Making a case for offshore investing
State capture, corruption, land expropriation without compensation. These are all terms that have become part of the South African lexicon and part of our daily reality. According to the recent 2020 Bloomberg Misery Index which ranks major economies by inflation and unemployment expectations, South Africa is the third-most miserable economy in the world. Not surprisingly, the Rainbow Nation’s economy is ranked only after Venezuela and Argentina.
“With this backdrop, it is not hard to see why offshore investing has become such a popular topic in meeting rooms, on Zoom calls and around the braai,” says Johann Rossouw, Associate Financial Planner and Certified Financial Planner at Fiscal, a Cape Town based wealth management company.
Rossouw explains: “To understand the merits of investing offshore, it is important to grasp the concept of diversification. Diversification is a strategy that mixes a wide variety of investments within a portfolio to reduce a portfolios risk/volatility. A diversified portfolio contains a mix of distinct asset types in an attempt at limiting exposure to any single asset or country/region. Diversification is the embodiment of the old saying don’t put all your eggs in one basket.”
South Africa contributes less than 0.5% to the World’s Gross Domestic Product (GDP) – meaning, South Africa is a small component of the global economy. South Africa also has a small universe of shares to select from. Fast-growing global industries like biotech and sustainable energy, for example, are under-represented on the JSE in Rossouw’s view. He says by focusing on the South African market, investors miss out on global giants like Apple, Facebook, Google, and Microsoft.
“From a diversification point of view, it does not make sense to put all your eggs into one basket at the tip of the African continent. Instead a much more prudent approach would be to spread your investments across various geographies,” advises Rossouw. This can be done in the following ways:
A feeder fund is a rand-priced investment fund that allows you to gain offshore exposure without converting the currency or making use of your Single Discretionary Offshore Allowance. This is the easiest way for South Africans to obtain offshore exposure.
Direct offshore exposure:
A single discretionary allowance within a limit of R1 million per calendar year is available to all South African residents who are 18 years and older, and in possession of a valid green bar-coded South African identity document or smart identity document card. This means that each South African can transfer R1 million offshore, without obtaining a tax clearance certificate.
A tax-payer in good standing and over the age of 18 years, can invest up to R10 million in his/her name outside the Common Monetary Area (CMA-Lesotho, Eswatini and Namibia, including South Africa), per calendar year. A Tax Clearance Certificate (in respect of foreign investments) must be obtained for amounts between R1 million and R10 million.
By making use of these allowances, you can physically externalise your funds and invest in foreign-denominated investments.
“There are various implications of investing offshore and you should always obtain proper, impartial financial advice before making any decisions on which investment vehicle or underlying investment fund to choose. The case for investing offshore will, however, only grow stronger in a globalised world,” concludes Rossouw.