The South African financial market currently represents less than one percent of the world economy which means by restricting yourself to local investments only you are denying you and your family the opportunity to invest in some of the biggest and most successful businesses and markets in the world. At Capta FS, we believe that investing internationally should form part of any long-term financial plan and by allocating a portion of your investments offshore, you could spread the risk, and enhance the possibility of generating better returns plus have exposure to sectors that you would not necessarily find on the JSE…
There are many compelling reasons for investing offshore, including diversification benefits alongside local investments, reduced emerging market and currency risk and maintenance of 'hard' currency spending power. But why would you want to invest offshore? In the article below, Investec Asset Management sets out why one should take a long-term view to fully benefit from the return potential of international assets:
Investing in international assets allows for greater diversification, which is a key investment principle for reducing risk. In addition, investing in international markets provides access to countries, currencies, asset classes and industries that are not available locally.
REDUCED EMERGING-MARKET RISK
SA remains an emerging market, albeit with pockets of first-world industries (such as banking and mining) and infrastructure (for example, roads, ports and railways). By world standards, though, SA is a small economy with a relatively illiquid and volatile stock market. Interestingly, while the FTSE/JSE all-share index makes up less than 1% of the world’s market capitalisation, SA’s gross domestic product (GDP) comprises only about 0.5% of the world’s GDP.
REDUCED CURRENCY RISK
All things being equal, economic theory states one can expect a currency to depreciate in line with the differential between that country’s inflation rate and those of its major trading partners. With inflation still hovering closer to the upper end of the South African Reserve Bank’s 3%–6% target, SA’s inflation rate exceeds, by some margin, the inflation rates of its major trading partners. Therefore, over time, the rand can be expected to depreciate against these currencies.
Figure 1 (below) illustrates the overall deteriorating performance of the rand against the US dollar since 1972. The graph also uses the theory of purchasing power parity (PPP) to show the relative cheapness or expensiveness of the rand against the dollar over time. (PPP is a theory stating that exchange rates between two currencies are in equilibrium when their purchasing power is the same in both countries.)
When the blue line in figure 1 is above the green line, it suggests the rand is cheap and vice versa. The two grey lines represent two standard deviations – cheap or expensive. This simply means the rand is expected to trade within these bands about 95% of the time.
Currently, therefore, PPP is suggesting that the rand is on the cheap side. However, it is important to consider SA’s worsening terms of trade, general risk aversion and continued US dollar strength on the back of rising US interest rates. All these factors are potentially negative for the rand.
MAINTENANCE OF 'HARD' CURRENCY SPENDING POWER
It is important for South Africans who travel abroad or who buy imported items (or any product or service priced in an international currency) to ensure that they maintain (and grow) their spending power in real terms.
A long-term view is required to fully benefit from offshore assets’ return potential. While the case for investing offshore is compelling, it is important to consider where the return from an international investment could come from: the exchange rate and/or the underlying foreign investment.
The impact of exchange-rate risk on a foreign investment should also be an important consideration.
Many South Africans got burnt when they invested offshore in 2001 and 2002 when the rand traded at around R12 to the US dollar. As a result, South African investors now tend to have an underweight exposure to foreign investments. Studies have shown that when considering the historical returns of foreign investments, the impact of the exchange rate is uncertain and volatile, and that when measured over shorter periods, the exchange rate can have a significant impact on the investment return in rand.
Research indicates it is only over longer periods that the underlying investment contributes more to the return than the exchange rate. Therefore, Investec Asset Management is of the opinion that when investing offshore, investors need to take a long-term view to fully benefit from the return potential of the international assets in which they are invested.
SIMPLIFYING OFFSHORE INVESTING
The prospect of investing money outside of your country can be daunting, given the sheer size of the investment universe. As a new investor, you might feel uncomfortable with the idea of placing assets and investments in another country with foreign organisations. You also have to consider product and government rules, regulations and restrictions on purchasing offshore assets. With 50 different offshore centres, 126 different legal and tax systems, 27 000 different listed equities and an estimated 36 000 different unit trusts to choose from, where do you invest? The answer is simple. Stick with an organisation you know and trust and who has a sound track record of investing offshore.
At Capta FS, our expertise not only covers the South African investment landscape but extends offshore too. This means that if your personalised financial roadmap calls for international solutions, our Wealth Management team has immediate access to a range of international products/ fund managers to ensure you get the best global solutions and offshore exposure...
Our team specialises in the following offshore services:
Offshore investment and portfolio management advice
Offshore trusts and companies in leading jurisdictions – Mauritius and Switzerland
Investment advisory services to offshore trustees
Guaranteed structured products
International pension plans
Sourcing of quality UK Commercial property
Offshore property investment structures
Foreign direct investments for South African companies.
Contact us TODAY to discuss the type of offshore options we have on offer!