Many in­vestors have been rat­tled by the re­cent down­grades of South Africa's credit rat­ings. How­ever, this does not mean you should just move money out of the coun­try willy-nilly - be sure to weigh up the myr­iad op­tions care­fully be­fore mak­ing a move.

Finweek English Edition - - FRONT PAGE - By Mariam Isa

sus­tained strength in the rand is pre­sent­ing South Africans with an op­por­tune time to in­vest off­shore, but the step should be taken as part of an over­all strat­egy rather than a mad dash to es­cape po­lit­i­cal un­cer­tainty at any cost, fi­nan­cial plan­ners and fund man­agers say.

There has been a rush to take money out of the coun­try since Pres­i­dent Ja­cob Zuma un­ex­pect­edly axed for­mer fi­nance minister Pravin Gord­han at the end of March, trig­ger­ing two credit rat­ing down­grades that un­der­mined frag­ile busi­ness con­fi­dence.

The rand has with­stood the shock well, sup­ported by cap­i­tal in­flows into emerg­ing mar­kets, which of­fer in­vestors bet­ter yields than those in de­vel­oped economies, in ad­di­tion to what is de­scribed as a “risk-on” global en­vi­ron­ment. (Also see page 22.)

At lev­els of around R13.60 to the dol­lar, buy­ing for­eign cur­rency is far less costly for South Africans than it was a year ago, when the rand was trad­ing at around R16 to the dol­lar. There is a chance it could strengthen

fur­ther, but pos­si­ble shifts in eco­nomic pol­icy and fur­ther credit rat­ing down­grades make that scenario un­likely.

“Now, as it stands be­cause of what South Africans are ex­pe­ri­enc­ing in the po­lit­i­cal sphere, peo­ple are tak­ing much more off­shore,” says De­siree Raghu­bir, a cer­ti­fied fi­nan­cial plan­ner at BDO Wealth Ad­vis­ers. “From an ex­change rate point of view now is a good time, but if there is that panic set­ting in, we would en­cour­age clients to look at their port­fo­lio with­out emo­tion,” she adds.

Stick to strat­egy

Clients of­ten do not know their full off­shore ex­po­sure be­cause many of the top JSElisted shares were al­ready rand hedges, she notes. Raghu­bir adds that it is im­por­tant to en­cour­age them to look at their goals in a holis­tic con­text – such as where they in­tend to re­tire, or if they want to send their chil­dren to for­eign uni­ver­si­ties.

Says Wayne Sorour, head of Old Mu­tual In­ter­na­tional SA: “Peo­ple are look­ing to in­crease their off­shore al­lo­ca­tions but I don’t think a knee-jerk re­ac­tion is a good thing.

“Peo­ple shouldn’t re­act and change their over­all ob­jec­tives or main strat­egy.”

In­dus­try ex­perts say the most im­por­tant rea­son to in­vest off­shore is to di­ver­sify – for bet­ter yields, or sim­ply to take ac­count of the fact that SA makes up less than 1% of the global econ­omy.

Growth is another im­por­tant con­sid­er­a­tion. South African eco­nomic out­put is ex­pected to ex­pand by just 0.8% this year, af­ter in­creas­ing by 0.3% in 2016. Those fore­casts point to bleak earn­ings out­looks for many do­mes­tic com­pa­nies, par­tic­u­larly those in the re­tail and bank­ing sec­tors.

By com­par­i­son, the global econ­omy is ex­pected to grow by 3.5% this year, and emerg­ing mar­kets over­all by 4.5%, ac­cord­ing to fore­casts from the In­ter­na­tional Mone­tary Fund pub­lished last month.

The big ques­tion is: what por­tion of their in­vest­ments should South Africans in­vest off­shore? The most com­mon an­swer is be­tween 25% and 30%, al­though some fund man­agers think it should be closer to 50%. Much will de­pend on the amount of money in­di­vid­u­als have avail­able to spend – those with more funds at their dis­posal can af­ford to take more off­shore, they say.

