As savvy goal-based investors know, diversification is one of the keys to long-term portfolio success. We all know that it’s unwise to keep all our eggs in one basket, which is one reason investors often turn to alternative investments such as private equity real estate or venture capital to balance their portfolio and hedge the risk of more common investments such as stocks, bonds, and mutual funds. Yet there are more ways to think of diversification than simply the industry or type of fund you’re investing in.
Investing internationally is an excellent way to ensure that your portfolio will reap the rewards of being fully diversified on multiple levels. The data has proven many times that it’s important for people to invest in different asset classes and regions to maximize diversification and increase their portfolio’s odds of success.
Here are some of the ways your portfolio can benefit from international diversification:
Sophisticated investors who seek big potential upsides often seek out international investments—especially in emerging markets—which can be purchased at a discounted cost with measured risk. While the United States economy provides investors with numerous upsides, it remains relatively stable and mature, equating to limited growth potential. Emerging markets, on the other hand, are where all the growth is happening; investors simply can’t find these stocks in the U.S. economy.
Africa, for instance, is home to 10 of the fastest-growing cities in the world. In these locales, populations are growing, business is booming, and both domestic and international investors want a piece of the pie.
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In 2010, South Africa was listed as one of the top emerging national economies alongside Brazil, Russia, India, and China, comprising the influential group known today as BRICS. Cape Town’s luxury real estate market was even recognized as the second-fastest growing on the planet. With businesses flocking to Cape Town, Johannesburg, and other high-growth South African regions, the spike in investor interest is unsurprising.
One of the main benefits of international diversification is that these investments often follow different market cycles, as their performance is tied to different geo-political factors. For instance, while political pessimism in the United States may negatively impact our country’s stock market, other countries’ investments can remain unaffected. Therefore, when our economy is down, international investments can help boost portfolio performance by equalizing at-home losses with international gains.
International diversification means more diversification in currency, which can reduce expected volatility and risk in the long term. In addition, when the exchange rate between the U.S. dollar and the currency of an international investment changes, it has the potential to increase your investment return. By investing in international real estate, you will generate cash flow in a different currency to maximize diversification. Plus, you’ll get a lot more bang for your (American) buck. For example, in early December 2018, $1 (USD) would equate to 14.35 South African rand (ZAR).
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Thanks to OppenheimerFunds, we know that 76% of the world’s companies valued over $1B in market cap live outside of the United States. With so many international companies making waves in both the local and global arena, it would be unwise to dismiss such a huge potential for investment growth in international markets. Plus, recent data suggests the U.S. economy will account for a smaller percentage of the world’s wealth in years to come.
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According to finance guru Paul A. Merriman, “U.S. multinationals don’t give [investors] much exposure to value, small-cap, small-cap value or emerging markets — every one of which can be a powerful return booster.” Therefore, if you think you have a hand in international investing simply because you have invested in U.S. multinational businesses, you’re wrong. International diversification requires investments specifically made within foreign markets.
International Man claims that “foreign real estate is the new Swiss bank account.” Although there are a number of considerations to be made when adding international investments to your portfolio, international diversification can be an excellent way to help you achieve your long-term goals. Foreign real estate is one of the best places to get started.
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In February 2018, Cyril Ramaphosa was elected President of South Africa, inspiring confidence and optimism that rippled across the globe. Ramaphosa’s predecessor, Jacob Zuma, had been dogged by allegations of corruption and scandal throughout his almost decade-long reign as President, and the country was overjoyed to be free from the grasp of his wayward policies.
With a resume that boasts both business and political credentials, Cyril Ramaphosa’s new role as President was particularly “hailed by the business community” thanks, in part, to his more pragmatic economic stance.
Now, less than a year after holding the position, Ramaphosa is living up to all the hype. The President recently announced his plans for a South African economic stimulus and recovery plan. In anticipation of faster economic growth, job creation, and market-friendly policies, we’re sensing a lot of excitement from residents, business owners, and investors alike.
According to Ramaphosa, the new stimulus and recovery plan, which was revealed in September 2018, consists of financial and non-financial measures intended to:
According to the President’s announcement, the economic stimulus plan centers on “a R400 billion infrastructure fund aimed at attracting investment from the private sector. Government also plans to re-prioritise about R50 billion within its existing budget to spend on measures that will, it is hoped, spur economic growth and create jobs.”
Although many countries’ recovery plans rely heavily on raising or borrowing funds, the South African economic stimulus plan centers on effectively re-allocating money to make a bigger impact on key growth areas to drive the economy. Citibank economist Gina Schoeman rates the stimulus plan an eight out of 10 and “says the reallocation of the existing budget as opposed to introducing more debt to fund the stimulus package is a ‘positive move’.”
As part of the South African economic stimulus plan, the country hopes to reduce travel barriers to boost tourism and improve business travel. With a growing number of countries looking to open offices in South Africa (especially as their entry point into the African continent), these improvements will have a hugely positive impact on the international companies who conduct business in the country.
