Why Should you Invest Offshore?

Categories

Investing offshore can be a daunting topic given there’s just so much choice, especially when compared to a relatively small economy and financial market like we’re used to in South Africa. In episode five of the first season of the Unpacking Wealth Creation podcast series, portfolio managers at Investec Wealth & Investment, Ronelle Hutchinson and Rick Cardo, look at the ins and outs of taking your money abroad.

Listen to podcast

What are the benefits of investing offshore?

"One of the fundamental reasons for offshore investing is to diversify away from South African-specific risks, especially our volatile currency," says Hutchinson.

Cardo adds: “Going offshore also provides you with a far greater investment growth opportunity set than just investing in South Africa does. It allows you to grow your wealth in a way that isn’t only linked to the SA economy.

“The South African economy makes up less than 0.5% of the global economy so we’re a tiny dot in the ocean. Over the last 10 years, our economy has probably grown in the region of less than 2% each year, while the global economy has grown at around double that rate and with more predictability. While we do have some global champions listed on our stock market, there are less than 400 companies on it. Overseas there are about 45,000 to choose from.

“Look at the tech sector. Apple, the biggest company in the world, has a market value of roughly $2.5 trillion – double the market value of the entire Johannesburg Stock Exchange (JSE)… if you go offshore you’re spoilt for choice. You’ve got the Apples, Alphabets, Googles and Amazons of this world, versus the one big listed technology company we have in SA – Naspers Prosus. Going offshore means you’re being exposed to parts of the market that you aren’t really able to access in South Africa.

“Another example: our corporate bond market is tiny in South Africa but a $50 trillion industry globally. And SA government bonds are currently sub-investment grade so if you want to get exposure to investment grade bonds, you’ve got to go offshore.”

What is an investment grade bond?

Investment grade refers to the quality of a bond. Ratings agencies, like Standard and Poor’s, or Moody’s, rate bonds according to how risky they’re considered to be. Investment grade bonds carry low to medium credit risk. Sub-investment grade bonds are higher risk investments than investment grade bonds because they carry higher risk.

Ronelle Hutchinson, portfolio manager, Investec Wealth & Investment

One of the fundamental reasons for offshore investing is to diversify away from South African-specific risks, especially our volatile currency.

How can I go about investing offshore?

“There are a few ways you can access offshore opportunities. Firstly, you could start by simply investing in JSE-listed companies that are exposed to global markets," explains Cardo. "A number of SA-listed firms have substantial offshore operations, which means investing in them exposes you to what’s happening in those international markets."

Hutchinson adds: "For the investor in the early stages of their wealth creation journey, unit trusts can offer good access to local and global assets."

“The more direct way to access global markets is to take money abroad and convert your rands into hard currency," says Cardo. "You can use your single discretionary allowance which enables every adult person, over the age of 18 to take up to R1 million overseas each year and then you can do with that hard currency what you want, whether that’s invest or spend it. You don’t need any regulatory approvals to do that. But be aware that if you go travelling overseas and spend on your credit card, that spend is deducted from your R1 million amount.

“The other direct way is to use your foreign investment allowance. To do this, you need to be a registered taxpayer and have all your tax affairs in order. You can then apply to the South African Revenue Service (SARS) for what’s called a tax clearance certificate. This certificate is valid for a period of 12 months and enables you to take up to R10 million offshore and convert this into hard currency. And again, you can invest it pretty much wherever you like and you can keep the money offshore, it never has to be converted back into rands.”

What is a unit trust?

Unit trust funds are a cost-effective and tax-efficient way to invest. Investors' funds are pooled together and invested collectively, allowing investors with smaller amounts of capital to access professionally managed portfolios.

Rick Cardo, portfolio managers, Investec Wealth & Investment

While we do have some global champions listed on our stock market, there are less than 400 companies on it. Overseas there are about 45,000 to choose from.

What should I invest in overseas?

“The key thing to consider when you go offshore, is what your objectives are," says Hutchinson. "For example, if you’re at an early stage of your investing journey, you want to have maximum risk exposure. You want your assets to grow at a maximum rate and historically, equities have been the highest returning asset class. Other asset classes like fixed income can be used that to mitigate the level of volatility that comes with equity risk. If you’re more of a moderate risk-taking investor then you may want to have a more diversified portfolio to mitigate some of that equity risk.”

Cardo concludes: “Ideally you want investments that have low correlation with South African assets and you want to benefit from hard currency growth. It’s been proven that over time, the rand will weaken against most hard currencies but don’t try time the currency. Any rand weakness that happens over and above hard currency growth is a bonus.”

Disclaimer

Although information has been obtained from sources believed to be reliable, Investec Wealth & Investment International (Pty) Ltd or its affiliates and/or subsidiaries (collectively “W&I”) does not warrant its completeness or accuracy. Opinions and estimates represent W&I’s view at the time of going to print and are subject to change without notice. Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice. W&I and/or its employees may hold a position in any securities or financial instruments mentioned herein. The information contained in this document does not constitute an offer or solicitation of investment, financial or banking services by W&I . W&I accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, goodwill or any type of financial or other pecuniary or direct or special indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the or reliance on the information contained in this document, whether authorised or not. W&I does not make representation that the information provided is appropriate for use in all jurisdictions or by all investors or other potential clients who are therefore responsible for compliance with their applicable local laws and regulations. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of W&I.

 Investec Wealth & Investment International (Pty) Ltd, registration number 1972/008905/07. A member of the JSE Equity, Equity Derivatives, Currency Derivatives, Bond Derivatives and Interest Rate Derivatives Markets. An authorised financial services provider, license number 15886. A registered credit provider, registration number NCRCP262.