The whole world is your investment oyster
The country’s past and also the individual pasts of many people are preventing them from taking advantage of opportunities outside SA
We all have a unique prism through which we make sense of the world. A large part of how we think about our wealth is a result of the environment we were raised in — how we were nurtured during our formative years.
Ask yourself honestly: how much of an effect did your upbringing have on how you view wealth? Do you subconsciously live out the spending and saving habits of your parents with your own money?
The habits of our parents are often our default behaviours until we consciously change them, and the mindset of previous generations was shaped by pressures that are no longer relevant — or useful — in today’s SA. South Africans must seek to understand the wider prejudices, inconsistencies and fallacies they hold regarding wealth to properly manage their own capital — and invest for maximum return at minimum risk, which the majority of South Africans simply do not do.
Exchange controls were first implemented in 1939 at the outbreak of World War 2, with the goal of preventing South African capital from reaching enemy Axis forces. This restrictive, bureaucratic oversight of capital has continued to this day. Indeed, prior to 1995, investment outside SA’s borders was expressly prohibited: we were a closed country in terms of capital movement.
SA was not truly capitalist. Money could not flow to where it could best be used globally as external cross-border transfers were illegal. Nor was SA fully exposed to globalisation, as it was outside the global monetary system by design. Operating in a closed economy has been the formative financial experience of generations, who have viewed this situation as the norm, influencing present-day investment thinking.
The second effect of exchange controls was to artificially stabilise and increase returns on domestic assets. As money could not leave the country, any new capital created had to be invested within SA. This closed loop gave South African companies cheap funding while providing stable returns to local investors: it is easier to find a buyer in a system that greatly restricts the choice of what you can purchase.
Investing in a closed-loop system is more stable and profitable than in an open one — until the closed-loop system is exposed to the competition pressures of the free market: then the inefficiencies and waste of one are brought to light by the dynamism of the other.
SA’s regulatory situation and its history are far from normal. About 87% of countries worldwide have no exchange controls, meaning citizens can invest their wealth in other countries, in line with the principles of global capitalism. As a result of this free exchange, investment portfolios in the vast majority of countries all over the world are global in nature.
In countries with a similar share of global GDP to SA, such as the Scandinavian nations, most wealth is invested outside the country of origin as a default. Why wouldn’t you access the best opportunities globally, seek to maximise your returns and achieve the maximum diversification across industries and regions when there are no barriers to doing so?
Consider this: in countries that do not have exchange controls, the term “offshore wealth” does not exist, nor does the mindset. Competent investors and finance professionals in these countries consider holistic wealth, and so should you.
Start with the beginning in mind: what do you want to achieve? If you are a rational investor the response will be: the highest return for the least level of risk. How do you achieve that? Simple, pick an investment strategy that focuses on harnessing near-limitless global opportunities rather than the handful of domestic ones. Utilise a full set of investment options rather than constrain yourself to any one company, region or sector.
Do not artificially limit yourself to an economy worth under 0.5% of global GDP, with a mere 1% of global investment opportunities available within its borders, and in a currency that has depreciated versus the dollar at an annual rate of 6.5% since 1994. Take the other side of the equation.
View it from the opposing perspective. The US is the world’s deepest investment market, with more than 40% of all tradable securities within its borders. The US possesses the world’s reserve currency: around two thirds of money in issue globally is denominated in US dollars. This greatly reduces an American investor’s requirement for international investment: as a US investor you already own the currency all other currencies are priced against and have the lion’s share of investable opportunities within your borders.
Given these advantages, what amount of wealth did experts from a Wall Street Journal panel recommend US investors place outside of their domestic borders? The consensus was about one third, despite the much-diminished diversification and return benefits a US investor receives in comparison to a South African.
What does this mean for you? There is a strong argument that we should use the figure of 33% as the absolute minimum amount of wealth you should invest internationally. Remember, SA is a 1% country: it has less than 1% of the world’s GDP, has access to 1% of its investment opportunities, accounts for 1% of global currency, and has medium-term political and social challenges that make physical externalisation more compelling compared to the US.
What’s stopping you from investing more wealth globally? It certainly isn’t rational arguments based on fundamental investment principles. Perhaps it is time for some individual psychoanalysis: is your past — and the past of your country — preventing you from acting in your own best interests when it comes to investing?
Increasing your global investment exposure gives access to global returns, while simultaneously reducing your SA-specific risk (the Argentina stock market fell 48% in a day last week: the same can happen here). Intelligent investors seek to preserve and grow their capital through a worldwide approach: externalise wealth, invest globally and sleep easier at night.
• Joshua is author of The South African’s Guide to Global Investing