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Offshore Investing: Venturing Beyond Familiar Territories to Capture Growth

By Attila KadikoyOriginally published here.

Investing affords us the ability to grow and preserve our hard-earned wealth in ways that we could not do on our own. It exposes our money to local and international opportunities – of trades and assets that we may not have available here. In the past, we’ve not always had much freedom in what we could do with our savings, but this is changing.

In February 2022, the National Treasury relaxed exchange control laws by boosting what people could invest offshore in their pensions from 30% to 45%, prompting many to take advantage of this and increase their offshore holdings.

Besides more favourable exchange control laws, there are several reasons why you should invest more of your pension and savings offshore. These include:

The ability to increase returns

Limiting your investment universe to just South Africa, exposes your savings to only 1% of the global economy.

However, you may be concerned about investing offshore at this time, given that some 40 national elections are on the calendar for this year. South Africa is not the only nation that will go to the polls – others include the US, India and Germany

Historically, investors typically park their money in low-risk investment vehicles before elections to avoid any potential volatility. Presidential elections make people nervous as a country’s problems are often laid bare for all to see and scrutinise. But if you limit your investment universe to cash, you could lose out further, particularly if the cycle of interest rates rising globally is winding down and if markets rally due to favourable political conditions or positive economic news. If interest rates drop, banks will probably reduce the rates they offer on cash too and this will probably make returns in equities more attractive.

Reducing your investment and currency risk

There are many areas in which South Africa is advanced – we need only look at our financial services industry to know that we can compete with the best on the world stage. However, South Africa is considered an emerging market and investing in emerging markets alone comes with more risks than investing in developed economies as they are subject to more volatility in their currencies and stand a greater chance of defaulting on their debt. Investing offshore also allows investors to mitigate the volatility and weakness of the rand.

Opportunities within specific sectors

Diversifying offshore also exposes investors to companies and sectors that would otherwise be difficult to access in South Africa, such as the US tech stocks that form part of the “Magnificent 7”, including Microsoft, Apple and Amazon.

While many have benefited from the phenomenal growth from US tech giants it’s important not to be too enamoured by hype. Restricting your exposure to the US’s Magnificent 7 could result in you missing out on similar success stories in other markets.

Fads come and go. Consider the 1970s where there were a group of stocks that many investors flocked to, referred to as the “Nifty 50”. Professor Jeremy Siegel, from the University of Pennsylvania, called them “one decision stocks: buy and never sell”, however many of the company’s share prices plummeted during the 1973 to 1974 bear market. Today, most are no longer publicly listed, including Black & Decker, Gillette and Polaroid. We’re not suggesting that the AI stocks will follow a similar fate, but it pays not to be blinkered or hyper focused on one sector.

Exposure to markets and assets with more potential

Investing offshore provides South Africans with access to a vast array of global markets that may offer opportunities unavailable domestically. When South Africans invest abroad, they typically limit their investments to the US and the UK. This, we believe, is a flaw.

It’s important to remember that merely offshoring wealth is not a solution, it’s important to diversify your investments offshore too. While the US and the UK deserve to remain in offshore portfolios, the potential that other countries like, for example, Japan and India offers can no longer be ignored.

Today, Japan stands as a global powerhouse renowned for its technological prowess, resilience and innovation. As one of the world’s largest economies, Japan boasts a diverse range of industries, spanning from robotics and tourism to health care and finance, making it an enticing destination for those seeking investment diversification.

According to the International Monetary Fund (IMF), India is set to overtake Japan and Germany by 2027 to become the third largest economy. India’s success has been driven by its growing workforce, robust consumer base and growing working-age population, which is set to reach 1.3-billion people by 2050.

Exploring new horizons

Investing offshore does come with risks. As mentioned, 2024 is a big election year, globally, and there’s the threat of the Palestine/Israel war as well as the conflict between Ukraine and Russia spilling over into other areas, widening the fighting.

But there are opportunities for investors too that they would not be exposed to locally, especially with Asia-Pacific countries playing an increasingly pivotal role in the world. By venturing beyond the traditional norms, investors position themselves strategically to tap into the next phase of global economic growth. For too long, laws have prohibited investors from growing their wealth by expanding their investments internationally. It’s important to seize this opportunity now as well as any further relaxations down the line.

Diversifying investment portfolios beyond the familiar territories represents a forward-thinking strategy in our view. While offshore investing requires careful planning, due diligence and professional guidance, the potential long-term benefits could ultimately outweigh the challenges, offering South Africans a pathway to more financial security and growth.

Kadikoy is the managing partner of Wealth Managers Levantine & Co.

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