5 reasons you should invest offshore

Author: Steven Crouse

Like many South Africans these past few weeks, you’ve no doubt thought about your future and what it might hold. A good question to ask when looking ahead is, ‘Do I have enough of my portfolio invested offshore?’

The current political environment aside, the opportunities presented to investors wanting to externalise their wealth often far outweigh the risks. For one, a healthy portion of your wealth invested across global markets can provide you with several attractive opportunities:

  1. Access to global markets
    The International Monetary Fund puts South Africa’s GDP at a mere 0.4% of global GDP – we are a minute drop in a vast ocean of developed and emerging economies.Not only is the globe an enormous place, but it also offers access to broader investment opportunities and asset classes. Here, companies operate in completely differentiated markets. My favourite examples being the listed property company whose entire portfolio comprises plots of land housing cellular phone masts, and another whose ‘properties’ are wind turbines in the Mediterranean. These are contrasted against ‘conventional’ property firms whose portfolios consist of the rather pedestrian retail, industrial and commercial properties for rent.

Another benefit of offshore markets is investing across different economic cycles. While the local economy chugs along at a sputter, many global economies are producing GDP growth numbers supportive of the business cycle, dividend growth and positive investment returns.

  1. Tax benefits
    With the top marginal tax rate having recently been hiked to 45% for people earning more than R1.5 million per annum, the inclusion of foreign investment income (interest, capital gains and dividends from global investment holdings) could prove beneficial in the long-run, especially when considering a potentially weaker currency over time.There is the option of an asset swap or rand-based offshore investment, where the investment is priced in ZAR daily and can only be redeemed in ZAR. However, it is important to note that any currency depreciation is reflected as a capital gain and therefore taxable in the hands of the investor as such.

But as a means of providing a simpler, more manageable entry point to global markets, a number of bespoke investment products are available to investors in the international currency of their choice. The added advantage is that tax is deducted within the product and at a lower overall rate!

The product of choice we advise for our investors provides a further benefit by ‘rolling-up’ all gains as capital gains, regardless of the source, and only taxing these at a flat rate of 12% on the gain.

  1. Currency protection/hedging
    The most common reason I encounter for investors wanting to invest offshore is to ‘hedge’ the value of their assets against a possible depreciation of the currency. While most investors are betting against the rand lately, it cannot be ignored that the rand and other currencies can, and will, move in both directions.Although the trend for our currency over the past 18 months has been one of strength, the primary concern I have always held for our beloved ZAR is that with a meaningfully higher inflation rate than those of our global trading partners, our currency will be the main release valve for this difference and should weaken by a small margin annually to compensate for this.
  1. Externalising your wealth (or the two-fold insurance policy)
    While it may be regarded a taboo dinner table topic, the fear of having to ‘up and run’ remains at the back of many people’s minds. Legally externalising a portion of your wealth and investing your assets in a foreign jurisdiction means having capital available offshore and readily accessible should you need it.

The more likely scenario is that you don’t leave the sunny skies, beautiful beaches and splendid fauna and flora of South Africa, and live out your days on our shores. Notwithstanding other factors and the inflation-differential previously alluded to, if inflation continues to exceed that of other countries, our currency could show sustained weakening over time. Given the extent to which we import our inflation, one’s long-term inflation-hedge strategy is somewhat incomplete without ensuring a healthy portion of your assets are invested for growth in other currencies.

  1. Succession and estate planning
    Investing assets offshore can also set up your heirs to inherit globally. Considering the extent of globalisation and emigration, along with job opportunities opening across the globe, it is plausible that your children may leave South Africa to pursue opportunities abroad.The use of appropriate products where an investor can nominate beneficiaries on a global basis means one can externalise or dollarise their wealth; invest these funds for growth; and have the investment paid into an account anywhere in the world on their passing, for use by their heirs. And because local estate duty tends to be lower than that payable in developed economies, investors can further reduce their estate costs.

The decision to invest offshore requires more than a one-size-fits-all approach. And while the benefits are obvious to most, the impact on an investor’s portfolio needs to be carefully considered, thought out and planned, as there are pitfalls.

Chatting to your Octagon adviser will help you identify potential opportunities, and structure the appropriate channel and strategy to employ in exploring this possibly under-explored realm of investing.