Knowledge is power in just about any endeavour, even when you build a sound offshore portfolio
For starters, you need to understand the macroeconomic environment. This includes currencies, interest rates, inflation and market manipulation by Central Banks. For example: Japan introduced negative interest rates to try boost their economy. But negative interest rates means consumers won’t borrow as much, therefore spending will drop and economic growth will remain stagnant.
You also need to look at the political stability and corporate governance. For example: The Middle East is riddled with war which has spread chaos throughout Europe and Asia.
But the biggest favour you can do yourself is understand what drives specific markets. South Africa for example relies heavily on commodities. But commodities have been on a downturn over the past few years. Consequently this is just one of the reasons why South Africa is struggling to boost their growth.
Japan’s markets on the other hand, is driven largely by exports. If it can’t export goods to the rest of the world, its economy will suffer. This will impact the Dollar/Yen exchange rate which will hurt your investments (DBX Tracker Japan) in Japan’s economy.
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Offshore Investment Key #2: Forget economies strained by political instability
Don’t ignore politics, economic reforms, policy changes and the impact they have on stock markets. For example: The sacking of Finance Minister Nhlanhla Nene is December 2015 saw the JSE crash with massive companies falling with it.
The point is to dodge countries where the political landscape is too volatile and uncertain can help protect your investments for epic losses. The point is, understanding the regulatory and political risks is sometimes more important than conducting financial analysis.
Offshore Investment Key #3: Develop a contrarian instinct to pick undervalued investments
The valuation of a countries stock market is also something you should consider when investing offshore.
Simple, identify the key regions carrying low price to earnings ratio (PE ratio) because there could be great stocks that are undervalued. Ignore stock markets with excessively high PE’s.
For example: When compared to US and European equities, Japanese stocks are trading at a significant discount. The MSCI Japan Index is trading at a PE of 16:1, the S&P 500 is at 18.3 and the MSCI European Index is at 23.3.
So you’re getting great value from the Japanese markets because the profits in the index is delivering is much higher that what you’ll be paying for it.
Offshore Investment Key #4: Cover a wide area with your investments for protection and diversification
Diversifying your investments should be a habit for investors. There’s no need for to explain why diversifying is important.
I’d rather just explain with a personal example. I’ve invested in a range of offshore exchange-traded funds, most notably, the DBX USA, World and Japan trackers. The reason why I spread my money over these three is because is Japan’s stock fall, hopefully US stocks will rise, therefore minimising any losses from the one market.
While different degrees of political and economic risks vary, you can cancel them out by building a sufficiently diversified offshore portfolio.
Until next time, knowledge brings you wealth,
Managing Editor, The South African Investor
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