With an ongoing recession and a global pandemic that’s forced the South African economy to a standstill, you may be concerned about your local investments and savings.
Perhaps you’re considering moving your money abroad. In this part of our Covid-19 Content Series, we got in touch with investment specialists to find out whether this is the right decision.
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Does the lockdown signal a time to move your money overseas?
According to Danesh Ranchhod, vice president and executive director at Franklin Templeton Emerging Markets Equity, it makes sense to invest part of your savings outside of South Africa.
However, he doesn’t recommend this solely because of the economic turmoil from the Covid-19 crisis. Rather, he believes it ought to form part of a sound diversification strategy to reduce risk in your portfolio by not being exposed to only one country.
“South Africa was already on a general downward trend over the last five years ahead of the Covid-19 crisis due to a previous government regime which looted state assets and stalled policies, which resulted in weak economic growth and a serious debt burden on the state,” says Ranchhod.
“There is growing dissent against the lockdown regulations, which appear too strict and ongoing. It’s resulting in more unemployment and business bankruptcy than usual. This creates a growing risk that a recovery may get pushed out even further and this could see public debt and economic growth metrics suffer further pressure,” he explains.
Ranchhod points out that countries that face prolonged recessions or depressions create unfavorable environments for asset markets to do well.
“While the Covid-19 crisis can be seen as a global crisis, there are already countries that are recovering with a more favorable base than South Africa. Having investment exposure to a mix of countries helps to reduce any country specific risks,” explains Ranchhord.
Albert Louw, head of business development at STANLIB Multi-Manager, cautions that it’s important not to act irrationally, and to always refer back to your investment strategy and goals.
“The reason you invest offshore should be to diversity your investments. South Africa is less than 1% of world market capitalisation, hence it makes sense to invest abroad. However, this can also be done to match your liabilities. For example, if you want to send your child overseas to study, it would be prudent to invest overseas to match your offshore liabilities,” says Louw.
Desiree Raghubir, certified financial planner at BDO Wealth Advisers, believes that during this time of extreme volatility in the financial markets, you should look beyond short-term uncertainties and risks, and identify opportunities for the long term.
“I recommend a well-diversified portfolio that has exposure to both equity and income, as well as local and offshore assets. How much you allocate to each asset class and geographical location is dependent on your personal investment strategy which will include your risk profile and time horizon,” says Raghubir.
“I think during these times of crisis and unpredictability, South Africans should, together with their certified financial planner, review their investment portfolio with a view to rebalance their portfolio in line with their long-term investment strategy,” she adds.
Raghubir says that this may include moving your savings outside South Africa, but it may also include bringing in your savings from offshore funds. You need to identify the opportunities that are applicable to your personal financial goals.
What are the risks and benefits of investing abroad?
According to Scott Picken, founder and CEO of Wealth Migrate, there are risks to doing anything, and there are also risks to doing nothing.
"As an example, the Rand was R6.77 to $1 USD in 2011. It is currently R18.52, which is a loss of your total wealth in Rands of 274% in 9 years - or a loss of 30% per year," says Picken.
He believes that the most important thing you need to do in order to be successful, is to cultivate the right information and the right partners. This will dramatically reduce your risk.
In an attempt to create a diversified portfolio, you need to consider both the strengths of doing so and the costs you may incur.
If you plan to transfer funds from South African rands to a foreign currency, Raghubir recommends considering the following risks and benefits.
Risks of investing abroad:
- Currency risk: The level of the rand when you buy currency and during the term of the investment.
- Interest rates or yields: If you’re transferring to a bank account in another country, the interest rate there may be lower than in South Africa and below our inflation rate. You are then basically eroding your funds over time.
- Fees: The level of fees charged on the savings or investment account. How does this compare to the return you’re receiving?
- Taxes: Having your funds invested in a tax-inefficient structure may reduce its value over time. You should be aware of how your offshore savings or investment account is taxed and what reporting is required from the local tax authority. The different applicable taxes are income tax, capital gains tax, and estate duty taxes.
- Liquidity of funds: This depends on the type of investment fund and may not be easily accessed. For example, funds in a bank account may be accessed within a few days, while funds in a unit trust investment account may take much longer.
Benefits of investing abroad:
- Diversification of your assets – the South African financial market comprises of about 1% of the global financial market.
