Why South Africans are investing offshore
South Africa’s slow economic growth makes a good case study for offshore investments
South African investors are buying into global investing. Day to day, we interact with local investors who have embraced investing in global companies as a key pillar of their long-term investment strategy.
At first glance this may seem strange. After all, we are geographically (and, for a long time, politically) isolated from the rest of world. Many believed that we were so inwardly focused we didn’t really look too far beyond our borders. This is changing.
Pragmatism over patriotism
The reasons behind the recent push to invest offshore is more a case of a pragmatic assessment of the available investment options than unpatriotic sentiment towards SA.
For one, most of the JSE-listed companies, especially the blue-chip Top 40, are global companies that just happen to be listed locally. Naspers, BHP Billiton, British American Tobacco, Richemont and Bid Corporation, among others, all derive the bulk of their profits from foreign jurisdictions, and so local investors are realising that we are actually global investors, even when we buy local shares.
We are actually global investors even if we buy local sharesNesan Nair
The concern, though, is that these companies have a narrow focus. For example, Naspers’s holding in Tencent is focused just on online and gaming investments in China, not necessarily on global information technology; and Richemont only really plays in high-end jewellery and watches in the luxury segment without getting exposure to lucrative luxury segments such as handbags, clothing and personal goods, and cars.
Is SA itself a growth story?
SA makes up a small part of the global economy (less than 1% by gross domestic product and consumer size). Furthermore, the local economy is growing at a much slower pace than the rest of the world: we’re hoping to grow by 1.7% in 2019, whereas the rest of the world is growing by more than twice that number. The combined effect of this leads one to look for investment opportunities outside our borders.
Here are some of the other frequently cited reasons for local investors looking beyond our borders:
- Stock market performance: In recent years, offshore markets, particularly the US and Hong Kong markets, have enjoyed high double-digit growth, whereas the FTSE and JSE’s performance has been lacklustre. In fact, if you strip out companies with large global exposure on the JSE, the local market has actually gone backwards.
- Investment diversification is one of the reasons that come up all the time. This means different things to different investors, but it usually refers to having an investment that protects one against political anarchy or a dramatic fall in the currency and the effects of these – social unrest and hyperinflation as we are now seeing in Venezuela.
- The strong currency is also providing impetus to those investors who have little overseas exposure and regretted it when the currency weakened to R16 against the US dollar. It is encouraging to see clients being so proactive and taking advantage of the strong rand to build their global portfolios, rather than rushing to a crowded gate when there’s a currency catastrophe.
Finally, it’s becoming easy for South Africans to invest offshore from an exchange control perspective. Twenty years ago, many South Africans’ offshore investment strategy consisted of going unnoticed through customs with a wallet full of hard currency notes to be deposited in an overseas bank.
Nowadays, with the lightening of exchange control regulations and much stricter foreign tax compliance, that’s just not worth the risk.
And with hard currency interest rates at virtually 0%, cash in the bank is no longer an investment strategy. For this reason, many investors are looking to establish a portfolio of globally traded shares that provide good dividend and capital growth prospects.
Even more importantly, these investments can be managed directly from SA through several local investment platforms.
This article was paid for by Sasfin.