While South Africa already has favorable international trade arrangements thanks to both its inclusion in BRICS and key legislation with top countries like the United States, the new recovery plan will continue to support legislation that boosts exports and reduces the costs of conducting business, making the industry more competitive.
Lastly, the plan outlines how some of the reprioritized funding will be used to ignite economic activity, especially in townships and rural areas by providing “finance to either scale up existing projects or provide start-up capital for new projects.” These decisions make clear the President’s intent to nurture business as a way to increase jobs and improve South Africa’s overall economic health.
South Africa Finance Minister Nhlanhla Nene says that although some are “skeptical” of the new stimulus and recovery plan, “the reception from the business sector [in South Africa] and in New York has been positive.” And it’s not too hard to see why.
Although large South African cities such as Cape Town, Johannesburg, and Durban have already experienced recent growth in their real estate markets—particularly within the luxury real estate market—investments in business, infrastructure, and tourism can only drive real estate prices further upward, creating prime opportunities for savvy investors.
According to Ramaphosa, the South African economic stimulus and recovery plan “prioritises infrastructure spending as a critical driver of economic activity. Infrastructure expansion and maintenance has the potential to create jobs on a large scale, attract investment, and lay a foundation for sustainable economic expansion.” With growth expected in the coming years, this is an excellent time for investors who seek to break into the South African market and get the most out of their investment, especially as we near the end of the current stock market cycle.
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Durban, South Africa could easily be mistaken for paradise. With an inviting subtropical climate, endless expanses of sandy beaches, and a melting pot of races and background, even a casual observer could see why the city has been ranked as the South African city with the highest quality of life for the past four years (and counting).
Yet Durban is much more than a pretty face. Situated on the east coast of South Africa, the tourist hotspot is also home to the country’s largest container handling port, making the city a key contributor to the South African economy. Currently, top global brands are competing for a stake in South Africa, and Durban is an excellent gateway for these companies looking to solidify their presence in the African market.
Durban’s Busy Port Is Vital to South African Development
In addition to being the largest container port, Durban also handles the third-largest bulk and break-bulk volume in South Africa. Despite the port’s current success, data shows that it still isn’t operating at full potential, meaning there is excellent opportunity for growth.
In a 2018 report from PwC, the auditing firm claims that the Port of Durban is inclined to “become increasingly sophisticated due to [its] air links, proximity to highway networks and the internet as well as their access to a large hinterland.” The report even likened the port to other major ports worldwide, such as New York and Los Angeles for North America.
South Africa has pursued favorable trade agreements and important economic partnerships with various countries, including the United States and China. With growing ties to many countries, ports like Durban are as important as ever in attracting foreign direct investment (FDI). As South Africa attracts more trade partnerships, ports like Durban will become an increasingly important source of revenue and employment.
Come for the Beaches, Stay for the Food
Tourism is also an important economic contributor in Durban. The city’s coastal appeal is only the start—Durban is home to a number of historical, cultural, and natural attractions, and is known for its delicious cuisine.
In 2018, Durban hosted Africa’s greatest horse race, the Vodacom Durban July (VDJ), investing millions of rand (over 10 million dollars) to support crowds of more than 50,000 people. Events like these are becoming more commonplace as Durban seeks to make it easier for domestic and international tourists to visit. A new Durban direct flight from London is the perfect example of how the city continues to deepen ties with international countries.
Durban’s Property Market Continues to Appreciate
You can’t blame people for wanting a piece of Durban’s rich economy and picturesque beaches. According to a local real estate agency, buyers are particularly drawn to areas such as Durban North, Berea, and Hillcrest. Ongoing developments and investments, continued economic growth, and a “complete restructuring” of the waterfront all point to Durban being an excellent location for real estate investors looking to capitalize on the growing South African economy.
It also comes as no surprise that many global brands have established branches in this booming port town. Unilever, PwC, Deloitte, Toyota, and Novartis all have a presence in Durban, and we expect that many companies will soon follow suit. Compared to South African cities like Johannesburg and Cape Town, Durban is relatively affordable, which makes it a great choice for businesses seeking to expand their presence in SA.
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Picture this—a vast cityscape punctuated by thousands of buildings and looming skyscrapers as far as the eye can see. No, this isn’t Hong Kong or New York—we’re talking about Johannesburg. Since gaining popularity as a gold mining settlement back in the 1800s, this South African city has remained an economic force both in South Africa and throughout the continent, maintaining its places as top contributor to the overall $326 billion GDP of the South African economy.
Johannesburg Leads South Africa in Economic Output
Known more commonly as “Joburg” or “Jozi,” Johannesburg is the largest city in South Africa and the country’s primary economic and financial hub. The bustling city is also the provincial capital of Gauteng––South Africa’s wealthiest province.
