1. Diversification mitigates portfolio risk
The primary advantage of offshore investing lies in the diversification it offers across countries, industries, companies, asset classes and currencies. Diversification effectively mitigates portfolio risk while maintaining the same expected rate of return, resulting in a more optimal portfolio structure through the dispersion of risk across multiple investments. South Africa’s contribution to the global GDP stands at approximately 0.5%. Consequently, many South Africans have limited exposure to offshore investments. Typically, South Africans possess primary residences, with some also owning secondary vacation homes or investment properties within the country. Their employment is often centered in South Africa and some may even have their own businesses. Ultimately, the majority of their assets and income/salary are heavily concentrated within a single country. Irrespective of one’s country of residence or personal stance on a country’s economic growth, it is prudent to distribute risk across various asset classes, countries and currencies.
2. Foreign equity consistently outperformed the JSE stock exchange
The graph presented below illustrates the returns of different asset classes across multiple time periods. It is apparent that while foreign equity occasionally experienced brief periods of underperformance compared to other asset classes, it has consistently outperformed the JSE stock exchange over the last 5, 10 and 15 years in the long run.
Figure 1: Average unit trust category returns in South African rand (June 2023)
3. Since 2000, the rand weakened by 5% p.a. against the US dollar
The impact of the rand on various investments varies depending on the specific holdings and fluctuations in the rand’s value, known as currency risk, can have either positive or negative effects on portfolio returns. Taking into account how movements in the rand affect different components of an investment portfolio can help ensure the achievement of investment objectives despite currency volatility.
A depreciating rand generally benefits offshore investments. For instance, if one has savings in an offshore bank or engages in forex trading, a weakening rand relative to the invested currency would result in positive returns when measured in rand. In other words, if an individual purchases US dollars at an exchange rate of R14/US$, their return will be positive if the rand weakens to R20/US$ (indicating a weaker rand), but significantly lower if the rand strengthens to, for example, R7/US$.
The South African rand has experienced a consistent weakening trend against most currencies, with the US dollar (USD) appreciating by an average of more than 5% per year against the South African rand. In addition to offering diversification benefits, the USD has consistently outperformed the ZAR over an extended period of time.
Figure 2: USD/ZAR exchange rate since 01.01.2000 – 30.06.2023
4. Gaining exposure to growth opportunities
The equities listed on the Johannesburg Stock Exchange (JSE) constitute merely 1% of the global equity market capitalization. Consequently, investing solely in South African equities would result in missing out on 99% of the global equity universe. Offshore investments provide clients with the opportunity to access themes and sectors that are not readily available within South Africa, such as Cybersecurity, Robotics, Medical Devices, Technology, Smart Infrastructure, Genomics, Cloud Computing, Artificial Intelligence, Aerospace and Defence.
Residing in an emerging market like South Africa, diversifying into developed markets can prove highly advantageous. These markets are influenced by distinct macroeconomic factors, offer more stable growth prospects and grant exposure to various sectors with hard-currency exposure. Simultaneously, rapidly expanding emerging markets, particularly in certain Asian economies, present lucrative growth opportunities. By expanding one’s portfolio beyond the domestic market, the probability of achieving superior returns is significantly enhanced.
5. South Africa’s economic outlook remains weak
Continuous power outages, rampant crime, pervasive corruption and deteriorating national infrastructure have an immeasurable negative impact on South Africa’s potential for economic growth. Promised reforms often fail to materialize and the governing party’s public alliance with Russia raises concerns. Regardless of how the African National Congress (ANC) attempts to address these issues, any potential market revaluation (from currently depressed levels) is likely to occur only in the context of a stronger global economy and a weaker US dollar. Secondary sanctions, amidst heightened geopolitical polarization, have created reluctance among potential investors to allocate resources to the country.
South Africa’s greylisting status carries significant implications for economic growth and global competitiveness. Being greylisted means that all transactions involving South African companies and individuals are viewed as high-risk, resulting in increased compliance requirements, administrative burdens, and potentially discouraging investment and trade with South Africa. According to a report by the International Monetary Fund (IMF), greylisting leads to a significant reduction in capital inflows, and for vulnerable countries, it can even trigger a balance of payments crisis. South Africa could potentially be removed from the grey list within a period of two years if the government and the private sector collaborate to take decisive actions addressing the concerns raised by the Financial Action Task Force (FATF).
In 2022, South Africa experienced a record number of days with loadshedding. Calculations indicate that stage 6 loadshedding costs the country approximately R 200 million per day. The South African Reserve Bank estimates that loadshedding is responsible for a 2% reduction in the country’s GDP growth.
While there are still some opportunities in South Africa, we believe it is crucial for investors to allocate a substantial portion of their assets to global markets, considering the aforementioned threats. However, we acknowledge that a portion of an investor’s portfolio should still include South African assets.
Our solution
There are numerous favorable factors for South African investors considering long-term investments in global markets. At VEGA Asset Management, we offer a distinctive service that entails opening a Swiss bank account in each client’s name, which we then manage in terms of investment activities. Additionally, clients have the option to utilize the Swiss bank account for transactional purposes. Through this account, we can invest in most globally listed shares and hold cash in various currencies. Moreover, the account can serve as a platform for investing in a range of financial instruments, including structured products, bonds, and options, among others. The primary challenge for investors lies in not allowing short-term fluctuations in portfolio value to impact their decision-making. Rather than fixating on the daily share prices of companies, it is advisable to focus on factors such as revenue and earnings growth, profit margins and debt levels. These indicators provide a more reliable assessment of a company’s potential as a sound long-term investment.
In the words of Warren Buffet, “The stock market is a device for transferring money from the impatient to the patient.”
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