Given the significant rand weakness over the last few weeks and the very recent losses on the JSE, some investors are starting to wonder if they should rather invest their money overseas and away from our volatile economy. This type of thinking is very similar to what was experienced in the early 2000s when rand weakness was apparent against all major currencies. Many thought rand weakness would continue to the point where the currency had no value.
History proved those who sent money out of the country to protect against rand weakness at that time made a mistake. Doing so this time might repeat the error.
The JSE protects against rand weakness and US inflation
With the recent rand weakness and all the negativity surrounding the South African economic and political situation, I am often asked whether investors should simply invest their money overseas. This is a completely understandable question. But it might not be your best investment strategy to protect against rand weakness. In my view, unless you think Zumanomics will destroy the SA economy, you must maintain a sizable investment in the JSE to ensure long-term investment success.
Many of the biggest companies on the JSE earn the majority of their money from outside of SA. This means any rand weakness will increase profits, which is positive for their share prices in the longer term.
The fund managers that I believe provide the best investment research, Cannon Asset Managers, created the graph below. It shows the return of the JSE in US$ (green) against the US inflation rate (blue) and the US stock market (red). As you can see, even with the recent rand weakness and the sharp drop in the JSE, SA investors are still handsomely beating the US inflation rate, as well as the US stock market, over the last 10 years.
The graph is interesting because it shows the JSE has beaten US inflation and the US stock market over all the preceding 10-year periods from 2006 until now. (You can also see the JSE underperformed in the 10-year periods from 1997 to 2006.)
Compiled by Cannon Asset Managers. Source: Bloomberg
Given this information, even the most hardened afro-pessimist would have a hard time arguing that it is always better to invest outside of SA to protect against rand weakness. For me, the graph further illustrates the value of a properly diversified portfolio of shares to give you exposure to the JSE and offshore markets. The primary reason for this diversification is to protect against stock market events that are totally unpredictable, but massively damaging to investors.
How much must I invest offshore?
If you plan to spend your life in SA, I feel you should have an offshore investment allocation that equates to 20% to 40% of your net wealth. It’s important to note that you can get a lot of this offshore allocation via local unit trusts, exchange traded funds (ETFs) and even some of the pure rand hedge shares.
If you are planning to spend a large portion of your time (and therefore your money) outside SA, you should invest 35% to 70% of your money offshore. More importantly, you must invest a significant portion of this money directly overseas, i.e. using your offshore allowance. In so doing you can access the money from overseas when required.
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