Investing Offshore – First Ask Why

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Offshore Investing – First ask why -(then where and how).

Whenever SA Inc has a wobble, South Africans worry that we are going the same way as our neighbours to the north and look to moving some of their nest egg offshore (or moving themselves out altogether). It’s all very well to dismiss this as a kneejerk reaction, but those fears and doubts are very real and personal, so let’s take a look at the pros, cons and possible pitfalls.

Whenever you make a new investment, and an offshore investment is no exception, it is very important to determine the end-use objective of the investment – that will be the primary determinant of how it should be invested. To put it very simply, the objective will determine the timeframe and the need to protect or grow capital – and the asset classes that should be used to achieve this. Short-term investments usually need to be liquid and preserve capital, so cash and bonds are used. Long term investments, on the other hand, can have less liquidity, and ride out the cycles in the stock market to optimise the growth of that capital over a decade or more.

Before we look at the different investment objectives, let’s look at some of the realities of offshore investing. In all investing (local or offshore) there are 4 basic asset classes: Cash, Bonds, Property and Equity. Currency mixes everything up! Basically, it acts as a ’multiplier’. Think of it like this:

  • Rand depreciates and your offshore investment grows at about the same rate – effectively (in Rand terms) your investment has ‘doubled’.
  • Rand depreciates but your investment shrinks – these counteract each other and your growth is flat.
  • Rand appreciates and your investment shrinks – you will get a double downward whammy.

 

Another factor that will impact your offshore investment is inflation. In the West, inflation is so low that disinflation is a very real threat. Interest rates are used to keep inflation under control (the ‘monetary policy’ of central/reserve banks), and these have been in the low single digits for over a decade (and in some instances have actually gone negative). The UK has seen a ‘welcome’ bump up in their inflation, but that is thanks to GBP depreciation as a result of Brexit. Cash and Bond returns of your offshore investments will probably be minuscule, and after bank or investment fees could well be negative. This puts you in a quandary if you want to preserve your capital and get it to grow even at just inflation without risk.  Although the Western stock exchanges have been doing quite well (especially in the last 6 months) the days of double-digit stock growth are rare post-2008.

Currency values do not move rationally, they are the playground for day traders, and the Rand volatility makes our currency one of the favourites for these gamblers. Having said that, the gradual depreciation of the Rand over decades is largely due to the large inflation disparity between us and the West. Even at our 6% inflation, we are consistently 4% above developed nations, so it is can be expected that we will continue to depreciate by this difference over the long term.

Let’s look at the different ‘objectives’, and how to structure your investment accordingly:

Emigrating: If you have made this decision, then partner with someone who knows the Reserve Bank regulations so you can start moving your money out – the sooner you start it the better. If you formally emigrate (as opposed to leave and live or work outside the country for a while) then this is considered a Capital Gains Tax event on all your assets, even if you leave them here. This tax will be due on investments, and property (especially property that is not your primary residence). If you are not formally emigrating but want to top up your retirement bucket by working in a tax-free/friendly country, beware of the changes in regulations that are on the cards which will bring you back into the SA tax regime and will be a game changer.


Retiring Overseas: The most important decision to make here is what country are you going to retire in – and invest there and in that currency (rather than just defaulting to the Dollar for example). This aligns the purchasing power of the investment with the currency you will be using in the long term from the very start so that your expectations are met.

Doomsday Nestegg: All of us are familiar with Zimbabweans who lost everything when they left the country, but you are probably aware of many more who made some astute decisions long before they left and are okay. Personally, I don’t think we are going to go down the Zimbabwe route (and I have lived in a number of African countries that have had their fair share of wobbles (Rwanda, Burundi for example)), but this is a very personal and emotional decision and I am not going to try and persuade anyone to change their mind. In Zim, and other ’emerging market’ countries, the biggest potential problem is inflation going out of control and decimates any investments, including pensions for example. Holding property in Urban areas appears to be safe from confiscation without compensation (unlike farms for example), but you never know. It will also keep up with inflation. If you’re worried, then use the forex allowances available to you now as money becomes available (before they start reducing them, which is a very real possibility if the government feels that too much money is leaving the country.) You can always bring it back if you change your mind.

Offshore legacy for your children: If you’re not too worried about the short/medium term but fear for your children and grandchildren then there are ways to address that. The best legacy you can give your children is a decent education, and looking after yourself so they don’t have to so keep that in mind before overextending yourself on any legacy (local or offshore). In other words, don’t focus on their legacy and not look after your retirement or fail to insure yourself against disability or incapacity due to dread disease when you’re older. One elegant way of filling this need is with an offshore life policy, with the premium being paid here (without you having to do the PT), but the pay-out is offshore in Dollars (I am not going to give free advertising to providers here, but you’re welcome to contact me if you want to know how you can do this).

Rand hedging: If you want to protect your investments against the devaluing Rand you can invest offshore, you can get plenty of hedging right here at home with many of our blue-chip shares with offshore exposure ( Anglo, Naspers, Richemont). If you’re buying Local Rand or Dollar denominated offshore unit trusts, or even completely offshore Unit Trusts and Trackers, have a very good look at their fees before you sign-up. These could be gobbling up your growth. Offshore Stock Market growth has been running at 2 to 4% over the last decade. If the unit trust takes 2% in fees (very common), then bag goes your market growth, and the only growth you’re going to get is if the Rand appreciates and you bring it back.

Action: When investing offshore try and separate your emotion from the investment decision and be well aware of the potential downside if you “guess” wrong.

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Author Dawn Ridler ©

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