The next big de­ci­sion is where to in­vest. Con­ven­tional wis­dom says that as South Africa is still a de­vel­op­ing econ­omy with a higher level of risk, de­vel­oped mar­kets like the US, the UK and Europe are the best op­tion.

Fu­ture re­mains un­cer­tain ev­ery­where

But the big po­lit­i­cal events of last year – Pres­i­dent Don­ald Trump’s elec­tion in the US, Brexit in the UK, and the rise of right-wing pop­ulism in Europe – have made the fu­ture of all those coun­tries far less cer­tain, and more volatile.

“I think you would be hard-pressed to find an ex­am­ple of an in­vest­ment process that has been con­sis­tently suc­cess­ful in fore­cast­ing eco­nomic and po­lit­i­cal events,” says Adrian Sav­ille, chief strate­gist at Citadel and chief in­vest­ment officer at Can­non As­set Man­agers.

“There is al­ways risk – all that varies is the level of anx­i­ety. Our abil­ity to fore­cast what is com­ing at us is spec­tac­u­larly low, and that has al­ways been the case.”

Un­sur­pris­ingly, Sav­ille sees value in emerg­ing mar­kets, even for South African in­vestors. The Chilean and South Korean economies of­fer “fan­tas­tic” op­por­tu­ni­ties, while Poland and the for­mer East Ger­many are also at­trac­tive, he says. “I would want to find a good as­set at a good price.”

Fi­nan­cial plan­ners do not think now is a good time to buy US eq­ui­ties as the mar­ket there looks ex­pen­sive fol­low­ing an un­prece­dented bull run af­ter the elec­tion of Trump last Novem­ber.

Opin­ion is di­vided on the mer­its of the UK and Europe. Many be­lieve that the UK will “come right” af­ter Brexit ne­go­ti­a­tions are over – but it is clear now that the EU wants to pun­ish the coun­try for opt­ing out.

The UK could face a Brexit bill of up to €100bn and there are re­ports cir­cu­lat­ing that UK Prime Minister Theresa May will not be al­lowed to ne­go­ti­ate di­rectly with her Euro­pean coun­ter­parts.

“Peo­ple shouldn’t re­act and change their over­all ob­jec­tives or main strat­egy.”

Rhyn­hardt Roodt, fund man­ager at In­vestec As­set Man­age­ment, rec­om­mends Europe as an in­vest­ment des­ti­na­tion, say­ing that once the pol­i­tics have “washed away”, it presents a value op­por­tu­nity – the eco­nomic cy­cle there is less ma­ture and cor­po­rate bal­ance sheets are in bet­ter shape.

“With a bit of a tail­wind Europe would be a much more in­ter­est­ing and com­pelling des­ti­na­tion,” he main­tains.

Sav­ille thinks other­wise. A “col­lec­tive sigh of re­lief” breathed af­ter pop­ulist can­di­dates lose this year’s elec­tions could be short-lived as they will still pose a risk at polls in a few years’ time, he warns.

Move money off­shore

Amid all the volatil­ity and un­cer­tainty, Raghu­bir says a good strat­egy is sim­ply to move money off­shore and let it sit there for six months or a year while op­tions are weighed up. “Now is a good time to take cash off­shore but it is not nec­es­sary to lock it into cer­tain in­vest­ments. There is no rush, it’s a long-term in­vest­ment strat­egy,” she adds.

For South Africans whose tax af­fairs are in or­der, the process is straight­for­ward – they must ap­ply for for­eign al­lowance clear­ance and get ap­proval from the Re­serve Bank. (Also see page 24.) It can all be done on­line and the process can be com­pleted within 24 to 48 hours, al­though the trans­ac­tion has to be placed through an au­tho­rised dealer.

Caps on the amount of money which can be taken off­shore are of lit­tle con­cern to most South Africans – in­di­vid­u­als can move R11m each year and of that sum, R1m is a “dis­cre­tionary” al­lowance which does not re­quire any ap­proval or tax clear­ance.

