Local Vs Offshore - Where Should You Be Investing:

CAPTA WEALTH on 2023-01-08

One should realise that current uncertainty and economic headwinds are a global phenomenon and the secret to any investment success is not about 'timing the market' but rather 'time in the market' and a healthy broad-based exposure.

It is hard not to let emotion influence your thinking about your own country and as South Africans, we tend to shift quickly between pride and despair. Decisions regarding how much to invest offshore versus locally tend to get swept up in these times of unpredictability, so it is perhaps no wonder why as investors we struggle not only with sticking to long term investment strategies, but are constantly asking the question of: when is it really the best time to diversify and invest offshore?

The standard answer to our clients is.. NOW. And more importantly to not to let your long-term plan get impacted by short-term swings in sentiment about the country. Diversification is crucial. And offshore investments will not only give you access to opportunities across different countries, industries, companies, and currencies but it will expose your portfolio to more possibilities while diversifying your risk.

The first month into 2023 seems to have passed by quickly, yet not without its challenges. Struggling state utility Eskom has been implementing daily power cuts, with prolonged stage six load shedding causing significant damage to the country’s economy and wiping off more than R4 billion from GDP every day it continues. And with no end in sight for the rolling blackouts and its significant impact on economic growth and inflation, many of our clients have been asking whether or not they should be looking at diversifying or rebalancing their portfolios to take their locally invested funds offshore.

When planning on moving money abroad, there are a few other crucial considerations to keep in mind such as market performance, currency fluctuation and various tax implications.

Understanding the difference between a direct vs indirect investment:

The question on many investors’ minds when it comes to offshore investment vehicles is whether they should invest directly themselves into funds abroad or through an indirect investment mechanism, which is referred to as an asset swop.

Essentially, direct investing involves the converting of rands to a foreign currency and investing it abroad into an offshore bank account which can be used to transfer money to and from investment vehicles such as funds or shares. Other reasons for direct investing is for immigration.

Indirect investing is done through financial intermediaries who regularly monitor your portfolio to ensure its direction is right throughout the course of the investment strategy. The most common indirect investment option is a mutual fund. A key benefit of indirect investing from a tax perspective is that it does not affect your foreign investment allowance of R10 million per calendar year as you are effectively leveraging on your fund manager’s foreign allowance.

In addition, no tax clearance certificate is required from Sars in order to invest indirectly offshore. This means that should you wish to invest directly offshore at a later stage, you will still have your full annual foreign investment allowance available to you.

Local vs offshore market performance:

The Johannesburg stock exchange didn’t fare too badly over the past twelve months, but as well as it may have performed compared to global equities, most investors would agree that consistent long-term performance is more important than one good year, over a 10-year period. For example, if you invested in local equities 10 years ago this would have produced a return of 102% as per the graph below. Whereas investing in international equities (particularly the S&P500) would have produced a return of 167% over the same period.

We would caution investors not to see this recent spike of local performance as a sustainable investment approach. In addition, as well as local markets have performed over the past year, we have seen exceptional growth from global markets over the past decade.

Something also worth noting is that the global equity universe is vast and the JSE only represents 1% of global markets. What this means is that South African equities are 99% shy of missing worldwide opportunities, many of which are exciting. By including offshore exposure into your portfolio, you are able to gain exposure to diverse industries that are not represented locally, such as biotechnology, electric vehicles and alternative energy.

History of the rand and currency depreciation:

As markets rise and fall, currency depreciation becomes either a strategic liability to investment portfolios that are heavily weighted in local assets or creates opportunities for portfolios exposed to offshore assets.

In 2020 for example, the rand fluctuated from R14 per US dollar at the beginning of the year to around R19 during the peak of the Covid pandemic, and then back down to R14.60 by the end of the year. As of recent where January typically sees seasonal strength in the rand, market players are penalising the domestic currency, as the state fails to allay investor concerns over the electricity crisis. This has meant we have had quite a volatile start to the year for our local currency which ultimately paints an unpredictable picture that South Africans need to factor in when making investment decisions.

We have seen many investors panicking over the past quarter, making big shifts offshore following sharp periods of rand depreciation and incurring losses by using a weak rand to buy more expensive global assets.

Investments in hard currencies like US dollars, euros, sterling, and yen act as protection against a depreciating rand and other South Africa-specific risks which effectively ensures you match your longer-term offshore ‘liabilities’ with equivalent assets.

Scandals which have rocked our economy:

Further to the points listed above, one must also consider our corporate governance, or lack thereof. We've seen a number of recent events in our country which have had a significant negative impact on investors and in certain instances resulted in South Africans losing a considerable chunk of their change. The past decade has been marred by a series of scandals in South Africa’s private sector, each demonstrating a clear lack of ethics and fraudulent in their unique way.

One of the most notable instances being that of Steinhoff, who inflated their assets by R250 billion resulting in their share price plummeting by 98% in December 2018. The repercussions of this resulted in millions of South Africans losing their investment capital as well as their retirements savings.

Some other key factors to consider when deciding to diversify offshore:

  • Diversification benefits: investing in international assets allows for greater diversification, which is a key investment principle for reducing risk.
  • Do not put all your eggs in one basket: Mitigate against single event risk by being adequately diversified across sectors and regions.
  • Think long-term: Having offshore exposure is an important part of an investor’s portfolio given the range of opportunities on offer. However, the exposure needs to be suitable to the investor’s long-term needs.
  • Volatility and timing: Ensure your time horizon is correct. Offshore investing is more volatile because of the currency impact. This means you need to have a longer timeframe to mitigate against unexpected short-term volatility.
  • Do not overpay: Be cognisant of valuation levels in both the currency and the offshore assets because Rand investors are dependent on both for returns.
  • Ask advice: The structuring of your investment portfolio is critical and largely depends on your personal financial needs. It’s worthwhile speaking to your wealth manager before making any final decisions to ensure that your portfolio is well-diversified and best suited for you.

With all the above in mind, it goes without saying that we love our country, and although it has its challenges, of which there are many, the lifestyle and amount we pay for it is second to none.

We aren't for a second saying that we need to pack up shop and immigrate, but the prudent thing to do as a citizen of any politically unstable country is to build up a safety net elsewhere.

If you are looking to diversifying your portfolio or would like further advise on moving funds offshore, contact our team of private wealth manager to discuss all the options available.

Speak to a CAPTA Wealth Team Specialist

To schedule a consultation with a Wealth Manager or to learn more about our service offering, contact us at info@captawealth.com.
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