril) and a Brazilian (Jair) walking into a financial advisor’s office – it is already beginning to sound like a poorly-crafted joke. Each citizen has an equal sum to invest and, being the patriots that they are, want to invest in an ETF that tracks their nation’s index. How did their respective investments perform over a 5 year period (ending 28 February 2019)?

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Donald invested in an S&P 500 ETF, Cyril in a JSE Top 40 ETF, and Jair in an ETF for the IBX50. The graph above displays the percentage value of their investments over the period. Seemingly, Jair has come out on top by some margin over the S&P 500 with the Top 40 lagging far behind. Despite a fairly sideways market, the Top 40 has still posted a cumulative return of 16%, so not all doom and gloom for Cyril. Donald will be fairly content with a 48% growth in his investment and it should be enough to finance his home’s security upgrade in the form of a large wall. But it is Jair who is smiling all the way to the bank with an 89% investment growth.

However, these returns are relevant only to their local markets and economies. It is fair to regard the US dollar as the “global currency’. As we would like to compare their standing in this global context. Let us introduce the effect of the exchange rate and compare the dollar value of their investments:

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Converting the investment values into dollar terms yields a staggeringly different picture. Naturally, Donald’s investment has remained unchanged as it is already denominated in dollar. The Brazilian real depreciated significantly over the 5 years and eroded much of Jair’s return to barely 13%. Unfortunately for Cyril, though, he has lost 12% of his investment. As per the graph above, his investment is now worth only 88% of what it was worth 5 years ago. In fact, he would have been better off converting his investment to dollars and hiding the cash under his matress for 5 years – or buying Bitcoin.

There is another factor worth considering: inflation. The graph below has taken the value of their investment, stripped out the effect of inflation, and converted it to into its dollar value.

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Introducing inflation paints a dismal picture. The graph and table of returns does not lend itself well to Jair and Cyril. The latter of which has seen nearly a third of his investment wiped away, a shocking testament to the effect of currency devaluation and inflation. Disturbingly, at one point in October of 2018, the investment was worth just over half of its original value. After 5 years Donald would be the only content investor with a 41% real return.

Putting the parable aside, it would be wise to highlight its insights. Brazil was chosen due to its similarities with South Africa and does illustrate that the South African market and economy has greatly underperformed over the past 5 years. This is hardly news, but the comparison does illustrate the large extent of the underperformance (Brazil with -6.38% vs -32.57% for SA). Interestingly, inflation and currency devaluation had a much greater negative impact on Brazil than on South Africa (i.e. inflation and devaluation eroded more of the IBX50’s returns than the Top 40’s). You may recall from the first graph that the IBX50 grew by 89% which gave it some “buffer” above the JSE Top 40.

Admittedly, stripping out the effect of inflation on the investment and then converting to dollar is not the most realistic of scenarios (yet it is not unconceivable). Regardless, it is a useful comparison to examine the global standing of the 3 respective citizens and the parable’s lessons remain. Donald is some 41.41% richer, Jair is 6.38% poorer, and Cyril is some 32.57% poorer.

The comparison should highlight the importance of seeking offshore investment opportunities as well as staying mindful of the factors which may erode your wealth.

If you’ve been exploring your options for moving your wealth abroad, complete the below form to get in touch with one of our trusted wealth advisors to discuss the various offshore investment opportunities offer.

 

Aidan

Aidan van Niekerk
Junior Investment Analyst

Aidan is responsible for quantitative research and stock-market analytics. He has a keen interest in all things numbers and – in addition to working for Sharenet – is a full-time BSc Mathematics and Statistics student at Unisa. Aidan has represented South Africa at a professional level in road cycling where the rigorous demands and self-discipline has prepared him for the markets. He aspires to one day complete a Master’s degree in statistics and delve deeper into the world of algorithmic trading, market analytics, and financial modelling.


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