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Time to invest Offshore?

Finance minister, Pravin Gordhan, announced in the last week of October, that the o­nce-off foreign investment allowance for individuals has been increased to R4 million. With the stronger Rand and the growth potential in emerging markets, it looks like a good time to invest offshore. Although South Africa has been relatively protected from the market volatility, South Africans are re-evaluating their overseas investments in developed markets.

First world countries may not be a good investment choice at the moment with interest rates o­n money markets at 0%. Furthermore, recent statistics show that inflation is rising in these countries, and they now face a dilemma: either they can allow inflation to run and give GDP space to grow, or they can raise interest rates to curb inflation. This will limit any chance of economic growth over the next year or two.

So fund managers are looking to add to their investments in the emerging markets. These markets have seen averaged returns in the region of 90% (not annualised) over the past six months to the end of September (although -12% over o­ne year in the current market turbulence). Funds plummeted around the end of last year, but have come most of the way back. If you invested R1m a year ago, you could be standing at around R880 000 now. But if you had invested R1m six months ago, in April this year, you’d have R1,9 million.

The key is to have a long-term view.

Diversifying your investments means that if o­ne market does not perform well, you still have other investments doing their best for you. South Africa constitutes less than 1% of the global economy and it makes good investment sense to invest offshore in other emerging markets.

Just how much of your money should be invested offshore depends o­n your individual needs, but there is a rule of thumb that suggests you should have 30% of your assets invested abroad to ensure that your portfolio is adequately diversified.

The Rand is considered a volatile currency in an emerging market country,so by diversifying through offshore investments, you have a defence mechanism against currency fluctuations and political risk. It also offers you the opportunity to obtain investments that are otherwise limited in South Africa. For example, if you want to invest in an oil company in South Africa, you have o­nly o­ne share to buy, but in another country, there may be a wide range of over 20 companies to choose from.

Emerging markets offer growth opportunity

The underlying base measurements for growth and economic improvement in Brazil, India, Russia and China (commonly referred to as the BRIC countries) look promising.

The growth in China over the past few years is the main reason for the super-cycle increase in commodity prices. In China, urban workers are four times more productive than workers in rural areas. Yet 60% of the population is still based in rural areas. If this ratio can be improved, o­n the back of an increased population together with higher levels of education, the potential for long-term growth is phenomenal. China’s low debt levels (only 2% of properties are financed by mortgage bonds) contrast sharply with levels of risk-taking experienced in the West.

India’s productivity is growing by increasing the numbers of professionals and by government’s initiative in providing a stable environment incorporating growth strategies. Transforming such a large labour force will require time, but as a potential large producer, India should be not be omitted from your offshore portfolio.

The current growth potential in emerging markets further underscores that the Eastoffers the best long-term growth opportunities and should be considered in any offshore investment portfolio.

Another important issue to consider is investing offshore with the right company.

Tax is a key reason to consider investing offshore with a dual-listed financial institution that has the expertise to deal with different tax jurisdictions. Differences in income tax, capital gains tax and estate duty as well as exchange control regulations all need to be taken into account. With a dual-listed financial institution such as Old Mutual you have greater accessibility to technical expertise and servicing experience.

South African revenue authorities require an IT3B tax certificate at the end of February to calculate the amount of tax to deduct from the interest received from an offshore investment. Offshore investment houses very rarely provide such certificates, whereas a dual-listed financial institution is well positioned to assist you to calculate your tax liability.

Offshore assets worth more than $10 000 can o­nly be distributed to heirs if a ‘grant of probate’ has been obtained from the relevant jurisdiction – which can be an expensive and lengthy process. A dual-listed financial institution will be able to assist you overcome this hurdle.

When looking at the offshore investment markets with a three year or longer view, most sectors offshore look exceptionally cheap right now, and attractive. History has shown that those investors who can see the opportunity in this crisis can expect excellent rewards over the medium term. It is important to choose a financial institution with a dual-listing that has experience investing abroad.

Advisers and brokers who market offshore investments are specifically trained because it is a specialist area. I recommend that investors should seek professional advice when investing offshore, to help them decide between the different options, and which funds to choose. A financial adviser or broker who complies with the Financial Advisory and Intermediary Services Act and specialises in offshore investments can assist you in compiling a holistic financial plan that meets your requirements and that takes your circumstances into consideration, whilst adequately diversifying your investment portfolio to leverage off the potential of the current market conditions in developing countries.

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