Offshore bank accounts, property and even residency as insurance against political uncertainty gains momentum

Tom Elliot, International Investment Strategist at global independent financial consultancy deVere Group.

Geographical diversification of assets has become increasingly important to South Africans given the country’s lack of economic growth, the rand’s slump and heightened political uncertainty.

Since the dawn of democracy in 1994, exchange control regulations have been relaxed incrementally and since April last year, South Africans are able to invest R10m (or R20m per family) a year offshore with a tax clearance, and an additional R1m annually without needing tax clearance.

While many South Africans have already diversified their assets through investment in rand hedge shares, rand-denominated offshore investments, offshore funds and global investment portfolios, there is increasing interest in opening bank accounts, purchasing property or a business and obtaining residency permits or citizenship as insurance and security against local risks.

This trend is not unique to South Africans. “Political instability and uncertainty are driving many of our clients, across the globe, to ensure they have sufficient assets in relatively stable economies to protect against local currency devaluation or other economic or political uncertainty or upheaval to the extent that many are now ensuring they have sufficient assets elsewhere to relocate if necessary,” says Tom Elliot, International Investment Strategist at global independent financial consultancy deVere Group. “Sensible investment policies for all investors require diversification of assets, which might include property, financial assets and even residency permits for people who are currently based in a political unstable country. People living in environments of uncertainty are increasingly concerned that if they were to move abroad, they would need sufficient assets abroad to support that move.”

deVere Group suggests that potential investors in property or other physical assets, like businesses, should consider developed, open economies that offer less risk. These may include regions with some legal and cultural or language familiarity such as Northern Europe, North America, Australia or New Zealand.

Once a base in a developed country has been established, it may then be worth using local knowledge of developing markets to continue to expand investments in less stable but faster growing countries further down the line.

The deVere Group has offered similar advice to UK investors, saying they “should consider taking precautions against the potentially significant adverse effects of a Brexit [British exit from the EU] on UK assets.”

“It could be a timely decision to rebalance portfolios in favour of international stocks, bonds and perhaps property”, CEO Nigel Green said.

“Investing across geographical regions is one of the fundamentals of a well-diversified portfolio, and those with a well-diversified portfolio are best-placed to mitigate risk in times of market turbulence, and best-placed to take advantage of the opportunities”.

While many South Africans are finding that their available funds for investment purposes have reduced due to a worsening economic environment, or may feel they lack experience in investment in developed markets, deVere Group is of the view that it is “a misconception that international investment options are exclusively the domain of sophisticated investors,” and there are many well-managed retail funds that offer global stock market exposure, even if the amounts are not huge.

For many South Africans, the first step may be to invest in offshore unit trusts priced in rands or shares in companies listed on the JSE, but with substantial offshore exposure. This gives them access to geographical diversification, a better spread of companies and industries, and some protection against the devaluation of the rand.

However, there is increasing interest in going a step further and moving capital offshore, which offers more permanent protection from both currency and political risk.

There is indeed more interest in upping the ante in terms of offshore investment. The latest Reserve Bank Quarterly Report for March showed that the acquisition of outward portfolio investment assets by South African residents, reflected in a R10.6bn outflow in the fourth quarter of 2015 compared to an outflow of R24.2bn in the third quarter. But outward foreign portfolio investment increased considerably from R24.2bn in 2014 to R50.1bn in 2015, “partly reflecting institutional investors’ confidence in offshore financial markets.”