How safe are my (foreign) investments?

"The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance," legend has Cicero saying in 55 BC.
The debt problems of Greece are only the tip of the iceberg into which the global financial Titanic could crash, writes Hein Kruger.

As we see from the attached quote by Cicero, there is nothing new in the world and the basic principles stay the same. Although the decline of the Western Roman Empire took place between 400 and 500 years later, and the fall of the Eastern Byzantine Empire a further 1 000 years later, we know that things happen at a much faster pace today.

Greece’s debt is not only a Greek problem, it is a European problem; and Europe and the United Kingdom’s economic crises are not only theirs but also that of South Africa.

Europe, including the UK, is South Africa’s largest trading partner. Any economic slowdown of one's largest trading partner will have a negative effect on one's own economy.

At this stage, it is clear that the European crisis, which began with Greece’s debt problems earlier this year, will not simply blow over soon. The threat of Portugal, Ireland and Spain’s economic troubles loom in the background, and only points to a further drawn-out affair.

The euro and sterling, since the end of May last year, are some 15% down on the rand and 10% down on the United States currency. The fact that our currency has been strengthening against our major trading partners in the past year is not necessarily good news for the local economy going forward. If we compare interest rates, the South African interest rate looks attractive to the European market, which further strengthens the rand, but our exports look continuously expensive.

Adding to the European PIGS’ shortage on gross domestic product, the UK, US and Japan also hover between 8% and 12% of GDP.

Australia was the only country in the mainstream world economy which escaped the recession officially, although Australians did feel the pinch. Africa was officially in recession, albeit not as hard hit as the big global economies, due to it not really being part of the mainstream.

A global sovereign debt crisis will be another story, as it will be much more drawn out than the recession and third-world economies will be much harder hit.

Where the recession was caused by individuals who for too long lived too high above their means, and financial institutions merrily making money from it - which eventually became their problem - the present sovereign debt crisis in the first world is that of governments which have lived for too long above their means.

It is no wonder that these governments in the US, UK and Europe are currently drawing attention away from their own debt problems by highlighting the problems of the private sector, with endless debates on stricter government control over the private sector; and in the interim, they have already lost control over their own.

Although low interest rates help countries such as the US, Japan and the UK to absorb their shortages, the writing is already on the wall for them, although they are not necessarily cracking yet.

South Africans should not rest too assured. The post-Soccer World Cup economic realities of a deteriorating trend in local government and provincial solvency, infrastructure and the financing and maintenance realities of an oversupply of the most luxurious sport stadia in the world, will become the taxpayer’s problem - as sovereign debt did in the first world.

South African investors should also be cautious about their investments in the near and medium future. Investment decisions should increasingly be made on calculated considerations and not on what looks obvious at the time. More variables should be considered than in the past.

For instance, a strong rand could make offshore investments, which are under pressure, attractive. At the same time, such investments could be under pressure for a good reason – the economy in which it operates experiences a protracted slowdown.

If the rand, which is exceptionally strong currently, as seen above, starts to normalise against the currencies of its major trade partners, an acquisition made with a strong rand will increase both from the strengthening of the investment in its own currency as well as the rand weakening against the specific currency.

The JSE has grown in rand terms by nearly 50% since the beginning of March last year, with the S&P 500 at 35%; the Australian All ord. 35%; the German Dax At 18%; the Japanese Nikkei by 15%; the US Dow Jones by 14%; the UK FTSE by 11%; and the French CAC by -1%.

Currencies have played a major role in these percentages and investors will have to take the current strength of the rand into consideration when considering offshore investments.

Although Europe is under pressure, and it seems will increasingly be for the foreseeable future, it does not mean that it could not offer attractive investment opportunities. With a low currency, its export opportunities simply become much better than in the past.

Global stockpicking therefore becomes a much more important art form than in the past. For South African investors to try to do such stockpicking themselves, though, could be quite dangerous. The expertise and track records of fund managers of the likes of Kokkie Kooyman who, among others, manages Sanlam’s SIM Best Ideas Fund, should rather be employed.

Global portfolio diversification simply becomes more important, as with a drawn-out global economic financial crisis of sovereign proportions, there will be nowhere to hide. It will be impossible to predict where to hide.

Investment horizons should be long term, at least 10 years plus. Asset class diversification, including Australian and other property markets in portfolios, would be advisable.

But, it would also be extremely important to follow the income streams in diversified currencies in different asset classes to reinvest on payment and increase one’s long-term capital growth.

Trying to time one's investments over the next few years will be worse than trying to play the jackpot.

Heinrich Kruger is the founder and current CEO and CIO of Kruger International, www.krugerinternational.co.za