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How South African advisers can tackle the offshore-onshore conundrum

03 February 2025 Gareth Stokes

One of the biggest investment challenges facing South African financial advisers and their clients turns out to be somewhat of a two-parter. The first part involves how much of your client’s discretionary investment portfolio to invest offshore; the second, centres on the timing of moving money offshore to enable the first. Given how volatile the rand is against a basket of international currencies, the second part of this riddle can have a significant impact on portfolio returns.

Dollar versus rand history

Over the past five years, the rand has traded as low as R19,80 to the US dollar, and has high as R13,40. This means an investor who took R1 million offshore over the past five years could have converted that sum into as little as USD50 505,00 (in June 2021) or as much as USD74 626,00 (in May 2023) based just on the timing of the transaction. Yes, dear reader, if you got your decision point wrong, your offshore investments may have had to claw back a staggering 47% just to compensate for the currency conversion ‘loss’. This explains why analysts, asset managers and financial advisers keep a close eye on rand strength or weakness versus the British Pound and US Dollar. 

There are reasons for the rand’s ongoing depreciation against developed market currencies, starting with the domestic inflation rate being persistently higher than that of both the United Kingdom and United States. This gap has narrowed over the past couple of years as developed markets battle levels of inflation last experienced four decades ago; but structural economic issues such as high government debt; low economic growth; an overreliance on commodity exports; unemployment and the widening fiscal deficit keep the pressure firmly on the rand. Once you add South Africa’s political and policy uncertainty to the mix, few are surprised to learn that the rand has devalued by 5.8% per annum against the dollar, going back to 2014. 

Fleeting, infrequent top five ranking

The rand had an exceptional 2024. Data collated by Bloomberg shows the rand as the fifth best-performing emerging market (EM) currency over the 12 months, behind the Malaysian Ringgit, Hong Kong Dollar, Thai Baht and Peruvian Sol. This is the first time the rand has featured this high on the EM tables going back eight years, to 2016. But before you pop your champagne corks, the rand still managed to lose around 3% of its value against the world’s reserve currency over the period. 

The dollar enjoys reserve currency status because it is widely held by central banks and financial institutions as part of their foreign exchange reserves, serving as a global benchmark for economic stability. 

How the rand will perform against the dollar in a given year is anyone’s guess, and the best that economists and currency experts can do is to offer a range the currency is likely to trade in. As these experts go back-and-forth with their predictions, financial journalists (including yours truly) have an absolute field day. While researching this piece, the following headlines appeared on the same Google search page, with both articles published on Business Tech. The first, dated 21 October 2024, postured ‘Rand set to drop below R17,00 to the dollar in 2025’; the second, dated early January 2025, decried ‘How the rand could hit R21,00 to the dollar in 2025’. 

The first article was informed by a report into prospects for seven African currencies, published by Ebury; the second focused on a worst case scenario of around R20,70 per dollar by end-December 2025, per commentary by Annabel Bishop, Chief Economist at Investec. To summarise: two articles, published less than three months apart and each informed by financial market experts, suggest as much as a 25% gap between high and low predictions for the rand against the US dollar over the coming year. This sheds light on why it is so difficult for financial advisers to advise their clients on when to move large sums of capital offshore. 

Solving for offshore-onshore is tricky too

As mentioned earlier, rand volatility is not the only concern when investing offshore. The domestic asset management and financial advice community has been debating how much to invest offshore for decades. There is so much hype around ‘offshore versus onshore’ that two respected investment minds recently went head-to-head in something called the R1 million Investment Challenge. Each investor was allocated R500 000,00 to invest in a basket of funds and / or equities for a period of five years, with the winner to be decided by the portfolio value at the end date. 

Heystek is a long-time advocate for investing offshore whereas Viljoen felt that local shares offered better opportunities, and certainly good enough opportunities for local-only managers. The competition is being closely monitored by Biz News who provide regular updates. By November 2024, Three years into the event, Viljoen’s portfolio had grown to R639 000,00 versus Heystek’s R502 000,00. 

Viljoen told Biz News his portfolio of local shares started to show life six months before the 2024 National Elections. “We have not made significant changes; the portfolio holds the same stocks as three years ago. What is happening now is the payoff for holding undervalued assets and sticking with them,” Viljoen said. The offshore portfolio got off to a rough start, losing around a quarter of its value between the start date to May 2022. “I [immediately] had a lot of catching up to do,” Heystek said. 

He confessed to Biz News that he was probably underexposed to the US technology sector, that he had panicked during a market downturn by moving some assets to cash instead of seeing out the volatility, and that he struggled with timing his exit and re-entry. “Timing the market is tough; you must be right twice when exiting and re-entering,” he said. PS, he may also have faced a timing issue on converting his rand to dollars; but the competition start date was predetermined. 

Setting sensible offshore targets

The Investment Challenge furthers debate but is not particularly useful in a financial planning context. After all, how often do you bump into a client who wants to go 100% offshore. Deciding on how much of your client’s capital to invest offshore should be based around his or her long-term financial goals and risk tolerance. You might start by evaluating the diversification benefits of offshore exposure within the context of the client’s existing portfolio. A viable solution is to decide a fixed percentage allocation for offshore investments and then agree on a set of rules to achieve this while managing the emotional impact of currency and financial market fluctuations. 

The currency risk can be partly addressed by encouraging your clients to build up to their preferred offshore exposure over a period of time. You could move rand offshore each month or quarter to mitigate the risk of making a significant transaction during a period of rand weakness. This approach will not eliminate all timing risks, but it provides a disciplined framework that helps clients avoid emotional decision-making driven by currency headlines. 

The same approach works well for increasing exposure to equity markets, locally and offshore You know the drill by now, dear reader, just have your clients invest a couple of grand each month into an exchange traded fund (ETF) or unit trust and benefit from rand- or dollar-cost averaging. 

You can improve your financial advising by using currency forecasting tools and keeping an eye on the economic and market commentary published by your preferred product suppliers; but do not fall into the trap of viewing this information as gospel. These predictions offer directional guidance rather than guaranteed outcomes; your job is to acknowledge short-term volatility while focusing on the long-term trends that tend to be more reliable indicators. In the case of the rand, the long-term term trend is for a gradual depreciation against the dollar. 

Managing clients’ expectations

Overall, going offshore is about managing expectations. Your clients need to understand that their offshore versus onshore decision is not about escaping rand weakness, but rather about tapping into global growth opportunities and accessing industries or sectors that might not be well-represented locally. By framing offshore investing as part of a holistic financial plan rather than a reactive decision to currency shifts, advisers can position themselves as trusted partners in navigating the complexities of global markets. 

Writer’s thoughts:

Offshore investing is about achieving portfolio diversification and accessing growth opportunities unavailable locally. How significant a challenge does currency volatility pose as your clients build their offshore exposure? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.

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