Global shares are relatively cheap and offer more choice
The local stock market has had an exceptional 10 years and the rand has remained strong. Under these circumstances, should South Africans consider investing offshore?
"Absolutely," says Debbie Netto-Jonker, partner at Netto Financial Services. "SA represents about 1% of the world economy. Even though you may be living in SA, it does not make sense to invest all your assets in an economy which makes up only 1% of the world economy."
"There's a strong incentive to take more money overseas now," says Glenn Silverman, global chief investment officer of Investment Solutions. "We think the rand is starting to look expensive, and global equities are arguably less expensive than local equities. There are also tens of thousands of global stocks compared with the less than 100 liquid stocks in SA.
"It's my sense that, over the next three to seven years, developed markets will be the place to be. Emerging markets have run hard, face some inflation problems, have attracted 'hot flows' and always face certain political risks, evidenced in certain parts of the world. I think developed market equities will provide similar returns, but with arguably less risk."
Silverman says there are both political and corporate governance issues in emerging markets. "Having said that, there's no doubt emerging market economies are in better shape than in the West, with less debt, more savings, less federal deficit and fewer banks in trouble. But they have outperformed for a long time, and if they offer equal returns, I'd prefer less risk."
Investors need to look at their overall requirements and asset allocation in terms of what to hold in shares, bonds, property, bonds, cash and offshore.
Those investors who intend spending more of their time or money and who take longer-term investment views could allocate a greater portion of their investments to offshore markets. Investors also need to consider the size of their disposable assets and personal risk appetites.
Silverman doesn't think it's reckless for wealthy people to have up to half of their assets overseas.
Offshore investment performance is dependent on the price of the underlying markets and the exchange rate, and exchange rates are volatile over the short term, so investors must have a long-term view, says Netto.
In fact, investors who've placed money overseas in the past 10 years have not much growth to show for it. Over this period, the returns of local compared with overseas markets show a huge gap - 18% against 2%.
Timing is everything. Often people invest as the rand shows a sharp decline. "This is usually the worst time to invest, but investors, unfortunately, often panic in these situations and thus end up investing at 'bad' times," says Netto.
Asked if one should have a certain amount of money before considering investing offshore, Netto says: "No, having a certain amount of money or disposable income is not relevant." It should be part of a holistic process from the day an investor starts to save. People should not try to time the market, but rather invest in a strategy that includes the appropriate portion of offshore investments.
"But as to when to increase your global proportion of offshore investment depends on your view of the rand and evaluation of local versus global equities," says Silverman.
How much to invest offshore depends on your retirement goals . Financial planners say 20%-30% of your portfolio should have offshore exposure.
HOW TO INVEST OFFSHORE:
- Buy shares in a South African company that earns a significant part of its income in foreign currency. This will provide you with some currency hedge;
- Invest in a locally registered unit trust, endowment, retirement annuity or pension fund that has some investment offshore. It will invest your money in overseas shares, bonds, property and cash. It's a fairly cost-effective way to access international investments without taking money offshore and pays a rand equivalent of the gains locally; and
- Apply to the SA Reserve Bank to put up to R4-million per taxpayer in foreign investments and sink the money in international assets. This would probably be done through an international manager, and offers flexibility and control, as well as greater risk. This would require your tax affairs to be in order because, to access your overseas allowance, you would need a tax clearance certificate from SARS.
