Investment 101: Offshore… A Myriad Of Opportunities

Many investors are hesitant about venturing offshore. When the rand crashed in 2001, many investors moved money offshore either in a panic, or because they thought they would make attractive returns. Many of them subsequently burnt their fingers when they then had to weather more than a decade of rand strength and the local markets re-rated relative to offshore markets at the same time. For this reason many investors have a poor perception of investing offshore. However, we now have plenty of factors in place to support a very strong case for investing offshore.

What are the benefits of investing offshore?

A myriad of investment opportunities

Says Douw Steenekamp, portfolio manager at SIM Global, “In the vast global investor landscape, SA represents a mere 1% of global GDP. By sticking to rand-based local investments only, you’re missing out on a multitude of investment opportunities that can be found in global industries not represented here in South Africa.” This includes the energy sector, large-scale commercial agriculture, green technologies, aircraft manufacturing and many more.

Diversification is important

SA is a resource-dependent emerging market, and emerging markets can often be volatile, while established markets offer the prospect of steadier growth. A balance of both types of market exposure can give you the growth you need without excessive risk.

You also benefit from geographic spread – that is, investing in different countries at different stages in their growth cycles. Diversifying your portfolio across several economies is a way of smoothing out your returns.

Offshore assets protect against a structurally weaker rand

The rand is a structurally weak currency that has historically depreciated against the dollar. Since 1990, the year the SA Reserve Bank was granted true monetary independence, the rand has depreciated at an average of 6% per annum against the US dollar, and this trend is likely to continue, a view which is supported by SA’s inflation differential with the USA. Our current economic policy and poor fiscal situation (we have a growing current account and budget deficit) do not bode well for the rand. But offshore investments can increase the value of your investment in rand terms if the currency declines (when the rand depreciates, the rand value of your offshore appreciates). This is what is known as a “rand hedge”.

Structural challenges facing South Africa

In addition to the trend of a weakening rand, there are some specific structural problems that SA currently faces, with the most pressing being lack-lustre economic growth and an unemployment rate of more than 25%. This, plus the fact that real wage growth has by far outstripped productivity, is hurting our competitiveness and exports. In addition, we also face other issues, such as wage strikes in the mining industry, subpar education, skills shortages, and limited water and energy resources. These, together with the growing fiscal and current account deficits leave South Africa vulnerable to the reversal of capital inflows and at the mercy of investor sentiment, which could further support a weaker rand.

South Africa is not cheap!

Currently the JSE is looking expensive when compared to global markets.  For example, compared to the USA’s S&P 500, the JSE is trading at the top end of its historic range on a list of valuation metrics. This, combined with the weak fundamentals in South Africa, suggests there is very likely more compelling value to be found in offshore markets.

How much should you invest offshore?

While it is important to recognise that the percentage of the portfolio that should be invested offshore depends on each individual’s specific financial circumstances and risk profile, it is generally true that most South Africans have too little offshore exposure. Investors with a higher risk profile (a younger person, for example) may want to invest up to 50% offshore, while pensioners may want to restrict foreign investments to around 20% of their total portfolio value.

For investors whose retirement fund is the main source of long-term savings, Regulation 28 restricts that fund’s offshore exposure to a maximum of 25%. So they would need to boost their offshore exposure through an additional vehicle like a unit trust fund or exchange traded fund (ETF).

How to invest offshore

Your quickest and easiest option is to invest in a global fund that is based locally (in South Africa). One example of such a fund is the SIM Global Equity Income Feeder Fund, which has a history of investing in winning stocks that offer significant capital growth over the long term along with attractive dividend pay-outs.

“When the markets change direction, they move so rapidly that you can’t reposition your portfolio fast enough when you need to”, says Steenekamp. The recent 2008/2009 crash is a perfect example.  While it is tempting to wait for a strong rand before you go offshore, it is extremely difficult to correctly time the markets.

Disclosure: International investments or investments in foreign securities could be accompanied by additional risks, such as potential constraints on liquidity and the repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk and settlement risk, as well as potential limitations on the availability of market information.