Current SA-specific risks mitigated by investing offshore

The recent 2016 Medium Term Budget Policy Statement confirmed National Treasury’s commitment to the status quo when it comes to exchange controls. Despite the stubbornly large current account deficit, there is no sign of tightening its stance, as the amount that individuals can take offshore each year remains at R11 million (R1 million discretionary allowance and R10 million individual allowance, which requires a SARS clearance certificate).

According to Investec Wealth & Investment chief economist and investment strategist Prof. Brian Kantor, the benefits of this policy have been significant. 

“The relaxation of foreign exchange controls over the last two decades has allowed – and continues to allow – South African investors to diversify their portfolios and reduce the impact of South African-specific risks,” he says. “It has also allowed highly skilled individuals to continue to ply their trade in South Africa, while being able to invest in diversified global portfolios.” 

He points out that it is significant that, in the second half of last year, the value of assets held by South Africans abroad surpassed the value of South African assets held by foreigners for the first time in history. In other words, the country's foreign assets now exceed its foreign liabilities. 

These assets, owned by local businesses, wealthy individuals and pension funds have come to play a very important role in local portfolios. 

“In recent years the South African economy, and the firms and households dependent upon it, have been severely buffeted by a damaging combination of weak growth and higher inflation,” Kantor explains. “Stagflation, which accompanied a collapse in the currency in 2015, higher charges for utilities, a severe drought and higher interest rates set by the Reserve Bank, all contributed to a difficult domestic environment. The increasingly large foreign component in South African portfolios therefore has helped significantly to mitigate the shocks to their incomes and balance sheets caused by specifically negative South African events, both political and economic.” 

Although the depreciation of the rand has also boosted the value of offshore holdings in local terms, Kantor argues that the case for investing offshore is much broader than just what might be happening to the currency. 

“You can hedge against the rand without going offshore,” he says. “So you have to have a better reason for going offshore than that.” 

He also points out that while the JSE does offer some protection against the South African economy through a number of locally-listed multinational companies, the opportunities are not very broad. 

“If you want IT exposure for example, your choices on the JSE are limited,” Kantor says. “Whereas if you go offshore you have almost unlimited exposure to a full variety of businesses and fuller diversification.” 

There are also ways to get direct offshore exposure through local unit trusts or exchange-traded funds (ETF) that only invest in international markets. For instance, a new S&P 500 ETF was launched earlier this month. However this is achieved through an asset swap by the institution, making use of the macro-prudential limit. This means that your money is never fully offshore and is therefore still exposed to some local risk. 

“The offshore allowance gives you more protection against the admittedly unlikely possibility of expropriation,” explains Kantor. “You would have to turn up in London or somewhere to collect your money, but it is outside of South African jurisdiction. An investment through asset swap never is.” 

No matter how serious you might consider South African-specific risks to be, no portfolio that is exposed 100% to a single currency, a single market and a single political environment could ever be considered diversified. Every investor should therefore consider what portion of their portfolios they reasonably need to hold offshore, and how to allocate it. For this, it is worth speaking to experts who can guide these decisions. 

“A well-diversified portfolio with a variety of investment opportunities, none of which will dominate the balance sheet and whose individual returns are somewhat independent of each other, makes for a much less risky portfolio,” Kantor says. “That is a portfolio whose value, while expected to rise over time, will do so more predictably than most of its separate components.” 

Wealth management firms are able to assist investors through opening offshore accounts, setting up share portfolios and providing investment advice covering both traditional and alternative asset classes such as private equity and structured products. Investec‘s* award-winning Wealth & Investment business, for instance, through its One Place offering, enables clients to invest and manage their funds in South Africa and the UK with expertise in both regions.With these services at their disposal, South Africans are able to take full advantage of the ability they now have to take money offshore.