Is offshore exposure from the local market enough?

Global investing offers South Africans unique and compelling benefits – the most fundamental of which is spreading your overall investment risk.

When it comes to investing, the Johannesburg Stock Exchange (JSE) already offers investors exposure to global markets – but is this enough to truly diversify?

The case for geographical exposure

If you have a retirement annuity or local investment, you probably already have offshore exposure built into your portfolio.

This is because a number of companies originating in South Africa have expanded their operations beyond our borders, so investing in these companies on the JSE offers your portfolio a degree of exposure to international markets.

However, the earnings of the South African stock market are dominated by a few large companies with a limited sectoral footprint.

This exposes South African portfolios to localised crises, like civil unrest and drought, as well as regional shocks, like slumps in commodities (consider how dependent mining stocks are on supply and demand).

This creates what is known in the industry as concentration risk.

The concern with concentration risk

“If an event seriously affects one of these big companies, or a sector, such as mining, in which a number of these companies operated, investors without adequate diversification would suffer a disproportionate loss,” says Head of Discovery Invest Marketing, Jennifer Arendse.

“Consider, for example, the sudden collapse of a business such as Enron or, in the South African context, Steinhoff. The resultant massive losses of shareholder value are clear examples of this risk,” adds Arendse.

This is especially true of the offshore exposure within the JSE.

South Africans may believe that what the JSE offers is sufficient, but this offshore exposure is only really offered within a handful of stocks and is highly concentrated within a few specific sectors.

Many of the world’s fastest-growing and most exciting sectors and geographies are almost completely excluded from the JSE.

Global investing offers more diversification across different geographies

An investor’s offshore exposure is limited to, and significantly dominated by, a handful of huge companies in very specific sectors.

As such, an investor seeking a well‑balanced portfolio may not get an adequate degree of diversification by investing only on the JSE.

This makes the case for diversification across different geographies and currencies even stronger. Along with access to a wide range of new opportunities, it also heightens the appeal of investing offshore.

To learn more about why and how to diversify when investing offshore, watch this video.

Visit Discovery Invest’s offshore investing info hub for a wealth of free resources to help South Africans make more informed financial choices.

This article is not financial advice. Please consult with a financial adviser for financial advice.