What do I need to consider when investing offshore?
Diversification is the name of the game when it comes to investing, and the offshore investment space offers plenty of it. The upside to investing a part of your portfolio offshore is twofold. You gain exposure to international markets and you hedge against volatility in the local South African market.
The economy in SA makes up less than 0.5% of global economic growth. A drop in the ocean, in other words. Locally, the economy also hasn’t been too hot, growing at a meagre 2% per year, compared to some economies globally that have been growing at double this rate. The stock exchanges abroad offer a much wider range of opportunities and exposure to parts of the market that are not available locally.
How do I invest offshore?
For investors new to offshore investing, the easiest way is to gain indirect offshore exposure by investing in companies listed on the Johannesburg Stock Exchange (JSE) that have exposure to global markets, but your options are limited.
If you want to invest directly, you have two options. One is to make use of what’s called a discretionary allowance. Every adult is allowed to annually move R1 million abroad and do with it as they please, without any clearance required from a regulatory authority. Professional investors at Investec can help you allocate these funds and design a balanced offshore portfolio.
The other option is to make use of a foreign investment allowance that allows you to take up to R10 million per year offshore, effectively enabling you to convert rands into hard currency such as dollars and invest this money into the market. To qualify for this, you must be a registered taxpayer and your tax affairs must be in order. The South African Revenue Service (SARS) will issue you a tax clearance certificate that is valid for a period of 12 months.
The other, more accessible, method for early investors is through offshore unit trusts or ETFs managed by a professional financial institution such as Investec.
Do’s and don'ts
When investing offshore, the rule of thumb is to be exposed to asset classes that have a low correlation with SA assets. In this way, you gain exposure to these markets while also hedging against rand and market volatility, especially considering that the rand generally weakens about 4-5% per annum against hard currencies over the long term.
SA is a commodity-based economy. These markets perform in certain cycles but they can also underperform, which leads to further volatility. When investing offshore, you don’t want to replicate the South African investment climate, but rather invest where there’s opportunity.
Don’t try and time the currency fluctuations, as it’s unlikely that you’ll be able to accurately predict what’s going to happen in the market, particularly in the time of crises. Diversifying your portfolio will mitigate against these drawdown risks for SA investors.