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Offshore investing for beginners

31 March 2023
6 minute read
Serious woman looking at laptop

Will your local investments help you reach your financial goals or should some of your money be invested offshore? We asked the experts!

Note: You should also ask the experts when you invest offshore as there are risks when you put your money to work outside South Africa. To make sure your offshore investment is appropriate for you and your investment goals, speak to a registered, authorised financial adviser who has the relevant expertise and experience.

Diversify with offshore investments

One of the golden rules of investing is to diversify your investments. This is when you invest in different types of investments in different sectors of the economy, such as the mining sector, the financial services sector and the pharmaceutical sector, and in different countries. For example you invest in a mining company in South Africa, an automotive company in South Korea and a tech/entertainment company in the US. If one of your investments loses value, you still have other investments to fall back on. This reduces the risk of not only capital loss, but also poor returns across all your investments.

Mulalo Nemataheni, certified financial planner and CEO at ImPowerX Advisory Services, says that when you invest offshore you diversify your investments and reduce the risk associated with investing in one country.

Bottom line: Diversification is one of the main benefits of investing offshore!

Investing offshore gives you more investment and growth opportunities

South Africa is a small economy in global terms, only around 0.7% of the world’s economy. That means you have access to a limited number of investment opportunities when you invest locally. You will find more opportunities if you invest offshore.

Palesa Dube, certified financial planner and director and wealth manager at Wealth Creed, says there are around 400 locally listed shares versus around 43 000 offshore.

“When you look offshore, you have more companies in many different industries to invest in,” Palesa says.

For example, if you want to invest in tech stocks the opportunities are far greater offshore. Think of Google, Apple, Samsung, even Netflix or Tesla, all offshore businesses. And if you fancy an investment in the automotive industry, you do need to look offshore at the big automotive companies in Europe and the East such as BMW, Volkswagen, Hyundai and Toyota.

“These options are not available to you locally,” says Palesa.

Another area of opportunity comes from investing in economies that are growing. For example, Vietnam (over 8% growth in 2022), as well as India and Thailand.

“If you want to invest in and benefit from the returns available in growing or expanding markets, your opportunities are offshore,” says Mulalo. “These can represent an opportunity for your money to earn good returns.”

Bottom line: There is just more opportunity offshore.

There are risks when you invest offshore

Palesa says you need a strong stomach when you invest, particularly if you invest offshore, because there are risks. Although any investment has risks, there are two you need to pay particular attention to when you invest offshore.

Currency risk

Exchange rates can work for or against your investments, unless your currency is fixed to other currencies or stable (the exchange rate doesn’t change) (not the South African rand!).  For example, if you invest R150 000 in a US dollar based investment when the US dollar/SA rand exchange rate is R15 (R15 buys $1) your investment is worth $10 000. If the rand weakens, say to R19, your investment benefits in rands because your dollar value of $10 000 is now worth R190 000. However, if the rand strengthens you have a lower rand value.

Exchange rates can move very quickly, either way, without warning, so be very sure you understand this risk and how it can affect your capital value and returns when you are investing offshore.

Geographic risk

An offshore investment is an investment in a jurisdiction other than where you live, says Palesa. In other words, not in South Africa. This means that you have to be aware of how the unique risks in each country you are invested in could affect your investment. For example, some countries have more political risk than others (think of Eastern Europe and the Russia-Ukraine war). And, each country has its own legislation, tax and compliance regulations. All of these can affect your investments. Researching and monitoring them gives investors a lot more work than there is for a local investment.

“You, and/or your adviser and investment manager must have knowledge of the different risks when you invest offshore,” says Mulalo.

Bottom line: There are risks associated with an offshore investment that could mean your investment doesn’t give you the return you need or are expecting.

How do you invest offshore?

There are essentially two types of offshore investments. Offshore investments where you invest in rands and are rand based, and those where you invest in foreign currency.

Invest in rands

Investing offshore in rands is easy. You can buy a local rand-denominated offshore unit trust fund, for example, that invests in offshore investments. Your investment is still in rands (you don’t have to buy any foreign currency or get any tax clearances). However, there is currency risk because the rand value will be affected by changes in exchange rates.

Invest in foreign currencies

Investing offshore using foreign currency is slightly more onerous (there is a lot more paperwork), and there are limits on how much you can invest offshore. Current regulation (at May 2023) allows you to invest R1 million offshore with no paperwork, as well as R10 million with the required tax clearances from SARS (and lots of paperwork). These are annual allowances. Essentially, you transfer your rands into another currency and invest in that currency, and earn returns in that currency.

Whichever one you choose (you can do both), pay attention to our top tip that is so important we are giving it again!

Top tip: Get expert help! Offshore investing comes with extra risks and the greater number of investment options can be difficult to assess without the help of a qualified and experienced professional.

Don’t forget: You may already be invested offshore

Many local companies and unit trust funds already have offshore exposure.

Not only do many of the larger South African listed companies, such as Richemont, Naspers and British American Tobacco sell products and services offshore, but many local unit trusts, such as multi-asset funds, often have a portion of their investments offshore. And, your pension or retirement fund could also be invested offshore in these and other offshore companies.

Always remember why you are investing

How much you invest offshore depends on your individual circumstances. Palesa says the number one thing you must remember when you invest is your goal – why you are investing. That will guide your investment choices and whether or not you can achieve the returns you need when you need them in an offshore and/or local investment. And if offshore investments are a good option, your adviser will help you allocate the correct portion of your investment portfolio to offshore opportunities.

You can read more about investing for your goals in this blog.

Bottom, bottom line

Offshore investments are definitely worth considering. But always take into account your investment goals, the opportunities to achieve these and the risks associated with your investments before handing over your money!

Quick offshore investing checklist

When you invest offshore, Palesa and Mulalo say you must keep the following in mind:

  • Offshore investing will give you more opportunities to earn returns than are locally available
  • As with any investment, there are many risks associated with offshore investing
  • There is no guarantee your investment (local or offshore) will deliver the returns you need
  • You need knowledge of the risks in each country when you invest offshore
  • There will be tax and compliance issues, and sometimes lots of paperwork
  • You need expert advice when deciding where, when and how much to invest offshore

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