- By investing offshore, you have the option to access global company shares in developed markets and you get to participate in their growth.
- Access to international investment fund managers and their investment expertise and experience.
- Protection of your investments from a depreciating rand. The rand is a volatile currency and having funds offshore offers a hedge for your investments.
- Offshore investments may be held in tax-efficient structures.
- The ease of investing offshore – almost all investment companies in South Africa offer direct offshore investments with a wide variety of investment options.
Lisa Bathurst, director of Hurst and Wills, agrees that South Africans should diversify their investments with offshore exposure, regardless of the current lockdown situation. She points out that, in considering this, interest rates are both a risk and a benefit.
“It makes little sense to put cash into offshore banks since the interest rates are so low – 0% in most of Europe, for example. In this case, people should consider putting cash into resilient and stable asset classes, such as property,” says Bathurst.
“In some cities, one can buy a very good investment property in a prime location, earn 8% yield, and also benefit from capital growth of up to 15% a year,” she explains.
However, Bathurst points out that the one good thing about the low interest rates is that South Africans can potentially get bonds in other countries. This means they can borrow up to 70% of the cost of a property at a low rate of just 3%, while the tenant pays the bond back.
READ MORE: What are the risks of investing in the money market?
According to Kondi Nkosi, South African country head for Schroders, investing offshore gives you access to global companies and markets which may offer better returns.
“There are sectors that aren’t as accessible in the local market, such as aerospace and medical device sectors. Even where there are overlaps, offshore investing potentially gives access to better performing and priced companies on a world stage, as opposed to the narrow lens of the local market,” says Nkosi.
Two ways to invest money abroad
Picken points out that it used to be extremely hard to invest internationally, with massive barriers to entry with large amounts of money required.
"Now, with technology, you can do it simply and safely," says Picken.
Nkosi explains that, broadly speaking, there are two ways of getting access to offshore investment markets. The first is through direct offshore investing, which entails converting your rands into foreign currency by investing into offshore unit trusts or other investment vehicles of your choice. This is subject to tax clearance and reserve bank permission.
“Most asset manager investment platforms will host offshore funds and they can facilitate this process for you. A number of our funds, which have been approved for distribution by the local regulator, are housed on these platforms,” says Nkosi.
“The second option is indirect offshore investing through rand-denominated unit trusts, which are then invested offshore on your behalf. The proceeds from this type of investment will be paid out to you in rands.
“When you go direct, the administrative burden is far heavier than going indirectly. It’s also important to take into consideration the compliance with local regulatory requirements of the region in which you invest. Tax treatment of proceeds from the investment also need to be factored in,” says Nkosi.
He explains that for indirect offshore investing, there are low barriers to offshore investing for individuals, including no required tax clearance. Pension and provident funds, as well as retirement annuities, are regulated to have no more than 30% offshore exposure, plus another 10% to Africa.
“With direct investing, South African taxpayers can move up to R1 million a year out of South Africa without applying for a tax clearance certificate, and up to R10 million out of our borders with tax clearance from the South African Revenue Services (SARS),” says Nkosi.
According to Raghubir, your tax consultant will be able to assist you with your tax clearance certificate, or you may arrange this via your SARS e-filing profile. She highlights the following documents which will need to be submitted to SARS:
- The completed FIA001 tax clearance certificate application form.
- An original, certified copy of your South African ID. Have a look at the lists of supporting documents required for foreign investment allowance.
- A statement of your personal assets and liabilities – if you have not already filed one with your last tax return.
- A proof of availability and source of funds for SARS. It’s required for offshore transfer. The required documentation will vary depending on where the funds come from.
Before applying, Raghubir recommends ensuring that any overdue returns and payments are fully up to date. Otherwise, your application will be declined.
“The approval time depends on your specific SARS office and typically takes between one and three days for amounts of up to R4 million, or four to ten weeks for amounts greater than R4 million. Your foreign tax clearance certificate is valid for a period of 12 months from date of issue,” she adds.
When investing abroad, Nkosi points out that there is a minimum investment requirement. However, he explains that this varies depending on the chosen fund. But most foreign-denominated offshore investments have a minimum investment requirement that can be fairly high for the average investor.
He nonetheless points out that for a rand-denominated offshore investment, there will be options available to an investor with, for example, a budget of R1,000 per month.
To access other parts in our Covid-19 Content series, click here.