The Human Sciences Research Council notes that Joburg’s economic growth is “relatively superior” when compared to national and provincial levels. According to 2018 Gauteng Province Socio-Economic Review & Outlook, formerly high “unemployment rates have declined to levels last seen before the 2008 global economic crisis,” which bodes well for the city’s labor force.
Tourism continues to be an important economic driver for the city thanks to impressive historical attractions such as the (Nelson) Mandela House, Apartheid Museum, and Constitution Hill, among others. Like other South African cities, Johannesburg has benefitted from favorable trade acts with global leaders such as the United States. Currently, South Africa’s top trading partners include the European Union, Sub-Saharan Africa, and China.
Global Brands Have Long Betted on South Africa
A number of top global brands and companies currently compete for opportunities in South Africa, choosing cities like Johannesburg and Cape Town as their gateway into the rest of the continent. Jozi and Cape Town in particular have earned a reputation for nurturing innovation and entrepreneurship, making them likely candidates for international companies looking to expand.
From accounting firms like Deloitte, PwC, and Ernst & Young to big-name tech companies such as Microsoft, Oracle, Cisco Systems, and SAP, chances are your favorite brands have already laid claim to a piece of the Johannesburg pie. Seeing huge potential in the African market, Facebook selected Jozi for its first location on the continent back in 2015. Other big-name companies with locations in Johannesburg include Philips, Barclays, Burger King, and Unilever.
How Joburg’s Economic Opportunities Are Rocking the Real Estate Market
According to data from JLL’s Q1 2018 Market Report, Johannesburg remains the first pick for businesses who are looking to break into the South African market with a presence in the city. A stable demand for space in Jozi has increased developer interest, particularly in the Sandton, Rosebank, and Waterfall nodes.
Sandton has long been called the richest square mile in Africa, and while many businesses still select office locations downtown, Sandton remains a highly concentrated pocket of wealth that draws businesses from around the world. Overall, numbers indicate that “developer confidence is strong across the main centres with pockets of optimism and opportunities for solid investment.”
With a rich, innovative environment that stimulates economic growth, Johannesburg holds special importance for both South Africa and the continent as a whole. A blossoming corporate scene has created an abundance of wealth in the landlocked city, attracting entrepreneurs and investors from all over the world.
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With rich biodiversity, sprawling beaches, and a vibrant cityscape, it’s easy to see how Cape Town has become a well-known tourist destination both locally and internationally. Yet the bustling port city is also an economic force to be reckoned with, boasting a rapidly growing labor force that’s driving property developments and skyrocketing rental rates.
Cape Town has long been one of the top economic contributors to the overall $326 billion GDP of the South African economy. The coastal city is home to South Africa’s second-busiest airport, and the country’s top-rated university, the University of Cape Town. It also boasts numerous high profile tourist destinations such as Table Mountain, as well as some of the world’s largest sporting events, including the famous Cape Town Cycle Tour and the Comrades ultra-marathon.
The Port of Cape Town is the third largest container handling port in the country, with approved plans for a multibillion-rand upgrade to the facilities now set in motion. The largest three sectors in the city are wholesale and retail trade, catering, and accommodation; finance, insurance, real estate, and business services; and agriculture, forestry, and fishing.
Cape Town contains a labor force of around two million people, which means the city has the second largest number of people employed in South Africa and is responsible for over 61% of all employment in the Western Cape. In fact, the growing economy and high job potential has recently attracted many migrants looking for work.
The city contains four major commercial nodes and is a manufacturing base for several multinational companies such as Adidas and Johnson & Johnson. A variety of companies are headquartered here, representing a diverse array of industries that span everything from petrochemical companies to fashion designers.
Information Technology (IT) companies, including Amazon and Dimension Data, have also found great success in the bustling city, making it an important destination for South African professionals in this industry. Investors worldwide have touted Cape Town as a growing hub for both innovation and entrepreneurship, especially within the tech space.
According to Economic Performance Indicators, 16.4% more building plans were submitted to the City of Cape Town in the fourth quarter of 2017. And it’s easy to see why. With a staggering 4.23 million people living here, the “Mother City” is home to more people than some of America’s largest cities, including the City of Los Angeles. In fact, Cape Town is the second-most populated city in South Africa after Johannesburg.
In 2017, the city’s luxury real estate market earned recognition as the second-fastest growing in the world, outperforming a number of notable cities, including Seoul, Frankfurt, Paris, and Sydney. A combination of factors, which include increasing demand and unique supply restrictions, have contributed to the growing housing market in recent years.
According to the JLL Cape Town Office Market Report, 35,000 square meters were in the development pipeline by the end of 2017. They also noted a 6.9% vacancy rate which is down almost a percent year over year. The South African Property Owners Association believes that a sustained improvement in the office vacancy rate is dependent on the long-term strength of key economic drivers such as economic growth and business confidence. If recent investments in the city’s infrastructure and a growing interest in Cape Town’s economic potential from both domestic and international businesses is any indicator, we believe trends will remain positive for years to come.
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