The Covid 19 lockdown has plunged South Africa into a deep recession, travel and sport are restricted, the news everywhere seems to be bad, and to add insult to injury Eskom load-shedding in 2020 was the worst on record.
It’s no wonder that everyone seems to be investing overseas at the moment. But what are the pros and cons of offshore investing and should you be planning to hold some investments overseas as part of your portfolio?
The benefits of investing overseas seem to be obvious – South Africa makes up less than 1% of the global investment universe so international investing allows for greater diversification, with access to developed markets such as the USA and Europe as well as emerging market giants such as China and India. In addition, the Rand seems to weaken every year, so holding Dollars or Euros makes sense doesn’t it?
Rand strength can surprise – In 2001 one US$ was worth R12 but 5 years later one US$ was worth only R6.
As with most things the answer is not so clear-cut, and the solution that works for you must take into account your personal circumstances. For instance:
- Are you planning to emigrate one day? If you are, then utilising your annual allowance to regularly transfer cash abroad may make sense. However, international bank accounts are often subject to inheritance and SITUS taxes, which can be over 30% of your portfolio value, and probate overseas is often lengthy and expensive. So, holding your overseas assets in a legal structure that mitigates these taxes could add tremendous value.
- Are you looking to create a legacy for your children and grandchildren? An offshore trust can often be expensive and inefficient. Furthermore, many are situated in countries that have poor governance. However, if you look in well-regulated jurisdictions such as the Channel Islands, it is possible to find world-class trust companies that are easy to work with and will ensure the long-term protection of your family assets.
- Do you want to have a nest egg outside of South Africa? This is a common goal, but if you need to draw a regular income from your overseas assets, you may find that Rand volatility becomes your enemy. This is because while the Rand does indeed weaken against the US$ over time, there are also periods when it strengthens substantially, which increases your investment risk.
Many South African investors end up with poor returns on their offshore investments because they make emotional decisions. After reading a particularly disturbing news article or chatting with friends at the weekend braai they feel compelled to get money out of South Africa as quickly as possible, without first seeking professional advice and formulating a comprehensive investment plan.
Investing overseas is not as straight forward as it might seem.
Some of the most common adverse scenarios that South Africans encounter when investing offshore include the fact that many overseas financial markets are not as well-regulated as those in South Africa, and costs are often higher overseas. Also, interest rates on bank deposits are very low in most developed countries and at the moment Euro bank deposits, far from paying you good interest will actually cost you money.
The JSE has performed poorly over the last 5 years but over the long term, it is the best performing world market in real terms.
South African balanced funds usually comply with Regulation 28 and are allowed a maximum of 30% overseas assets, which combined with the fact that the bulk of JSE company earnings are derived from outside the country means that investors in South African funds can easily get access to a good degree of foreign exposure anyway.
Investing abroad makes a tremendous amount of sense, but a well thought out investment plan is essential to generate consistently good long-term returns and avoid common pitfalls.