Magnus Heystek: Please Sir, can we have another R1 million?

*This content is brought to you by Brenthurst Wealth .MOST modern and progressive countries in the Western world today have scrapped foreign exchange controls and allow taxpaying individuals the freedom to move their money at will to currencies and countries where they can get the best returns..Unfortunately, South Africa is not one of them. Even though the regulations have been relaxed to move some capital at will, fairly wide-ranging (and strict) foreign exchange control regulations are still in place. These regulations are a legacy of the bad old days of apartheid, when moving money offshore was verboten..In the 2015 National Budget, the offshore limits were increased dramatically – from R400 000 to R1m in the case of the Single Discretionary Allowance (SDA) – while the annual investment allowance was also bumped up to R10m per person, up from R4m before..These generous increases were generally seen as an almost total scrapping of foreign exchange rules. In practice, almost everyone except the truly wealthy could move their capital offshore at will without any questions asked for amounts up to R1m, or so it seemed..The R1m annual SDA has become a major conduit for individuals building up offshore wealth (wise decision) and being able to pay for offshore holidays or perhaps studying a child at a foreign university..Only the SA Reserve Bank will know how much money has left the country via these channels, but it is estimated to run into the trillions of rands. The late Mike Schüssler, economic consultant to the Brenthurst Group, put this number at R1.3 trillion two years ago. By now, it must be substantially more..But isn't it about time that this allowance be increased? Many people are finding that R1m buys less and less on global markets, including the author who is funding the university studies of a child in the UK. R1m does buy one much in one of the most expensive cities in the world..A million rand, when converted into dollars today, doesn't buy you much. In 2015, R1m could buy you $82,500 at an exchange rate of R12.12. Today, an exchange rate of R19 buys you about $52,000..By itself, this is a decline of 37% in the US dollars one can buy..What makes matters worse is that the inflation rate in the US averaged 2.9% per annum over the same time, which means in pure dollar terms US priced goods also increased by 33%, which means that in REAL terms, an amount of R1m today only buys about 30% of the goods and services that it could a short ten years ago. .It would appear that many South Africans are trying to stretch their SDA by trying to spend more than the limit on their credit or debit cards, causing Nedbank, one of our four large banks, twice in a month warning their clients that such over-spending could lead to fines and penalties..Be careful, the SA Reserve Bank (SARB) employs very sophisticated software to track the offshore spending of SA citizens by collating the expenditure of offshore items from various sources and an increasing number of warning letters are going out to South Africans to cease further spending..So, here is the appeal to the Treasury, busy compiling the Budget, due to be tabled next month: please increase the SDA to at least R2m to compensate for the currency decline and the rising costs of goods priced in USD dollars..It would be nice to be treated as adults and not have to beg and fill in forms to spend our money wherever we want..Although the amounts for offshore investments or spending were increased in the National Budget of 2015, they require a more intense clearance process, which has been further tightened in subsequent budgets..The market reaction from investors and taxpayers was very positive, and moving money offshore via the SDA has become a major conduit for people wealthy enough to remit up to a million rand offshore. Banks are still the major conduits of this business, but many smaller companies have sprung up in competition with the banks, in most cases offering better service and pricing..It was also a major opportunity for some of SA's financial companies with offshore subsidiaries to move significant amounts of capital onto offshore platforms from where global investments could be made..The estimated R1.3 trillion that legally left the country is now invested in global stock market portfolios, collective investments, exchange-traded funds and overseas properties..Since then, the amount of US dollars one can purchase with R1m has declined due to the general decline – sometimes slow, sometimes dramatic – of the ZAR against the US dollar..Was it a good investment?.The government's opening of the foreign exchange gates has caused a major disruption in the local investment industry. Local asset managers, seeing an outflow of funds from their domestic, immediately embarked on a campaign to convince investors that "local is lekker" in an attempt to stop the flow of discretionary money leaving our shores..These campaigns are ongoing, and as recently as six months ago, Johann Els, chief economist of the Old Mutual Group (managing over R400bn), boldly advised investors to remit money from offshore as the "Rand was set to rise to R13 the US dollar Business Day). It is a common cause that the rand has weakened and is trading around R19,00 to the US dollar..Often, some of these claims and forecasts were outrageous, and it was clear that local fund managers were feeling the pain of not only a slowdown in their inflows but also experiencing substantial outflows as high-net-worth investors, perhaps better informed, moved substantial amounts of capital offshore by making use of both the SDA as well as the annual R10m per taxpayer. Investors who jumped at the opportunity to move some capital offshore and every year thereafter have benefitted handsomely, with their returns well ahead of the local market. In this study, I compare the investment returns of R1m invested into each of the JSE, Nasdaq, S&P500 and MSCI World index, made hypothetically on the 1st of January every year since 2015, to calculate the investment outcome today..In not ONE of these investment periods could the JSE match or beat the returns of the other 3 generally accepted measures of global equity performance, and in some cases, it trailed very badly..This reflects two things: the JSE's poor performance relative to world markets and the extraordinary returns on the stock markets in the USA, namely Nasdaq, S&P500, and Dow Jones. It has been a decade of American Exceptionalism as far as investment returns are concerned. .* Magnus Heystek is a director and investment strategist at Brenthurst Wealth. invest@brenthurstwealth.co.za .Read also:.Financial guidelines to build and protect your wealthUnderstand the risks when you choose alternative investmentsInvestment outlook 2025: Navigating opportunities in a year of transformation

Magnus Heystek: Please Sir, can we have another R1 million?

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