South Africans are experiencing growing frustration over the current economic and political instability in South Africa. With the increased implementation of load-shedding, the economy is under pressure and the rand is weakening.
Lifestyle challenges coupled with the difficultly of maintaining a fully operational business has become a reality for South Africans. It is during turbulent times like these when South Africans and investors start losing confidence in the volatility of domestic currencies and want to explore alternative investment strategies to international markets in order to safeguard and grow their wealth.
Investing offshore enables one to spread their investment risk across different economies and regions. It also gives investors access to industries and companies that may not be available locally and over the longer term, can yield a good return. In many ways it is a ‘safehaven’ that can ease the worry for investors who stay in it for the long term.
Pretoria based Financial Planner and offshore investment specialist, Eric Streso offers the following considerations on diversification for investors wanting to put their wealth offshore.
Research and understand the funds you are looking to invest in. Ideally an investor should be allocating a portion of his/her wealth into offshore funds with a clear understanding of the fund strategy and prospectus. Find out how accessible the funds are and to what degree does securitisation protect investor capital through diversification.
Don’t put all your eggs in one basket. Diversification is the name of the game! The funds that you allocate wealth to should have access to all asset classes and multiple strategies. Spreading your investment across different industries, currencies, countries etc. are all factors of diversification and risk.
A strategy of splitting between different funds in property, equity, cash and bonds is a more conservative and low risk investment in that it provides access to the broader market. Investing is much like that of a horse race. If you pick one horse, it has to win, or you will lose all, but if you pick the field with different odds, you don’t lose even if that one does not win.
The rand is fluctuating. Trying to time exchange rates is an impossibility. Once you’ve decided to invest offshore, you should assess the economic and political climate in that 5-14 day period and analyse potential movement through historic data. An investor will certainly gain from the exchange rate over time, however the exchange rate is not the only reason for investing offshore. Exposing your hard earned funds to 1st World Economies is most certainly another good reason. You should also get good USD returns offshore to make your investment work for you. Every depreciation becomes profit for the investor.
Offshore investing should never be reactive, but rather proactive. Think of your investment as a long term one. On pure inflation values, the Rand should weaken between 4%-6% per annum.
This number changes significantly with political and economic risk factors pertaining to South Africa. We should see a Rand / USD exchange of R16 within three years by just an inflationary depreciation, however no statistical consistency is ever achieved. Much like a cricket player that does not always bat to his average. We do find that over time statistical data does however show a clear picture.
Planning for the future. South Africa is an emerging market. Political risk of investing in the country, such as, state capture, corruption, legislation, Reserve bank & SARS legislation, has a direct impact on market performance. Naspers as a single share makes up approximately 20% of the entire SA Index. Should anything go wrong with it, it would be a disaster for the markets.
“Eskom impacts every business in SA, which has many commentators on edge as to what we can expectant for the SA market. Some of these commentators are predicting the SA Index to be less than 50 000 in 3 years. This entails a 5% - 10% drop from where it is today,” says Streso.
Eric strongly recommends that investors seek the professional expertise of Financial Planners that have experience in working with credible offshore funds.
“Offshore investment is not a ‘quick fix’ to make money, one must expect to remain committed for an extended period to really make their investment work for them,” he concludes.
Eric Streso holds 2 Law degrees, an international MBA in Financial Services, and is a Certified Financial Planner through the FPI.