A First-timer’s Guide To Investing Offshore
What recent events have confirmed is that offshore investments should play a
big part in achieving your financial objectives. Our stock market is quite
undiversified compared to others. Our GDP is tiny in comparison to the global
GDP, and currency limitations are in place. If you go offshore, you open up
currency opportunities and asset classes; the world’s your oyster
really. You also get access to products that you cannot find in South
Africa as a resident investor.
Living in an emerging market such as South Africa and diversifying into
developed markets often driven by various macro variables, can provide more
stable growth, and provide exposure to a broad variety of industries in
hard-currency, which can be greatly beneficial.
SHOULD YOU BE INVESTING OFFSHORE?
Offshore investing, is a legal, effective way to invest in entities that are only available
outside your home country. While there is no one-size fits all answer to the
question. Having a portion of your portfolio invested offshore is a great
way to diversify, and now’s a great time for South Africans to do just that
for a few reasons.
There’s a perception that only big rollers with millions can play in the
offshore market. While that may have been the case many years ago, nowadays
it’s easy for the Average Joe to play too. New products on the market
have sidestepped all of this and made it easy for the average South African to
invest offshore.
How to invest in offshore markets
Many might think that it’s complicated to invest offshore but it’s not so.
First, you will need the usual: a bank account, an investment plan, and a
strategy that includes your goals or objectives for investing offshore and
the portfolio of financial instruments you plan to invest. Many of the
people who invest offshore are already experienced traders with portfolios
in their countries.
I have found that the easiest way for me to invest offshore is through a South
African unit trust, which in turn invests in international markets. No
offshore account or broker needed.
Another way is through 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. You can to take your annual tax-free savings allowance and
invest it into a unit trust that invests offshore and pay zero tax on it,
locally and abroad.
What are the benefits of investing offshore?
- Diversification: South Africa represents less than 1% of world economic activity
- Access industries that don’t exist in our local market – for example, biotech
- Our domestic market is extremely concentrated with little exposure to global industry
- Access a much wider pool of fund management talent
- What we buy and consume is global – for example, McDonalds, Zara and H&M – yet we don’t invest in these
- Our currency is extremely volatile, and often influenced by factors which have nothing to do with the local economy
- Global exposure helps hedge currency and political risk bets
SO, HOW MUCH CAN YOU INVEST OFFSHORE?
A question often asked is what percentage of your total investment portfolio
should you invest offshore. In most cases, this percentage should range from
30% to 50% depending on certain factors such as age, risk profile and cash
flow requirements.
Every South African citizen over the age of 18 is entitled to take up to R1
Mil per calendar year offshore without applying for permission from the
South African Reserve Bank. This is called your Single Discretionary
Allowance.
For any amount over R1m, you need to apply to the Reserve Bank for a Foreign
Capital Allowance.
The 2019 Foreign Capital Allowance is capped at R10m per calendar year,
excluding the R1m Single Discretionary Allowance. This means you could
invest a total R11m per year offshore, all of it taxable.
Remember going offshore should be informed by personal goals and
circumstances, and efforts to construct a global portfolio best suited to
these needs. An experienced financial advisor can assist you to navigate through the rules and regulations associated with offshore investing and help you make sound decisions.
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