Once the funds are off­shore, an in­di­vid­ual can make a con­sid­ered de­ci­sion on where to al­lo­cate it – prefer­ably with the guid­ance of a fund man­ager who has the per­spec­tive and ex­per­tise to mon­i­tor the in­vest­ment on an on­go­ing ba­sis.

To make a for­eign cur­rency in­vest­ment an in­di­vid­ual should have at least $10 000 at their dis­posal, which is the min­i­mum for a unit trust pro­posal, Raghu­bir says. To ac­cess a share port­fo­lio is far more

What por­tion of their in­vest­ments should South Africans in­vest off­shore? The most com­mon an­swer is be­tween 25% and 30%, al­though some fund man­agers think it should be closer to 50%.

costly – the min­i­mum amount is nor­mally around £75 000 to £100 000 or the dol­lar equiv­a­lent.

As­set-swap route and off­shore life wrap­pers

But there is a much eas­ier route that al­lows in­di­vid­u­als to in­vest off­shore us­ing lo­cal cur­rency with as lit­tle as R500 a month, Raghu­bir points out. The money can be in­vested in a rand-de­nom­i­nated as­setswap fund – a unit trust which uses the com­pany’s ca­pac­ity to in­vest off­shore.

There is no need for for­eign ex­change al­lowance clear­ance or Re­serve Bank ap­proval and no lim­its to the money which can be in­vested off­shore – but it must be repa­tri­ated to SA in the fu­ture, and will be paid out in rand.

For those who want di­rect off­shore ex­po­sure, there are a num­ber of con­sid­er­a­tions which need to be taken into ac­count, says An­drew Brotchie, man­ag­ing di­rec­tor of Glacier In­ter­na­tional, a di­vi­sion of Glacier by San­lam, which makes global funds avail­able to lo­cal in­vestors.

In a pub­lished note to fi­nan­cial plan­ners in March, he sug­gests us­ing an off­shore life wrap­per, or en­dow­ment struc­ture, is­sued by a South African life com­pany. This means that an in­vestor doesn’t have to cre­ate an off­shore es­tate, which would re­quire an off­shore will and the ap­point­ment of an in­ter­na­tional rep­re­sen­ta­tive to help wind up their off­shore es­tate – a costly and time con­sum­ing process.

It would also en­sure that an in­vestor’s es­tate is not sub­ject to for­eign in­her­i­tance tax, which can be as high as 40%.

“In­vestors in a life wrap­per can sim­ply nom­i­nate a ben­e­fi­ciary or ben­e­fi­cia­ries – ei­ther for the plan to con­tinue to be in­vested in the ben­e­fi­ciary’s name or for the in­vest­ment to be paid out, in which case the pro­ceeds will be paid di­rectly to the ben­e­fi­ciary and not be de­pen­dent on the es­tate be­ing fi­nalised. The pro­ceeds will also not at­tract any ex­ecu­tor’s fees,” he wrote.

In­vest­ing through a life wrap­per means that the South African life com­pany is re­spon­si­ble for the cal­cu­la­tion, col­lec­tion and ad­min­is­tra­tion of any tax due. This means that the in­vestor has no ad­di­tional per­sonal tax li­a­bil­ity or ad­min­is­tra­tion. Also, the tax paid by the life com­pany could be less than they would pay in their per­sonal ca­pac­ity.

A good strat­egy is sim­ply to move money off­shore and let it sit there for six months or a year while op­tions are weighed up.

Pres­i­dent Ja­cob Zuma

Wayne Sorour Head of Old Mu­tual In­ter­na­tional SA

De­siree Raghu­bir Cer­ti­fied fi­nan­cial plan­ner at BDO Wealth Ad­vis­ers

Adrian Sav­ille Chief strate­gist at Citadel and chief in­vest­ment officer at Canon As­set Man­agers

Rhyn­hardt Roodt Fund man­ager at In­vestec As­set Man­age­ment

David Lewis Di­rec­tor of Cor­rup­tion Watch, a lo­cal chap­ter of Trans­parency In­ter­na­tional

An­drew Brotchie Man­ag­ing di­rec­tor of Glacier In­ter­na­tional

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