THE CASE FOR AND AGAINST INVESTING OFFSHORE
WITH THE RAND having strengthened about 55% from December 2001 to April 2006, many investors remain sceptical about investing abroad.
The currency has since weakened by around 18%, which in terms of developed currencies has halved the average return of South African general equity unit trusts during the past year.
Absa chief economist Christo Luüs has provided these arguments for and against investing offshore: Arguments for acquiring an offshore exposure
• Diversification means risk reduction. • The outlook for the rand is uncertain. The SA current account deficit is cause for concern and foreign reserves are still relatively low. The rand, however, could remain strongish for longer, because of the commodity price boom, a weakening US dollar, and capital inflows remaining strong. Investment opportunities domesti- cally are limited – SA lacks significant oil, technology, bio-fuel, and pharmaceutical and biotechnology stocks. Prospects in several offshore stock markets are considerably more attractive than locally. • SA assets have had an excellent run in recent years but this is unlikely to be sustained in the near term.
Arguments against acquiring an offshore exposure
Foreign dividends are taxable. SA dividends are not taxed in the hands of investors, although a 12,5% Secondary Tax on companies is levied on paid-out dividends by companies. Foreign-currency gains are taxable. Finding a low-cost, reputable asset manager with an above-average track record may be difficult. Obtaining official approval for foreign investment, tracking portfolio performance and dealing with the tax authorities can be a hassle.