Investing out of the country is considered a key element when it comes to a balanced financial portfolio. Offshore markets are an important consideration for South Africans looking to secure their financial future.
Offshore investing may sound like something only jet-setting millionaires can do, but the truth is that it’s far more accessible than it seems. In fact, the opportunities and potential rewards far outweigh any fears you may about global investment opportunities.
The performance of offshore investment is determined by the performance of the underlying asset as well as any changes in the exchange rate. South Africa represents less than 1% of the world’s economy and limiting your investments to the local market means you’re missing out on possible lucrative opportunities to grow your wealth abroad. This is a significant consideration for South African investors, given that the rand is one of the world’s most volatile currencies. The rand tends to depreciate over the medium to long term against hard currencies.
Looking back, a 10-year investment in the US market would have been significantly boosted by the rand’s depreciation over that time. Thus, an offshore allocation is particularly attractive for investors who have long time horizons.
To build a balanced and diversified global portfolio, one needs a defined offshore strategy. Financial advisors will attest that if you limit your investments to South Africa, you will be placing all your risk in one place. With constant electricity outtages, growing crime and unrest, mismanagement of funds and corruption, this may not be the best idea.
In the current investment environment offshore investments are an enticing option, says Stephen Katzenellenbogen, private wealth manager at NFB Private Wealth Management. South Africa’s post-Covid economic recovery has been off a low base. The muted recovery is due to the long period of lockdowns, unsustainable growth plans , high government borrowings and a widening fiscal deficit.
As these ratios deteriorate and South Africa sinks further into a debt trap, lower credit ratings are likely. Earlier this year, National Treasury relaxed foreign exchange controls, allowing retirement funds to invest up to 45% of their assets offshore. The optimal global exposure for a standard Regulation 28-compliant balanced fund is closer to 35%, according to analysts at Cape Town asset manager Old Mutual Investment Group (OMIG), who warn that you should exercise caution when making the decision to invest offshore
An investor must keep in mind that investment options in developed economies such as the USA, UK and Japan have performed better than the JSE in the medium to long term. In rand terms, international markets have performed relatively well during the global shutdown compared to local markets, mainly as a result of the rand depreciation. Investors with geographically diversified portfolios do have better risk than a focused SA portfolio and a greater chance of sustainable long term growth.
Sources:
Allangray.co.za
Moneyweb.co.za
FNB.co.za
Businessday.co.za