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“Investors wishing to diversify their portfolios do so by investing in various asset classes (including equities, bonds and property) and by gaining exposure to various geographic regions. ”

Offshore Investing - Expanding Your Markets

In this way, investors can obtain exposure to other currencies and markets from the countries in which they live. The idea behind this is to gain exposure to a wider array of markets and in this way, to reduce risk.

Previously this involved cumbersome paperwork and special dispensations from the South African Reserve Bank. Several products launched by the Johannesburg Stock Exchange (JSE) now make offshore exposure more accessible to individual investors. The JSE's offshore offerings are regulated by and traded on the Johannesburg Stock Exchange and include International Derivatives (IDX) (derivatives on listed blue chip companies from around the world), international ETFs, currency futures and commodity derivatives.

International ETFs
Deutsche Bank X-Trackers offer a suite of Exchange Traded Funds (ETFs) on major international indices, accessible through the JSE.

ETFs are passive investments holding the same stocks as benchmark indices but traded on the stock market like ordinary shares. ETFs are a cheap and effective way to get a broad exposure to a particular market or sector.

A passive exposure is one that tries to simply copy the holdings of the index. This has lower costs than an active fund that tries to select the best stocks in an index. ETFs have risen sharply in popularity, partly owing to the low fees (including hidden trading costs) an investor pays the asset manager to manage their holdings. Active management requires lots of research, skillful managers and frequent trading, all of which is expensive. By copying the holdings of an index, an ETF can keep its costs low guaranteeing the investor a return close to the market return. A list of all the international ETFs is currently available on the JSE's website¹.

Currency Futures
The JSE also offers Cash Settled Currency Futures on the following currencies: Dollar/Rand, Euro/Rand, Pound/Rand, Australian Dollar/Rand, Japanese Yen/Rand, Swiss Frank/Rand, Canadian Dollar/ Rand and the Chinese Yuan/Rand. Currency futures are highly geared derivatives instruments that allow speculators and hedgers to successfully manage their exposure to currency fluctuations.

The currency futures market has grown exponentially since its launch in June 2007 and is one of the JSE's fastest growing markets. To find out more about Currency Futures and options please go to the JSE's website² or speak to your broker.

International Derivatives
The JSE launched International Derivatives (IDX) in 2008 in collaboration with Deutsche Bank and Investec Capital Markets to provide South African investors with an opportunity to gain exposure to the price movements of internationally listed equities and, potentially, internationally recognised indices.

International Derivatives are cash settled derivatives on offshore equities. IDX instruments reference foreign currencies and are traded and settled in Rand. As such, they are a natural hedge against any weakening of the Rand. IDX allows South African investors to trade derivatives on companies like Berkshire Hathaway, Vodafone, Nokia and Bank of America. The initiative also allows for diversification due to the availability of equities that are relatively uncorrelated with the current universe of South African stocks.

A derivative is a geared investment instrument that allows you to put down a deposit (initial margin) to obtain full exposure to the stock price movements. You will be paid out or have to pay in cash based on the share price's movement and whether you are “long” or “short” the stock. Gearing offers significant returns but can also result in significant losses if the market moves against your position. Only experienced investors or investors with the help and advice of an experienced adviser should participate in this market. It is important for investors entering this market to be aware of the risks involved.

With IDX, certain South African investors can obtain exposure to foreign equities without using up their offshore investment allowance. The JSE's website has further information3.

Other factors about IDX are:

They can be traded through your existing broker without any special permissions
You will be able to access industries which are not well-represented on the JSE allowing you to diversify their portfolios by sector
Trading in an exchange-listed product removes risk associated to the person or entity with whom the initial transaction was concluded. The exchange becomes the counter-party to every futures position after trade.

Commodity Derivatives
In the past, most South African investors could only obtain exposure to the prices of commodities indirectly. Investors had to channel funds through commodity-producing companies. Investing in a company meant that events specific to that company could cause its share price performance to diverge from the price performance of the underlying commodity.

Investors are now able to gain exposure, trading in local currency, to a number of international commodities through derivative instruments listed on the JSE that reference the foreign market. Through a licensing agreement with CME Group, the world's largest and most diverse derivative exchange, investors can now gain exposure to a number of precious and base metals including the highly liquid WTI crude oil market. Local liquidity is guaranteed through market makers who access the foreign markets liquidity and quote competitive bid/offer spreads. asa

As a result of this, investors now have new trading opportunities for hedging and speculating on commodity price movements. You can now trade futures contracts on commodities including crude oil, gold, silver, platinum, copper, CBOT Soybean and Chicago Corn.

Like all futures contracts, the trading is done by two main groups of market participants – hedgers and speculators. Hedgers aim to transfer an existing risk to create a certain outcome that can be planned and budgeted for. Speculators assume these risks in the hopes of profiting. Commodities offer significant diversification benefits to an investor's portfolio due to their fairly low correlation with financial markets.

Gearing offers significant returns but can also result in significant losses if the market moves against your position. Only experienced investors or investors with the help and advice of an experienced adviser should participate in this market. It is important for investors entering this market to be aware of the risks involved. More information is available on the JSE's website¹.

Know the risks
No investment trading product can offer the returns without the investor having to assume some risk. Investors are therefore well-advised to understand their investment vehicles fully and be aware of all the investment risks involved.

Carbon Credit Notes
The JSE offers investors the opportunity to buy Carbon Credit Notes (CCN) which provide holders with the opportunity to gain exposure to Carbon Credits that are generated from carbon dioxide emission reducing projects, through holding a listed tradable security. CCNs offer exposure to a Euro denominated asset, protecting against potential underperformance of the Rand. CCNs can be traded via a stockbroker. To find out more please go to the JSE's website²

¹http://www.jse.co.za/Markets/Commodity-Derivatives-Market.aspx

²http://www.jse.co.za/Products/All-Products/Product-Details/Carbon_Credit_Notes_CCNs.aspx

Romy Foltan, M (Economics), is Investor Relations Associate at the JSE .

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