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By André Basson*
Many South Africans have woken up to the fact that it makes sense to invest globally. It is important to know the right reasons to do it, not just because we see the risks in SA and feel the need to “go offshore” with our money. We face several risks in SA, which are well-documented and warranted. This article provides good reasons to include offshore assets in your investment portfolio beyond the issue of local risk.
- Greater opportunity set offshore.
The South African market is less than 1% of the world index. This means that a global portfolio should include global assets, and most South Africans are underweight when they look at the percentage of offshore exposure they have.
- Best innovation globally, not found in SA – US markets & tech.
Some of the most innovative businesses are listed in the US and Europe; think of names such as Amazon, Nvidia, ASML and Tesla, to name a few. They are not listed or dual-listed on the JSE; therefore, you won’t catch them here by fishing in local waters. Industries such as global tech, cybersecurity and artificial intelligence are also found in offshore markets. If you want exposure to these driving themes, you must look abroad.
- Strongest balance sheets
Investing in well-established companies with strong and healthy balance sheets is a great way to build a robust portfolio. These companies have a diversified earnings base and make money worldwide, even if listed in the US, Europe or other territories. They access other markets such as India, Asia & Latin America. Names such as Visa, Mastercard, Microsoft, Estee Lauder and Nestle come to mind. These companies are global and can grow earnings steadily over time – they form the backbone of a global portfolio.
- Cheap markets offshore also exist – Europe, the UK
Some local commentators argue not to invest in offshore markets because they are expensive. Sure, there are global companies that are currently trading on expensive levels. On the other hand, we also find some stocks that trade cheaply for those that look in “less crowded” areas such as the UK, Europe, and Japan. By including assets from these jurisdictions, you also include other currencies such as the pound, euro, and yen – this is important should the US Dollar weaken during specific cycles.
- Uncorrelated markets exist – Japan.
Talking of Japan, it is one of those markets that blend well within a global portfolio. Historically, Japanese shares have a low correlation with the world index and US markets. This means that they can perform well when others don’t, and therefore increase the diversification in a portfolio.
- Diversification
This leads me to one of the most important elements called “the only free lunch in investing”. Diversification helps reduce the volatility in portfolios and reduce the specific risk attached to one investment, style, or jurisdiction. Investing in equity, offshore included, will come with volatility – but when an investor knows their portfolio is adequately diversified, it can help them hold on during the tough times when they come (and not sell at the worst time).
- Protecting against local factors
Additional benefits of including offshore exposure for local investors include:
- Most investors already have significant exposure to local assets; global exposure makes sense when you include the property’s value (a primary residence, farm or second property). When you invest in local property, you carry the risk of that specific municipality and how well it is run (or not).
- Protection against a failing state.
- Protection against weakening Rand (long-term trend)
- The uncorrelated link between exchange rate and equity markets.
When something on a global scale scares investors, they usually flee to US Dollar cash and sell all other currencies that seem risky – mostly all emerging markets. The rand is one of the most efficient and liquid emerging market currencies and usually “sells off” and weakens against the USD. This helps your global portfolio when measured in rands: theoretically, offshore share prices drop, but the rand weakens. This buffers offshore equity exposure.
Summary:
Selective stocks on the JSE can be in your portfolio; certain fund managers have shown over time that they can make money on local markets. However, offshore markets provide much more to investors and can add a lot of value for the right reasons.
Local investors can take R1 million directly offshore without needing clearance from the SA Reserve Bank; after that, everyone can apply for up to R10 million per annum. Investors with ZAR savings can get offshore exposure in the following ZAR-denominated structures: retirement annuities, pension, and provident funds (these three are limited to 45%), living annuities, endowments, and discretionary investments.
*André Basson, CFP® is the head of Brenthurst Wealth Val de Vie
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