The number of international ETFs on the JSE has grown significantly in the last few years, giving investors a wide range of choices. (Photo: Hiram Alejandro Durán)
It has been a depressing news period in South Africa, and it can perhaps be seen as our “winter of discontent”. Eskom’s loss for the financial year stands at R20.7-billion for the financial year, and the most alarming revelation of all was that the unemployment rate spiked to 29% in the second quarter of 2019. This is compounded by forecasts of weaker economic growth than expected, large companies cutting jobs and further possible ratings downgrades.
The divisions within the ANC and President Cyril Ramaphosa’s court battles with the public protector add to political uncertainty, a concern that many investors hoped Ramaphosa, holding the top job, would address.
Inevitably, when bad economic news collides with chaotic politics, headlines reflect an increased number of people making queries about immigration and the very wealthy moving their money abroad.
Why invest offshore
Even without the economic and political woes, South Africa contributes less than 1% to global gross domestic product (GDP), and it would be wise for any investor to diversify their portfolio and avoid placing all their eggs in one basket. There are many different options with varying price ranges for investing off shore, while maintaining a cautiously positive attitude towards SA’s future.
Regardless of whether one is an individual investor, if you have a retirement annuity you likely already have some exposure to markets abroad. Pension funds in South Africa are required to allocate 60% of their assets to assets in the country; a maximum of 30% can be invested abroad, and 10% in Africa.
Changes were announced to Regulation 28 of the Pension Fund Act in February 2018, which previously allowed a threshold of 25% offshore investments and 5% in Africa. This was done after heavy criticism that the limit was harming investment returns and retirement annuities.
Even the largest pension fund in South Africa wants to diversify abroad. The Government Employee Pension Fund (GEPF), which has more than R2-trillion in assets, plans to invest more outside of the country and in unlisted assets, to reduce the risk of reliance on locally listed companies.
Currently 92% of the GEPF’s assets are invested in companies listed on the JSE, as well as South African government and state-owned companies (SOCs) bonds, according to Abel Sithole, the principal executive officer of the GEPF.
There is also concern among shareholders that the ANC will implement its 2019 manifesto promise and implement prescribed assets for pension funds and potentially for other forms of investment vehicles.
This will require funds to allocate a certain percentage to state assets such as parastatals or infrastructure drives. The fear is that the monies could be used to prop up flailing SOCs such as South African Airways (SAA) and Eskom, and that returns will dive.
The apartheid government used prescribed assets to forcefully keep capital flows within South Africa, but this system failed, and they were scrapped in 1989.
Having money offshore can act as a buffer to the rand performing poorly or high inflation in South Africa, as well as other economic and political uncertainties.
Investing internationally unlocks the entire world as an asset destination and allows access to different industries, interest rates and inflation, as well as stronger and faster growing economies than South Africa’s, according to Standard Bank.
People should decide which level of risk they want to expose themselves to. Developing economies such as Kenya and other parts of the continent have higher growth rates than developed countries, but emerging markets have the potential for greater uncertainty and potential hazards.
African countries are relatively easy to invest in, given the strong financial services sector in South Africa, but Standard Bank warns people to undertake research first, as many parts of the continent are financially high risk.
How to get your money offshore
This will of course depend on how much money you have to invest. South African can move a cap of R10-million a year out of the country to foreign bank accounts, provided they are taxpayers in good standing.
A tax clearance certificate is required first, and this is relatively simple process done on the South African Revenue Services (Sars) eFiling platform. Once tax clearance has been provided, a local bank can deposit the money in an offshore account, which can then accrue interest, be traded and used to buy property or bonds, according to Johan Burger, a director at Brenthurst Wealth.
For transactions of up to R1-million, no tax clearance certificate is required, but they must be registered with the South African Reserve Bank. The movement of the money will also need to go through an authorised financial services provider, such as a South African bank.
Returns on offshore investment can remain abroad and there is no need for them to be repatriated back to South Africa, but they may be subject to the income and capital gains tax of the overseas jurisdictions, said Burger.
Where to put money overseas
Again, this depends on what your personal balance sheet looks like. Before investing overseas, Standard Bank advises that this is long-term game, and you can expect to wait for a minimum of five to seven years before realising significant returns.
Many foreign-denominated currency investments have a minimum threshold of $10 000 (approximately R140 000), and changing rands into dollars or other currencies with the relatively weak local unit means that large figures will need to be invested.
For people looking for a more affordable option or a monthly debt order, which will allow them to globally diversify their shares, several financial services providers in South Africa offer offshore unit trust funds that are priced in rands, such as Allan Gray and Investec, and can be accessed through tax-free savings accounts or by contacting the company directly.
Another option to consider that cuts out the red tape of exchange controls is offshore exchange traded funds (ETFs), such as Sygnia or Satrix. The number of international ETFs on the JSE has grown significantly in the last few years, giving investors a wide range of choices, and there is the option to get involved from as little as R300 to R500 per month, according to Burger.
With this local but global investment, you are not obliged to obtain a SARS tax clearance certificate to invest in these funds, as your investment is made in rands and paid out in rands on disinvestment. You are also able to set up a monthly debit order directly to the ETF.