Why should you invest offshore?

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.

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.

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.” 

READ MORE: 5 ways to maximise your tax-free savings account

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.

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.”

READ MORE: Opportunities for investors in the third quarter of 2023