These facts have not escaped the attention of the markets. In this millennium, bonds have returned an annualised 14 percent and equities 18.5 percent, thus both providing handsome real returns.

Sadly, you can't buy past performance and instead we're left with the question as to whether these performances have rendered market valuations unattractive. Most common valuation indicators suggest that this is indeed the case.

As an example, the price: earnings multiple of the JSE All Share Index relative to that of the S&P500 has re-rated in the past three years from around 30 percent to a current level of over 90 percent, the sharpest relative re-rating on record.

Sticking to SA makes no sense

Notwithstanding these admirable achievements, both South Africa’s GDP and its market capitalisation remain less than 1.0 percent of the respective global totals. It therefore makes no sense to confine your investments to just South Africa.

Also, don't make the common mistake of not investing offshore because you may believe the timing is wrong — instead you should invest offshore for the long term. So why should you take the offshore plunge?

• Diversification is the first principle of sound investing; it reduces political, currency, interest rate and many other idiosyncratic risks.
• It permits exposure to industries which are not listed in South Africa.
• South Africa’s equity market is inherently more volatile than Wall Street and other developed markets. The long term average rolling 12 month volatility of the JSE is about 19 percent against 12 percent for the S&P500 and 15 percent for the FTSE100.
• South Africa has a very open economy (measured by imports plus exports as a percentage of GDP). This does mean that the rand is susceptible to episodic weakness. Successfully predicting the onset of these sporadic episodes has proven to be beyond the capabilities of economists and investment strategists.

So is investing offshore unpatriotic? No, of course not — in fact, that belief is rather xenophobic. Even in the USA, which offers the world’s broadest investment opportunity set, pension funds invest an average of 15 percent of equity holdings outside the USA.

In countries with narrower investment choices, that percentage tends to rise considerably. Examples include Canada (51 percent), Japan (40 percent) and the UK (36percent). Lowering risk by investing offshore is one self-evident route towards those goals and if it helps to secure improved future wealth and financial stability for South African investors, then that is perfectly patriotically minded.

What about emerging markets?

A topical issue is the allegedly alluring case for investing in emerging markets. South Africa’s market capitalisation share of the globe comes in at less than 1 percent, while emerging markets cumulatively account for about 10 percent. It is simply not prudent to allocate from that 1 percent into the other 9 percent with which it is most correlated rather than into the 90 percent with which it is, for good reasons, less correlated.

Moreover, the advent of new acronyms and nicknames (like Chindia, and Bricks and in past years such fashions as Nifty Fifty, TMT, Y2K, Asian, Celtic and Arctic tigers) should be treated with great circumspection. Funds bearing these names, it seems, generally tend to be a harbinger of calamity. (Remember the sad outcome of a fund that cunningly played its name on the theme of “www”?)

Fund managers are not global experts

So why should you invest offshore if you can simply gain international exposure through local funds or even listed companies? Well, not surprisingly these claims are made most vocally by purveyors of funds purporting to offer this facet. The problem is that local fund managers can simply not be experts in all world markets, some of which require very different skill sets.

As for companies, corporate South Africa has some world-leading skills such as deep level mining and some enterprises with significant global market penetration, such as cigarettes, beer and luxury goods.

The problem is this: where listed South African companies do have significant portions of earnings emanating from abroad, the sources of these earnings invariably arise from the same sector as those companies’ domestic earnings. Therefore you are not investing offshore to gain exposure to industries that cannot be found at home, negating a main premise for investing internationally.

Rowan Williams-Short is the Chief Investment Officer, Nedgroup Investment Advisors (UK).