Interest increases as local economy dithers
THE South African economy represents less than one per cent of the global economy and minimal GDP growth of 0,6 per cent followed by 1,4 per cent is expected this year and next.
With all our socio-political and economic challenges, it appears unlikely to offer local investors much chance of decent returns.
To mitigate the risk of over concentrating assets domestically and to increase the potential for greater and diversified returns, high net worth investors are increasingly taking advantage of their R11 million allowance to invest outside of South Africa, says Wayne Sorour, Head: Old Mutual International South Africa.
Diversification of assets remains the primary strategic reason for offshore investment, he says, though from a South African perspective, he believes investors are investing in more stable economies for better returns, a wider choice of investment options and as a currency hedge.
“As an example, if investors wanted to invest in the Pharmaceutical Sector on the FTSE/JSE, the options are limited to three companies, namely Aspen, Ascendis and Adcock Ingram.
“However globally, there are over 60 such companies listed on the London Stock Exchange alone.
“Not only do your investment options increase exponentially, but investors are also able to hedge against the volatility of the rand.”
In terms of returns, Sorour notes that foreign equities are still attractively priced relative to bonds and cash.
“As a result of the low interest rates, investors can currently receive better returns from equities than govern- ment bonds and money in the bank.”
Given the current uncertainty surrounding many of the universities in South Africa, Sorour says that high net worth individuals are increasingly opting to fund future international study plans for their children by investing offshore.
“At the moment, a big concern for many is whether a degree obtained from a South African university will carry the same international recognition going forward as it has in the past.
“Parents are therefore in- creasingly opting to make provision for their children to study abroad if they wish to do so.”
When looking to make an offshore investment, Sorour says that investors essentially have two options to consider.
“They can invest directly offshore, or via a rand denominated offshore or asset swap fund.
“Investing directly offshore may seem like the simplest method, however this option requires tax clearance and various other forms of approval, making it a slightly more onerous process.
“For investors seeking more favourable returns with a rand hedge for reasons of current market conditions, an asset swap fund should be considered, whereby returns are based on the movements of another currency, but paid out in the base currency – in the case of South African investors, the rand.
“However, due to the ease of this process, the costs are often higher and the tax treatment is less favourable when purchasing an asset swap.”
Sorour urges investors eager to explore their offshore options to consider more than just returns.
In addition to potential returns, he says that the various investment structures available also need to be considered, as well as tax implications and estate planning consequences.
“All of these factors can impact the ultimate success of an investment.
“For example, if an investor with offshore assets were to pass away, there may be consequences of not having an offshore will. “This is where a financial adviser can add much value in determining what vehicle would be best for each specific client, based on their financial position and requirements.”
Ultimately, Sorour says that there is no ‘best’ route or pre-defined portion of wealth that should be invested offshore, as this is dependent on the individual’s specific financial situation and goals.
“Overall wealth, financial goals and family setup are just some of the factors that impact what percentage assets should be invested offshore.
“An experienced financial adviser will be fully equipped to assess these factors and suggest a solution that is most suited to a particular situation.”
Encouraging the pace of offshore investment is the potential for South Africa to be downgraded to junk by two rating agencies later this month.
In a STANLIB weekly re- port, Economist Kevin Lings says “the numbers do validate a downgrade later this month to junk by both these rating agencies, but recent meetings with the two agencies hinted that they may give us a bit more time, that is to delay the downgrades either to December or after the February budget speech”.
“So the likelihood of a downgrade to junk this month by both agencies is probably more like 50-50 at this stage.
“Obviously the fall in the value of the rand of late isn’t helping the bonds either.
“The rand is at its lowest against the Aussie dollar in 14 months at eleven to one,” writes STANLIB Director: Retail Investing Paul Hansen, in the report.
“On the offshore front, we have noticed a bit of profit-taking lately in the hottest market, the Japanese Nikkei, also in Europe.
“The Nikkei is currently at its highest level since 1992 – that is in a quarter of a century.
“Even in dollar terms, it is at its highest in 21 years.
“The MSCI Japan Index has returned +22.9 per cent in dollars in 2017, including dividends, ahead of the MSCI World Index’s +18.9 per cent; also ahead of the MSCI USA Index’s +17.5 per cent total return and now ahead of the MSCI Europe Index’s +21.7 per cent,” writes Hansen.
In particular, despite declining over the past week, the MSCI Japan Index is up a highly impressive +7.4 per cent in the 6-7 weeks since end September, in dollar terms.
The MSCI Europe Index has fallen -2 per cent in dollars over the past month, partly because of the euro’s decline against the dollar.
The dollar peaked at around $1.20 to the euro and is now at $1.164 to the euro.
However, even in euros the Dow Jones Euro Stoxx 50 Index of the 50 biggest shares in Europe has declined by -2.6 per cent in recent days, back to where it was in May.
The MSCI Emerging Markets Index is still the best in 2017, with a total dollar return of +33.8 per cent, led by the phenomenal dollar return of the MSCI China Index of +54.3 per cent, at another record high.
This index comprises around 29 per cent of the MSCI Emerging Markets Index and includes Tencent and Alibaba.