Stuart Kantor, founder of Kanan Wealth, says the main benefit of investing offshore is probably so that investors can gain a sense of security through diversification.
“South Africa is a relatively small economic player in the global landscape and there would naturally be additional opportunities outside of South Africa.”
Gerald Kahn, owner of Kia Brokers, says the local bourse has been trading at all-time highs and above its historical average price earnings ratio, which makes it relatively expensive. He says offshore equities are a better-priced buy.
“Over the past year or two, South African investors have had good positive returns investing offshore. This is partly due to some good performances from offshore markets, but also due to the depreciation of the rand.
“It is expected that offshore markets, such as the United States, will perform better than emerging markets, such as South Africa.
“It is also good to keep your investment portfolio diversified so that you can build up hedging against poor local performance and expected poor growth locally”, says Kahn.
Yet, Kantor says, since the global financial crisis in 2008, there seems to be a trend toward greater economic introspection and so-called on-shoring, so emerging markets such as South Africa may be entering an extended period of underperformance.
In that case, investors would seek offshore or developed market opportunities in defence of a weakening rand and in search of a more stable business environment, says Kantor.
It is always best to invest offshore when the rand is strong, so depreciation becomes a benefit, says Kahn.
Yet predictions are that the currency will continue to depreciate, whereas the local market is expected to remain expensive in the short- term, he notes.
“The rand is already relatively weak and the easy money may already have been made in the short term.
“However, if your goal is capital preservation as opposed to growth, then offshore may provide the best long-term (10 years or so) returns and the greatest sense of security, says Kantor.
If investors believe the current downbeat mood in South Africa is only temporary and a cyclical phenomenon, then remaining invested in South Africa may provide the best returns per unit of risk.
“Personally, I feel that South African companies remain attractive investment opportunities due to the limited competition they face as opposed to the nature of developed markets.”
It is always good to diversify one’s portfolio and offshore investing generally mitigates the risks, says Kahn.
“It is also not healthy to invest only in one market and to be dependent on the ups and downs of that market.”
Avoiding pitfalls
Kantor says there are two main disadvantages to investing offshore. Given the size of the offshore market, it could be more challenging to source the right opportunity, so investors or their advisors must do their homework.
There is a risk of currency swings going against investors, Kahn says, and figuring out what assets to buy is always very difficult.
“It is always a good idea to get advice from experts in the field who have some feel for the right assets.”
Currencies can be volatile, so investing offshore as a currency ploy should be secondary to the main goal, which is diversification and wealth preservation, says Kantor.
He also notes that, if one is investing directly offshore and not through an asset swap, then aspects such as each region’s tax legislation and any other regulatory considerations must be considered.
Kantor says there are many options when investing offshore.
“Asset swaps enable an investor to invest and experience offshore opportunities without using their annual allowance and so, when funds are required or withdrawn, then they are paid out in rands and not subject to exchange control.
“When you invest directly offshore then the opportunities are even more boundless and often less regulated by our own Financial Services Board.”
Currently one can take R1-million out of South Africa without tax clearance and R4-million with tax clearance a year to invest offshore.
These investments would need to be registered with the South African Reserve Bank.
There are also specific restrictions for compulsory money and, in this regard, no more than 25% of one’s funds may be invested offshore, says Kahn. This applies to retirement annuities, pension funds and the like.
Brett McLaren, joint chief executive of SAXO Capital Markets, notes the biggest disadvantage would be that it could take an extra day to transfer money offshore, as a South African investor needs to do this through an authorised dealer and/ or needs a tax clearance certificate from from the South African Revenue
Service, depending on the size of the investment offshore, and time is the most important commodity when investing.
Kantor advises avoiding the promises of exceptional returns and not getting involved with property developments until investors feel more worldly.
Focus on what is listed on an exchange or regulated, he adds.
McLaren says any investor who is looking to invest in any product or service should do their home- work, and research the company or product thoroughly.
This includes aspects such as the company’s track record, the share- holders and directors, the financial soundness of the company or investment, the regulatory environment, among other things.
“Always look at potential investments with a critical eye — if it seems too good to be true — it probably is.”
Russia worries
The ongoing crisis over Russia’s annexation of Crimea could spark an emerging market crisis, leading to investors putting their money into perceived safer markets, such as first world countries.
Gerald Kahn, owner of Kia Brokers, says the current situation will have an effect on investments as those invested in Russia (as one of the emerging markets) will withdraw their funds and move to established developed markets.
Stuart Kantor, founder of Kanan Wealth, says his main concern is that the issues with Russia, multi- plied against the backdrop of Turkey and Syria, could spark an emerging-market crisis as investors decide to flee all high-risk markets.
“Russia is a powerful force within the Brazil, Russia, India and China nations and so this does not bode well for emerging markets. Finally, a war involving Russia could cause a spike in the oil price and hamper the European Union’s recovery.
“Europe remains one of South Africa’s major trading partners. In this regard focusing on the US and Japan may be the best bet.”
Scott Thiel, who runs Blackrock’s BGF Fixed Income Global Opportunities fund, notes that countries around the area, such as Poland, could find their markets coming into a corrective period.
Thiel says there is a 60% chance that the situation continues as it is, and the situation eventually diffuses itself. He adds there are two less likely outcomes as well, which would have more negative implications for the capital markets.
The first, at 30% probability, would be that there would be social unrest within the country itself and that would involve perhaps the protesters from Main Square making their way to Crimea or tension between the ethnic groups within the country, which would then lead to a bigger conflict.
The worst case scenario would be some kind of conflict arising from the proximity of Russian forces and Ukrainian forces to Crimea, but there is only a 10% chance of that happening, he says.
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