The great South African investment irony

Having recently spent a year in Dubai I couldn’t help thinking, on my return to South Africa, of the contrast between the two countries. One of them comprises nothing but desert, and has no natural resource other than oil; the other has an abundance of every natural resource on Earth ? other than oil. Yet Dubai is a flourishing international metropolis (only 20% of its income is derived from oil), and South Africa languishes on the back burner of emerging markets. Why?

The answer is mindset. Dubai believes in itself; the country seems to have a collective vision for its own progress. South African business is still taking steps to recognise its own potential. The same mechanism applies to investing offshore, as opposed to investing only in locally derived stocks and bonds. The case in favour of the former is overwhelming. Yet, many South Africans find the transition from local to offshore investing impossible, even though they have the power to place their money (at least a portion of it) anywhere in the world. South African investors, by the same token, have to deal with the flip side of the same coin. Decades of careful propaganda ? together with rigorous exchange control ? made investing anywhere other than in South Africa illegal, even the thought of it unpatriotic. Now the bars have been removed and yet South Africans stare into the open space, see the opportunities, but are seemingly unable to act on them. Change has less to do with logical persuasion than it has to do with emotional readiness ? and the principle applies just as well to choosing a destination for one’s money. With the stakes so high ? both for the country, and, on the other hand, for an individual’s life savings, one would think that the ability to make positive changes would be easy. But this is not so. The laws of human nature prevail regardless.

Investors who have always thought only in rands have great difficulty in suddenly starting to think in another currency. Only once the concept of “dollar thinking” becomes de rigeur for an investor, can they realistically start shopping around for dollar- denominated opportunities. To begin thinking in dollars (or pounds or euros) is to start obtaining a reality-check on your wealth.

Wealth is measured in dollars. Even the value of the pound and the euro is essentially measured in dollars. Forbes Magazine’s Billionaires are dollar billionaires. The United States, whether one likes it or not, comprises nearly 50% of the world economy. The impact of its currency on the world is obvious. It is, of course, not pleasant for a South African to divide his or her net worth by 12, to obtain an indication of the real value of his or her estate. But it is a good exercise to do, and habit to be in. Yes, in South Africa we mostly earn, think in and spend rands, but the impact of a weakening currency will always have its effect on an economy and each individual’s real wealth, and their ability to stop working without experiencing considerable short-term wealth erosion.

That is why I submit it is so important for each investor to align their portfolio, as far as possible, with a hard currency, however psychologically difficult it may be to start.

The irony of this difficulty is that once the mindset of the country becomes truly international and the currency situation stabilises, so may the need to invest overseas, to a large extent, be reduced.

Chris Van is an independent offshore investment specialist.

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