South Africa’s economic environment is fraught with challenges.
South Africans have become increasingly anxious over issues such as high unemployment, pedestrian growth, bailouts of state-owned enterprises and the slow implementation of President Cyril Ramaphosa’s “New Dawn”, says Jeff Miller, the chief executive of Grovest Corporate Advisory.
But, he says, it would be naive to think that any person could wipe out the devastation of the past 10 years in one fell swoop.
It would also be naive to think that South Africa is unique in the world and that other foreign markets do not have their own problems, says Miller.
“Savvy South African investors are hedging their bets and taking some of their portfolios offshore.”
However, says Miller, many local investors also understand that if they live, work and play in South Africa, a material part of their portfolios should be invested here. “These types of investors should increasingly look to alternative asset classes that offer risk-adjusted returns.”
He says that one of these alternative asset classes - which prices in the risk of rand devaluation - is section 12J, which has more than R6billion in assets under management.
Investors into a registered section 12J company are entitled to a 100 percent deduction of their investment from their taxable income in the year in which the investment is made. This gives investors a tax benefit of up to 45 percent on their investment, says Miller. Taxpayers may invest a maximum of R2.5 million, in any tax year, into a registered section 12J company, he says.
“Because section 12Js typically feature predictable cash flows from their underlying investments, as well as solid asset underpins, it’s common to see these funds offering high yields and reliable dividends.
“Not only are investors earning risk-adjusted financial returns, but, by investing in small and medium-sized enterprises, they are playing a crucial role in creating direct and indirect jobs, while further growing the tax base of our country.”
To illustrate the benefits of 12J, Miller provides the example of an investor who is paying tax at the marginal rate of 45 percent injecting R1m into a section 12J fund when the exchange rate is $1/R15. The inherent risk-adjusted exchange rate for this investor as a result of the section 12J benefit would be $1/R27. This is an 80percent buffer.
Miller says South Africa’s tourism industry is a key example of a sector that has a built-in hedge for a weak rand, and there are many hospitality-focused section 12Js from which to choose.
Miller says another opportunity is solar energy and battery storage.
“Section 12J funds in the renewable sector offer reliable and consistent cash flows, as well as high yields. This is particularly the case when considering that more companies and body corporates no longer want to be reliant on the Eskom grid. This situation helps to lock in future renewable energy prices, while supporting a transition to these new green technologies and the creation of much-needed jobs in this space.”