So, your neighbors are packing up, your kid’s teacher found a better job overseas, and everyone you know is moving to Australia. The grass always seems greener on the other side.
Yet, for many of us, home is where the heart is. We tackle local challenges in ingenious ways—like installing electric fences for security and setting up solar panels to beat load shedding.
But what about your assets? How do you creatively protect and grow your wealth? Just as you’d use global technology for your solar panels, it would be wise to unlock your wealth and investments to opportunities for global growth.
The Comfort of Familiarity vs. the Promise of Diversity
Investing in what you know feels safe. There’s even a term for it—home bias. We naturally stick with familiar, local markets because it feels less risky. But is it really? Let’s dive in.
Liquidity:
Consider the ease with which your assets can be converted into cash. With frequent delistings and shrinking market capitalizations, there are increasingly stringent restrictions on tradable or investable assets.
Inflation:
Inflation gradually erodes the purchasing power of your wealth. Emerging markets typically struggle to curb inflation to the 2-3% levels observed in developed markets.
In these markets, inflation typically ranges from 5-10%, with South Africa currently standing at 5.2%. This substantial variance is a primary factor contributing to the rapid depreciation of developing currencies, a trend likely to persist.
Volatility:
Volatility measures the extent to which investment returns fluctuate. Developing economies heavily reliant on specific resources are susceptible to external shocks.
Their economic value can fluctuate swiftly and unpredictably, influenced by global market dynamics and news events. For instance, South Africa, deeply tethered to the commodity market, faces significant economic vulnerability stemming from this sector.
Security:
Finally, security risk encompasses the threat of loss of capital or income. The social and political risks inherent in emerging markets pose a threat not only to personal security but also to the return of invested capital in your assets and business.
Why Diversify Globally?
While higher risk usually comes with the potential for higher returns, emerging markets are not currently living up to expectations.
Look at the numbers: over the past five years, the MSCI World Index, which represents the equity performance of developed countries, has significantly outperformed the FTSE/JSE All Share Index, the benchmark for the South African market.
The MSCI World Index achieved a remarkable return of 109%, translating to an average annualized return of approximately 15.85%. In comparison, the FTSE/JSE All Share Index recorded a return of 66.7%, resulting in an average annualized return of around 10.77%.
Learning from the Exodus
Here’s something to ponder: major companies are pulling out of South Africa. In 2023, 27 companies delisted from the JSE, marking a new low of companies listed on the exchange. With giant corporations like Barclays and BNP Paribas having cut their last ties to the continent, maybe it’s time we rethink where we put our money too.
Currency Dynamics: A Tale of Two Currencies
The South African Rand has shown some fight recently, but the long-term outlook isn’t rosy. Over the past five years, the US Dollar has appreciated by 25% against the Rand. Moving some rands to dollars is the easiest way to participate in global wealth while preserving your purchasing power against the depreciating currency.
Imagine investing R375,000 ($50,000) in 2010 at R7.50 to $1. Today, with the exchange rate currently at at R18.70 that would be R935,000. And with this money compounded at 10%, it would be valued at R3,55 mil ($190,000!), an almost ridiculous return on investment over the 14 years.
Looking back, it’s easy to see the appeal of ideas we didn’t act on in hindsight. However, it’s wise to think of the investment decisions we could have made today for their future impact in 15 years.
Our Advice: Think Globally, Act Thoughtfully
Diversify Across Borders:
Open up your investment strategy to global markets. This reduces risk and positions your portfolio to benefit from the growth of other economies.
Invest in Hard Currencies:
Safeguard your wealth by investing in stronger and safer currencies. This shields your investments from local currency volatility and vulnerabilities, ensuring your money retains its buying power in the global economy.
Stay Flexible and Prepared:
Financial markets are unpredictable. Have a solid plan but be ready to adapt to changing circumstances. Taking these steps now can help you navigate local challenges while leveraging global financial tools and instruments to protect and grow your wealth.
Embrace global opportunities and secure your financial future.
Regards,
The InvestLife Advisory Team
