With credit downgrades and political turmoil, investors might be wary of spending their money locally, writes Angelique Ruzicka
You could be forgiven for wondering if your South Africa-based investments will outperform following the recent downgrades to “junk” status, the Cabinet reshuffle and calls for President Jacob Zuma to step down. The future sounds somewhat murky, too. South Africa represents less than 1% of the global economy and experts are expecting less than 2% growth in GDP per annum over the next two years, which means in the short term, investors can’t look forward to any stellar returns.
According to Old Mutual, high-net-worth investors are mitigating the risks by increasingly taking advantage of their allowances to invest outside of South Africa. The question is: should you do the same even if you’re not that well off?
If you haven’t got any offshore exposure, the simple answer is yes, because diversification (varying your investment portfolio) is key. “South Africa as a global universe is very small. As a long-term investor, you should have 60% of your money exposed offshore in a growth portfolio. You get that through the MSCI world index, which has beaten most of the fund managers and the JSE Top 40,” explains Eugene Maree, founder and director of financial services technology company, Wealthport.
Besides meeting your need for diversification, investing offshore can also open up more options and opportunities. For instance, if you want to invest in the pharmaceutical sector of the FTSE/JSE, the options are limited to three companies: Aspen, Ascendis and Adcock Ingram.
“However, within global markets there is a selection of over 60 pharmaceutical companies, and that’s just on the London Stock Exchange. Not only do your investment options increase exponentially, but investors are also able to hedge against the volatility of the rand,” explains Wayne Sorour, head of Old Mutual International SA.
But Maree warns that, if you are close to retirement or set on remaining in South Africa, you should have enough money to live off and to pay for your expenses. “As a retired investor, you should always have a good portion of your capital back home and available to you.
“Remember that the cost of living is going up and it’s possible that interest rates will too. You have to be wary of how much you are taking offshore,” he says. IS THERE A NEED FOR PANIC?
With all the bad news about South Africa swirling around you’re probably wondering if investing offshore makes sense to avoid further political heat and rallies in the currency. Maree points out that it is South African investors that are far more “doom and gloom” about their country than foreign investors.
He disagrees with those who believe it’s a cut-and-run situation. “The optimist in me believes this could end quite quickly and if you take a timing chance, you could be on the wrong end of this. With the right political will we could change all of this. Some countries have got out of downgrades more quickly than what was expected. We will suffer in the short term, but South Africans are a resilient bunch. I am optimistic and I think we will get out of this.” HOW CAN YOU INVEST OFFSHORE?
If you still think that investing offshore is the right thing to do to avoid all the chaos or if you simply want to diversify your assets, then it’s possible to do so in several ways. A South African resident over the age of 18 has two allowances to take advantage of over a one-year period, which enables him or her to invest abroad.
“The single discretionary allowance of R1 million can go into any account offshore and you don’t need tax clearance. The next allowance is called the foreign investment allowance up to R10 million, which you need a tax clearance certificate for,” explains Richard Beddow, managing director and founder of Forex People, one of the largest independent foreign exchange brokerages.
There is another way to get even more out of the country. You can go to the Reserve Bank and apply for a certificate of compliance that allows you to put as much as you want over and above the R1 million and the R10 million. But again, you would need to get tax clearance if you go for this option.
An individual’s partner or spouse would also have the same allowances available to them. So, couples can effectively send out R2 million without being asked questions by the SA Revenue Service (Sars) or R20 million or more with tax clearance.
Beddow warns that getting the R10 million certificate or the certificate of compliance can be an onerous task. “There is a fairly rigorous audit that Sars will do so your tax affairs have to be up to date.
“The money that you are sending has to be commensurate with your declared earnings or you need to provide proof of how you came across these funds.”
Investors have several options to consider when investing abroad. You can invest directly or via a rand-denominated offshore or asset-swap fund.
However, if you are going to invest offshore, bear in mind that your money may not always be accessible, so make sure that it’s money you are able to part with for some time.
Bruce Flemming of Old Mutual Private Wealth and financial planner of the year in 2016 explains some of the downsides. “If you are putting your money into a bank account offshore, you will be lucky to earn over 0.3%. If you put it in a wrapper or anything else, you may be obligated to invest for a fixed period of time. You can usually take one withdrawal or one loan against it, but then again, if you are investing money offshore, you want to do it for the long term, rather than bringing it back every few months.”
Ultimately, if you do invest offshore you also have to take into consideration the needs of your family and not just your need to obtain stellar returns or diversification. You need to think of the tax implications and estate planning consequences. So, take care to ensure you have the right advice and the right amount of funds to lean on if times get tough.
“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 an adviser can add a great amount of value in determining what vehicle would be best for each specific client, based on their financial position and requirements,” adds Sorour.
DIVERSIFICATION Investing offshore can open up more options and opportunities