Easy ways to invest offshore, and why you might want to do it
Your questions answered, continued.
As the end of the year approaches, people are starting to do some reflecting, thinking about their plans for 2014, what they want to achieve, and of course, how they want to invest. Hopefully, these questions and my answers will give you some ideas about what to do with your money going forward.
Over the last year or so, offshore investments have paid off big time for South African investors. Thanks in part to very strong performances by various offshore markets, and in part to the depreciation of the rand relative to the dollar, euro, and pound, South African offshore investors have enjoyed returns of around 35%. Naturally enough, many South Africans are now asking themselves, “Should I go offshore?” But this is easier to ask than it is to answer.
Investing offshore is always a tricky proposition for South Africans. There are government rules and restrictions on buying offshore assets, there’s the risk of currency swings, and there’s the challenge of figuring out what assets to buy. Navigating all of this can be a challenge, especially for a retail investor, but it can be done.
First, let’s consider government rules and restrictions, which pose less of a challenge than you might think. South Africans are permitted to invest up to R4m offshore every year, subject to tax clearance from the Reserve Bank, and up to R1m a year without tax clearance, although the investment needs to be registered with the Reserve Bank. You’ll need to invest through an “Authorised Dealer,” but since all South African banks and many other institutions are authorised dealers, this is easy enough. If you have more than R1m to invest in a given year, you can probably afford to talk to a specialised financial adviser, and should do so. If you have less than R1m, there are many ways that you can invest offshore using your allowance with a minimum of bureaucratic fuss.
The big question, then, is should you be investing? There are a lot of reasons to go offshore. For example, most experts expect that developed markets (like the US) will outperform emerging markets (like SA) in the next few years. Investing offshore is a good way to get a piece of that growth and to hedge against weak growth in SA. Offshore investing also helps diversify your portfolio. If you only buy domestic assets, all your eggs are in the South African basket, and any problems with the SA economy will punish you. If you invest offshore, you diversify, so that you are exposed to more than one economy. Hopefully, if SA underperforms, the other economies you have invested in will ensure that your portfolio isn’t ravaged.
Offshore investment is also a way to hedge against currency risk. If you hold South African assets that are denominated in rands, then when the rand depreciates, you assets are worth less (in the sense that they can buy less stuff). Holding assets that are denominated in dollars, euro, or pounds can hedge against that.
On the downside, some people think that now isn’t a good time to invest offshore, because the rand has depreciated a great deal in the last eighteen months, and global markets have had a strong run. Investing now may mean that you are getting to the party late. Certainly it is possible that the rand will depreciate further and that global markets will continue to perform, but there is always the risk that they won’t.
If you do decide to invest offshore in order to hedge against domestic risks and diversify, there are many easy ways to do so.