Offshore investing: What SA consumers need to know

Offshore investing refers to a wide range of investment strategies that capitalise on benefits outside of an investor’s home country, such as markets, inflation and exchanges rates. However, before investing offshore, local investors need to consider why

According to Ian Beere of Netto Invest and Financial Planner of the Year 2007, depending on the investor’s financial situation, offshore investing offers various advantages. “There are five good reasons why investors should invest offshore, namely asset and liability matching, tactical asset allocation, diversification, access to an unrestricted currency and sovereign risk.”

Beere adds that while there are potential gains to be made offshore, it is important to also consider the reasons for investing offshore. “It is crucial for investors to consider their personal circumstances, in light of these reasons, before deciding to invest offshore, as well as how much to invest.

“Investors need to analyse their current investments to see how much they have in various asset classes and of this, how much is invested offshore and locally. Also, they must ascertain to what degree their local assets will act as a buffer, should the rand fall.”

Beere elaborates on the reasons why investors should consider offshore investing. “One of the most important reasons is for investors to match their assets to their liabilities.

“For example, if the investor is saving for retirement, he or she will have a liability to pay themselves a ‘salary’ after retirement, which could be the next 20 or 30 years (depending on age of retirement), and because this liability is influenced by difference things, such as inflation, the investor will ultimately need to beat this inflation in order to feed themselves. Under normal circumstances, investing in equities, bonds, cash and property in the country in which you live will generally follow that country’s inflation rate more closely, thereby providing you with a greater certainty that their investments will grow, in relation to the rate at which their future living costs will grow.

“However as the inflation rate in South Africa is influenced by the exchange rate, offshore exposure is important. If your unique lifestyle costs are influenced by the exchange rate more than your neighbour’s, then you may want more offshore exposure than him.”

Tactical, or strategic, asset allocation is another reason for investing offshore. “When making a tactical asset allocation, investors adjust their investment portfolio to accommodate current market conditions and allocate money to markets which are offering better value and are more likely to perform well in the future. Recently, local markets have performed well, in relation to offshore markets, which has resulted in the price-to-earning ration of local assets rising to a point where finding shares that offer value is more difficult.”

Offshore investing also provides investors the opportunity to invest in opportunities that are not available locally, such as different markets, sectors and specific assets not listed on the JSE, such as Nestle and BMW.

Beere says that another reason to invest offshore is the access to unrestricted currency. “The rand is a currency which is controlled by the South African Reserve Bank and whilst we are currently able to buy foreign currency, with permission, this can be subject to change. The strong Rand as resulted in a relaxation of foreign currency limits to the extent that in addition to the R4 million Investors are allowed to take out of the country annually for investment purposes, they can take an additional R1 million for investment, travel and select other purposes, with minimal formality, thereby allowing couples to invest R10 million a year in foreign currency investments.”

The fifth reason to invest offshore is sovereign risk. “South Africa has recently been downgraded by investment rating agencies on the back of political uncertainty, which has raised concerns about the country’s political risk. This may lead investors to invest offshore due to concerns about the impact that local circumstances may have on investments in the region.”

When considering the best time to invest offshore, Beere says there are two things to consider, namely the exchange rate and price-to-earnings ratios in offshore markets. “The first being the exchange between the rand and the currency in which you plan to invest in. To mitigate the risk that the rand may weaken further, it is important to consider longer-term trends and invest for the long-term.”