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Ok. Got itBy Hein Klee, Head of International at Nedbank Private Wealth
Investing internationally is a vital element of a successful portfolio. It provides protection against market falls, reduces your overall risk exposure, and can offer enhanced long-term returns. But with economies and markets across the world continuing to suffer the impact of Covid-19 and lockdowns, growth potential seems scarce. There are, however, certain regions and sectors that offer promising prospects.
While nearly all economies are recovering from the lows in March and April, the extent of the recovery will be constrained by the nature of further Covid-19 developments and the impact of social-distancing requirements.
Economically speaking, we believe that Asia is better placed to cope with the virus than other regions. Most Asian countries have successfully managed the first wave of Covid-19 infections, materially outperforming the Western economies, especially the US. When we compare Europe to the US, it is interesting to see that Europe has outperformed the US in the way it has managed the impact of the virus. In addition, its income support and furlough schemes have placed it in a better position to bounce back economically, especially since EU countries have agreed to fund a €750 billion recovery fund. The US economy is therefore looking the most vulnerable, as reflected in the weakening dollar.
While they have their issues (some more than others), they also offer the best long-term growth prospects, the lowest valuations, and the added bonus of cheap currencies. Once again Asia, with the mighty China at its centre, stands out and is generally favoured by specialist asset managers. However, we believe the most important decision for investors is to have emerging market exposure, rather than trying to pick which region might do best.
Our international investment team prefers to focus on alternatives wrapped in listed investment trusts, and there are currently quality assets in this category trading at exceptional discounts. For example, high-quality UK commercial property portfolios are trading at 50% discounts to their appraised values. Commercial property funds, however, still face challenges, with the pandemic accelerating trends like the move to online shopping and working remotely. A hard Brexit and a weak UK economy add to these challenges. Valuations are therefore under pressure. Nevertheless, to suggest that a diversified portfolio of prime assets will halve in value, as implied by these prices, is highly unrealistic in our view.
Gold is still attractive as a safe asset. Traditionally, gold goes up when the dollar is weakening. It is also a good hedge against inflation, and the opportunity cost of currently holding gold is close to zero, given current interest rates. There is therefore a case for gold as part of a diversified portfolio. However, valuing gold is a challenge similar to trying to answer the question: ‘How long is a piece of string?’
Infrastructure typically offers high and reliable cashflow with some linkage to inflation. We believe that the only way the world can ultimately exit its debt problems is by deflating it away. Based on this, any asset that pays a good cashflow and offers an inflation hedge is worth considering. This includes renewable-energy infrastructure, general infrastructure and healthcare infrastructure (ie elderly care homes).
Working with someone who has expertise and knowledge and knows your goals and circumstances can help ensure that you make informed decisions about your wealth that support your long-term objectives. This is even more relevant when it comes to international investments, since the size of the investment universe is so much bigger and the tax and estate planning consequences that much more complex. It is therefore critical that you discuss your international investments with your wealth manager – we have the expertise to help ensure that you reap the diversification benefits and avoid nasty surprises down the line.