OVERSEAS INVESTMENTS: TIME FOR SOUTH AFRICANS TO BE PROACTIVE
As the saying goes, “The best time to plant a tree was 20 years ago. The second-best time is now”. The same can be said for South Africans investing overseas.
When it comes to investing off-shore, the misconception is that there is no real benefit of investing abroad or that it just serves to complicate matters, often meaning that South Africans avoid the option all together; some even go so far as to misconstrue foreign investments as tax-evading schemes.
This article looks at the advantages and disadvantages of investing overseas, and why many South Africans are resistant to the idea of offshore investments.
There are 3 rules to investing: diversification, diversification, and diversification.
One of the biggest advantages of having an offshore investment is diversification of assets. As a South African, this is important given the struggling economy at present, with poor economic growth, a weak currency, downgrades from credit rating agencies and political instability.
In global terms, South Africa’s economy is small, contributing less than 0.5% of global GDP. Investing internationally enables clients to access almost any geographic region, asset class, industry, and currency.
Additionally, investing into global markets offers greater growth opportunities as people are able to invest in developed markets and other growing economies. South Africa is still an emerging market, and so having exposure to global markets allows your investment to be exposed to companies throughout the developed and developing world.
Offshore centres, such as the Channel Islands, are widely used and are accessible to anyone who can meet the minimum investment amount, or pay the fees required to open such an account.
Investing offshore can be a very unnerving exercise, and it is crucial to make use of the correct investment vehicle and underlying investments in order to maximise the effectiveness and growth of your offshore investment.
Advantages of offshore investments:
- Investment diversification: research has shown that diversifying your investments across different geographic regions, asset classes, industries, and currencies is an effective way to decrease portfolio volatility, and thereby improve returns overall.
- Hedging against currency depreciation: investing in stable, offshore locations protects the wealth of investors against the decline of the local currency. The erratic movements of the Rand, which has declined by over 8.5% to the Pound (GBP) since the start of the year alone, makes the South African financial market an unstable and undesirable investment location, thus warranting the need to invest offshore in order to hedge the risk.
- Specialist financial services: the leading offshore centres have highly developed financial services sectors with expertise in stockbroking, asset management, banking, insurance, trusts, funds and legal services. Investors that require overseas investments could access these by taking their funds offshore into a safe jurisdiction such as Guernsey, Jersey and the Isle of Man.
The Disadvantages of offshore investments:
- Cost: investing in overseas markets can be a costly process. Depending on the location, the minimum requirement to set up an offshore investment could easily be upwards of $50,000.
- Tax laws are tightening: governments are increasingly aware of the tax revenue lost to offshore investing and have created more defined and restrictive laws that close tax loopholes. As these perceived benefits from offshore investments diminish, the opportunity cost of holding them increases, thus making them less desirable.
- Risk: offshore investing may be seen as risky by some, especially when investing in equities. Risk profiles and risk parameters must always be taken into consideration for any offshore investment.
There are great benefits in investing abroad, especially with South Africa’s economic and political climate inhibiting the ability to receive high returns from local investments. Investment planning for significant future expenditures, such as retirement, can help clients achieve their medium to long term growth targets.
However, the scepticism surrounding South Africans investing offshore is something that needs to change. With the right guidance from a qualified and experienced adviser, the advantages of investing offshore allow for greater benefit in the long run, especially if one considers the current economic climate that South Africa is facing.
Contact Northern Cross Wealth Management on:
+27(0) 21 200 5858.