Offshore is calling, but…

Guard against panic or greed guiding investment decisions

By Andró Griessel


By the end of the second quarter of last year, the overall value of international stock markets was R109 trillion, or R109,000,000,000,000, with the breakdown of the pie outlined in the graphic below.

The JSE represents just a fraction more than 1% of this staggering figure.

However, what many people fail to realize is that bond markets internationally are even larger than stock markets. This is also the case in South Africa.

And in this case too, our market accounts for no more than 1% of the total. When we further confront the reality that the vast majority of investors have exposure to these two asset classes, the following becomes a very difficult question to answer:

Why shouldn’t I have 95% or even more of my investments in foreign assets?

The standard response that planners have always given, myself included, is:

  • Your obligations are in rand, so it makes sense for the majority of your investments to have exposure to rand-denominated assets; and
  • Overseas investments come with too much volatility and are particularly unsuitable for retired investors for whom sequence risk (more on this in a subsequent article) is a reality.


Both reasons carry weight, but only as long as they don’t come at too high a price.

Over the past ten years, the price investors have paid (of course, with the benefit of hindsight) has been too high.

The growing chorus of commentators, as well as your own gut feeling, suggests that if you don’t want or can’t emigrate for any reason, you should simply own your home in South Africa and take everything else abroad at any cost.

This doesn’t sound entirely correct but given the figures I mentioned in the opening paragraph, it could also be the rational decision.

As custodians (first and foremost) of clients’ money, it is important for us to not only consider the potential returns but also the risk.

And risk, in my opinion, is when you acquire assets at significantly overvalued prices and then either have to sell at great losses or hold for a very long time just to recoup your losses.

In my opinion, there has been an unhealthy obsession with U.S. stock markets, as if they have begun to operate in a world of their own where the fundamental principles of investments (such as the price you pay for a company), or the implications of massive and unsustainable government debt no longer matter.

We continue to forget that a 30% or 40% decline does not erase one year’s returns but sometimes five years’.

So, where are these valuations currently compared to historical valuations?

A regression analysis of the S&P 500’s price-to-book value ratio (a measure of how cheap or expensive the market is) shows a very strong inverse correlation between the price you paid at any given time and the subsequent ten years’ returns.

Like at the beginning of the century (at the end of the dot-com bubble), this market is currently trading at a price-to-book value ratio of almost 5, while already from a 4 (indicated by the orange dot on the bottom right of the graphic), the expected dollar returns over a ten-year period are close to zero.

I’m not saying this is what investors in the S&P 500 should expect over the next ten years.

However, there can be no expectation of a repetition of the past 15 years, since the starting point 15 years ago was from very low valuations (indicated by the orange dot on the top left), while our starting point now is at high valuations.

Armed with the above information, if we accept that “only” 42.5% of your equity exposure is indeed in the U.S. and the expected returns from it are low to very low, it doesn’t take a Nobel Prize in mathematics to figure out that the remaining part of your portfolio will have to perform very well so that your total portfolio can deliver a satisfactory return.

So, what is the conclusion?

  • I agree that the reasons we have been giving over the years for why there are so many South African assets in clients’ portfolios, or should be, are becoming increasingly difficult to defend in an environment where our total capital markets make up only 1% of the world’s (poor historical performance should not be the main argument).
  • You should indeed make changes to your portfolio for the right, rational reasons and not for the wrong reasons, namely greed (“the U.S. market will just keep rising”) or fear (“South Africa is the next Zimbabwe”).
  • A random anything-is-better-than-SA approach can lead to further capital losses, as the main safety net for an opaque asset allocation (namely an overweight of U.S. equities) could result in a repeat of the lost decade of virtually zero returns from foreign investments (2000-2010).

What should you do?

Investments are both simple and incredibly difficult.

If you follow a consistent, well-thought-out process and can ignore the cheering crowds on the way to the peak of a bull market, acquire and hold quality assets at a discount, despite not achieving immediate success with your process, you should become wealthy over time.

It’s a slow and sometimes gruelling process, but one that has always worked and is a path that veers far from the abyss. I would be surprised if this time it’s truly different.

Andró Griessel is a certified financial planner and managing director of Woodland Wealth. Contact him at

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.

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