Making money moves - Investing offshore

The Afrasia 2019 South Africa Wealth Report shows that South African high net worth individuals (HNWI) hold less than 20% their wealth offshore.

It is also estimated that between 65% and 80% of South African investors’ total wealth is exposed directly to the SA economy. Total wealth includes career, business and property interests, in addition to investments such as pensions.

An amendment to prudential rules announced in the 2022 February’s budget speech enables pension and mutual funds to invest 45% of their assets abroad, up from a previous 30%. That’s the largest adjustment yet made to the offshore limit and gives South African investors the chance to fundamentally re-balance their portfolios.

RMB Morgan Stanley said in a research note that this amendment could lead to between R550 billion – R800 billion leaving the country over the next five years.

Why do people want to invest offshore or what are the benefits of investing offshore?

Investing offshore may enhance returns and reduce risk by diversifying exposure to a single currency or country.

This enables access to more investment opportunities than what is available in your home country. Globally, there are more than 200 000 different funds available. South Africa represents less than 1% of the world’s economy. This reduces the risk of capital loss by spreading investments across markets and currencies effectively minimising the impact of currency depreciation or political and market events on wealth.

What options for investing offshore are available to South Africans?

There are two offshore investment paths to consider:

Path 1 is a Direct path: Physically moving your cash offshore by going through exchange control processes, opening up an offshore bank account in another country and sending your rand overseas in the currency of your choice.

South Africans are allowed to take a maximum of R10 million a year offshore if they have been granted a SARS tax clearance certificate to move money abroad. Without this tax clearance certificate, you can send a maximum of R1 million out of South Africa into your foreign bank account each year.

The R1 million transaction must be registered with the Reserve Bank. You would then need to place the transaction through an authorised dealer, which most South African banks are. Once the money is offshore, you may do with it as you please: leave it in the bank account in your name or invest it in unit trust funds or stocks in that country. To apply for your tax clearance, you can download the FIA001 Tax Clearance Certificate application from the South African Reserve Bank (SARB.)

Your tax clearance certificate remains valid for 12 months from the date of issue and your annual allowances are allocated per calendar year and therefore expire on December 31 each year.

Path 2 is an indirect path: There are several savings, investments and asset managers in South Africa that offer offshore unit trust funds. These funds are priced in Rands, however, the capital is invested offshore, which provides global diversification and foreign currency exposure. With this path, you aren’t obliged to obtain a SARS tax clearance certificate to invest in these funds as your investment is made in rand and paid out in rand on disinvestment.

Another consideration is offshore ETFs (exchange traded funds). You are investing in rand and will be paid out in rand. Some call this path a swapping of assets. Your funds are invested in Rands, but still allow you to gain exposure to foreign equity instruments. Once the investment is cashed in, the market value thereof is returned to you in Rands. Products such as unit trusts, endowments and share portfolios can all be used when investing offshore, depending on investors’ profiles and needs.

Source: PSG Wealth

South Africans are allowed to invest a total of R33,000 per year (maximum lifetime contribution of R500,000) into a tax-free savings account (TFSA). A TFSA is not a single, standardised investment vehicle. It can be money market or fixed term bank account, a JSE-listed exchange traded fund, or a unit trust that invests offshore.

Another way people invest offshore is through buying shares listed in offshore exchanges through reputable brokers. Global equities returned 18.5% in 2021. US equities led the gains, returning 28.7% in 2021. The FTSE All-World share index rallied 16.7%in dollar terms in 2021. The FTSE All-World Index is a market-capitalisation weighted index representing the performance of the large and mid-cap stocks from the FTSE Global Equity Index Series and covers 90-95% of the investable market capitalisation.

Always "render unto Caesar the things which are Caesar's.” As a South African resident, you will have to pay tax on the interest and dividends earned on your foreign-domiciled investments based on the Income Tax Act.

Investing offshore can provide protection from the depreciation of the Rand over time. But be careful not to time the market or react emotionally when taking money offshore. Exchange rate movements are notoriously difficult to predict. While the rand is likely to depreciate over the long-term against developed market currencies due to inflation rate differentials, it can buck this trend for long periods of time, especially as the exchange rate can be very volatile.

With global financial market fearing of high inflation, low growth (World Bank, and the IMF have cut their global growth forecasts, by close to 1% year-on-year for 2022), the Rand is not yet expected to run back below R15.00/USD this quarter.

Nedbank added that rising domestic interest rates, and relatively deep and liquid financial markets should sustain some foreign capital inflows, helping to prevent dramatic rand weakness. Despite the supporting factors, unsupportive global conditions are expected to result in a moderately weaker rand during the remainder of this year.

For year-end, Nedbank forecast the Rand to trade at R15.90 against the US$, R20.99 against the Pound and R17.31 against the Euro.

Enjoyed this? Share with a friend!

How did you like this?