THE CASE FOR AND AGAINST IN­VEST­ING OFF­SHORE

Finweek English Edition - - Focus on offshore investments -

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.

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