Astute South African investors have more options than ever to diversify investment portfolios and access a broader universe of opportunities by investing in global companies, sectors and themes.
Diversifying portfolios with greater allocations to offshore investments has become increasingly prudent given the structural economic issues hampering growth and investment returns in South Africa.
Investing predominantly in the JSE also increases concentration risk in portfolios following a spate of delistings and mergers or buy-outs by global companies that have thinned out the local bourse.
As such, local investors investing offshore can access opportunities not available in the local market to potentially achieve higher returns and diversify their risk profile by investing directly or indirectly across various asset classes, geographies and sectors in global markets.
Enabling offshore investments
Relaxations in the South African Reserve Bank's (SARB) exchange control regulatory regime and technology-driven innovation have helped to lower the traditional barriers to investing globally, such as high minimums, restrictive investment limits, and administratively onerous application processes when externalising capital.
Online platforms like Clarity, by Investec make it simple for investors to get their share of global markets with easy access to a broad basket of offshore assets, with the ability to invest in individual company stocks or across indexes via exchange-traded funds (ETFs), and foreign currencies like US dollars (USD).
Progressive regulations support this ease of access, allowing individual investors to utilise an annual allowance to invest up to R11 million directly offshore in foreign currency or foreign-domiciled FSCA-approved offshore funds per calendar year.
This includes a single discretionary allowance (SDA) of up to R1 million. Individual investors can use their SDA at their discretion to invest offshore or convert South African rands (ZAR) into foreign currency without a requirement to produce documentary evidence relating to the funds transferred via an authorised dealer like Investec, unless travelling abroad, in which case, they must provide a passenger ticket.
The foreign capital allowance (FCA) enables investors to take up to R10 million a year offshore, provided they are taxpayers in good standing with the South African Revenue Service (SARS) and obtain a tax compliance status (TCS) PIN.
Should investors wish to transfer funds offshore that exceed the maximum total lump sum of R11 million per calendar year, they will need Reserve Bank approval.
Tax implications when investing offshore
When crafting an offshore investment strategy, investors should understand exchange control regulations, the local and foreign tax implications, and the global economic factors that could potentially impact their returns.
Regarding tax efficiency, investors can optimise offshore investing by understanding the different investment vehicles and solutions available to access global markets.
When investing in direct offshore investments, investors will need to consider the impact of foreign currency gains on the calculation of their taxable income. DIY investors should get individualised tax advice to accurately calculate their tax liability when divesting from offshore investments.
Investors investing offshore can access opportunities not available in the local market to potentially achieve higher returns and diversify their risk profile by investing across various asset classes, geographies and sectors in global markets.
Boosting rand returns
Another benefit of direct offshore investments is the ability to withdraw funds to an offshore bank account in the investor's name. This allows investors to realise returns on their investments while maintaining their capital offshore, away from SA-specific risks, with the option to deploy the money into other offshore investment opportunities in future.
Of course, bringing these returns back to South Africa also offers potential benefits as the strength of the local currency has a material impact on the overall rand returns.
For example, if the rand depreciated between their initial offshore investment and the time they disinvested, and they brought the full amount back into the country, the ZAR depreciation would add to the offshore investment’s return calculated in rands. Conversely, any rand appreciation would detract from the overall return.
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Value and growth in developed markets
Boosting offshore exposure gives investors access to powerful growth themes and sectors unavailable in South Africa, like the artificial intelligence (AI) revolution.
For instance, investing in a developed market like the US creates opportunities to get a share of mega-cap companies with high growth potential, like the 'Magnificent 7' tech stocks, namely Apple, Microsoft, Alphabet (Google), Amazon, Meta Platforms, Tesla and AI-chip maker Nvidia.
Other high-growth sectors that offer potential upside, even if stock prices are already high, include biotech and healthcare, which continue to make breakthroughs in new treatments and medicines to support continued stock price growth.
Another key theme is renewable energy, which includes companies producing the 'green' metals that will drive a more sustainable future and companies leveraging green technology, such as electric vehicle (EV) manufacturers or renewable energy producers helping to drive the decarbonisation agenda.
International markets, particularly in developed economies, also offer a wide range of value stocks. These investments buy and hold shares in established companies in mature industries with a history of stable profitability that appear undervalued by the market, sometimes trading for less than their intrinsic value. The expectation is that the stock price will eventually rise to reflect the company's true worth over time.
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Identifying emerging market opportunities
Investors can also look for inflation-beating returns from emerging and frontier market equities. However, it is vital to understand the socioeconomic factors that affect each region before investing the risks and conditions vary greatly.
Key themes in these markets that could deliver risk-adjusted returns include the demographic shift happening in many emerging markets in Asia and Africa, with large young populations emerging that will drive workplace productivity, consumer spending and investments in future.
And China remains a popular destination for global investor capital. Despite challenges related to government policy and the recent dip in the region's growth trajectory, the country implements sound fiscal and monetary policies, with a large consumer market known for high savings rates and strong spending amid favourable economic conditions.
Constructing an offshore investment plan
With so many options available, it is important for investors to clearly define their goals and objectives from their offshore investments, whether that is long-term growth, income generation, wealth preservation, or a combination to guide their strategy.
Additional factors to consider include risk tolerance due to potential currency fluctuations, political instability and region-specific risks. Investors must also understand the regulatory requirements and tax implications of their investment decisions to ensure they achieve their outcome without any surprises.
Ultimately, seeking expert advice and insights from offshore advisory and wealth management firms can help investors make informed decisions about when to externalise funds, considering factors such as exchange rate timing, global market valuations, and their individual risk profiles, and construct the best portfolio of offshore assets and jurisdictions to achieve their goals.
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