Financial Mail - Investors Monthly
OFFSHORE BECKONS
Do proper research before investing overseas
As capital floods offshore due to local risks, investors accessing global markets must consider broad international risks as well as specific localised factors when investing in preferred jurisdiction and asset classes in order to balance risk and returns.
Manoj Soni, chief investment officer at Capricorn Private Investments, says various risks currently affect international markets. These include Brexit uncertainty, the escalating US-China trade war, low growth in Europe and rising nationalist tendencies.
“While the US market remains robust amid rising global volatility, the Trump administration’s tone and priorities are shifting towards inward-looking policies. It is also pertinent to acknowledge the cyclical nature of economic events, considering it has been 10 years since the last global recession.”
Soni believes the global economy has reached an inflection point in its cycle. “So our focus is shifting to capital preservation.”
Chris Potgieter, CEO of Old Mutual Wealth Private Client Securities, says not all offshore markets are equally attractive right now, as certain sectors and geographies offer better fundamentals and valuations.
“Investors should never rush into offshore markets due
to panic or greed, and they shouldn’t attempt to invest offshore without credible investment advice.” Franita Neuville, market development manager: investment and advisory, Middle East and Africa at Refinitiv, highlights several additional risk factors to consider when investing offshore, including currency volatility and liquidity constraints in smaller markets.
“Opaqueness in foreign markets, companies and funds poses risks for foreign investors, who must rely on the information made available through company websites and news sources. Locally based investors usually have regular interaction with company management, and there is an advantage that comes with local on-the-ground knowledge. Foreign investors should consider incorporating alternative data into their decisionmaking to augment traditional company information and accurately compare companies and funds on a global scale.”
Doug Abbott, country head of Schroders in SA, says large global firms are investing heavily in resources that provide investment teams with accurate data to augment the traditional research they already use. “Schroders, for example, has a team of 26 data scientists who assist investment teams with research into companies.”
Access to information is imperative when investing in emerging markets, says Neuville. “While potential returns in emerging markets can be attractive, these markets often carry increased risks because reliable economic or company-specific data is often harder to come by. Emergingmarket assets are often also more susceptible to external and internal shocks, which leads to increased asset price volatility.”
Additional yet vital global investment risk considerations include tax liabilities and estate duties associated with the jurisdictions and structures investors choose to invest in. Elana Nel, director in the tax advisory division at Stonehage Fleming in SA, says SA tax residents are taxed on their worldwide income, including investment income.
“SA tax residents should give due consideration to structures that legitimately minimise their tax liability and the administrative burden associated with tax returns, and foreign inheritance taxes.”
Potgieter says that investing via an asset swap won’t require a tax clearance certificate, but investors will be liable for capital gains tax (CGT) on the initial rand investment, and tax will apply on interest and dividends.
“Using foreign currency to invest will also attract tax on interest and dividends. However, investors may save on CGT, as gains due to currency movements are not taxable while invested. When an investor sells investments bought in foreign currency, the foreign capital gain or loss is first assessed, then translated into a rand value, using either the average exchange rate or the rate on the date of sale.”
In terms of estate planning, Nel says investing in a foreign equity fund, rather than buying equities directly, could shield the investor from foreign inheritance tax — depending on the jurisdiction.
“The main problem with foreign inheritance tax is that the investor’s estate will also be liable for estate duty on these investments in SA. Though the estate can get credit for foreign inheritance tax already paid, if the amount is higher than SA estate duty, the estate will have effectively incurred a higher tax rate.”
Trusts can be used to reduce estate duty for future generations because only assets in a personal estate are subject to estate duty.
“If you bequeath your assets to a trust on death, though there will be estate duty on your death, there won’t be any future estate duty on those assets,” Nel says. ●