Why the global grass isn’t all that greener
Offshore investment is not a silver bullet – a well-diversified portfolio remains paramount,
says Larry Masson, Franchise Principal & Wealth Manager at Consult by Momentum
Rand plummets! SA on terrorist attack alert! Loadshedding continues to hurt the economy! Food and fuel prices skyrocket!
It is difficult not to feel despondent about the future of South Africa, with a quick scan of the country’s biggest news sites revealing a series of depressing headlines that practically yell the extent of our socio-economic challenges at us.
But are things really so much better further afield? And would local investors be wise to move the bulk of their funds offshore? Larry Masson, Franchise Principal and Wealth Manager at Consult by Momentum, says that the grass is not necessarily that much greener abroad – at least, not at present.
“We are certainly seeing an increase in interest around offshore savings and investment vehicles among clients, intending to safeguard wealth by investing in hard currency. Yet markets the world over are grappling with volatility and turmoil, which presents its own set of challenges.”
Masson explains that South Africa is categorised as an emerging market – typically considered higher risk – but that at present, even established markets are experiencing volatility in the current high inflation environment, with central banks raising interest rates to curb this. “This, coupled with rising global debt-to-GDP ratios, means that offshore investment returns are far from guaranteed.”
He adds that South Africans currently receive several benefits designed to incentivise local investment. “South African investors enjoy tax deductions on their retirement annuity contributions as well as other tax incentives. Furthermore, the recent relaxation of certain Regulation 28 (Pension Funds Act) rules allows for an increase in offshore exposure (45%), from which investors can benefit.”
Somewhat ironically, he adds, this relaxation was announced just before international inflation fears came to roost, resulting in global market volatility exacerbated by the war in Ukraine. “This resulted in international markets pulling back and thus offshore is not perceived as the safe haven it once was.”
So what’s looking good from a local perspective? Masson indicates that emerging market bonds are very attractive at present. “At around 11%, South Africa’s bonds are extremely well-priced and SA equites are currently very affordable.”
However, he cautions that investors must first identify their investment goal, which will inform the optimal asset allocation. “Depending on the investor’s risk appetite and tolerance, the asset class will differ.”
He adds that by that same token – and while certain South African asset classes are currently performing relatively well when compared to other markets – the country still only represents around 1% of the global economy. “Thus, those who decide to limit their investments solely to the local market take on very specific risks.”
Masson explains that there are currently a number of different ways to invest offshore:
South African rand hedge shares/equities – a South African listed company that generates its income abroad.
Asset swap funds – a fund that is registered in South Africa, but with underlying exposure abroad. “You thus get foreign exposure, but all proceeds are to be taken in rand, with capital gains tax (CGT) calculated on the currency movement and return of the underlying exposure,” explains Masson.
Offshore allowance – Natural persons receive R1M per annum (without tax clearance) and R10M per annum tax allowance (with tax clearance) to invest directly abroad. “You can therefore buy hard currency and invest it directly offshore, says Masson. “Thus while the funds are physically abroad, the returns can be taken in whatever currency you chose. The currency is thus locked in and CGT is only payable on the underlying investment return in hard currency. However, it’s important to bear in mind that you will still pay tax in South Africa (if you are a South African tax payer).”
While conditions may currently be challenging the world over, Masson maintains that effective diversification remains the holy grail of risk-adjusted returns over time. “Potential returns may be higher in developing markets such as ours, but so too is the underlying risk. Also bear in mind that to ensure hard currency growth, one needs foreign exposure – generating rand returns whilst the rand depreciates will result in a lower hard currency return.”
He reminds investors that returns are determined by the performance of the underlying exposure in addition to currency movement. “As such, when investing abroad one should not be solely fixated on rand returns but rather look at the hard currency return – bearing in mind that the currency is an overlay that will fluctuate in the short term.
By investing strategically and with a view to the investor’s specific circumstances and goals, risk can be addressed. “Deciding when, where, weighting and what asset class is not a one-size-fits-all, he adds.
“As the landscape shifts, engaging a qualified, experienced financial adviser who will help you navigate both local and international markets is critical to maintaining a well-diversified investment portfolio. They will also prove to be invaluable by guiding you in making the necessary changes to your portfolio as the landscape continues to evolve.
“Ultimately, the grass is always greenest where you water it.”
ENDS
