South Africans investing their money offshore – and it is not only the rich

South Africans are taking their money offshore to protect their investments from rand depreciation and increase their exposure to industries not represented on the JSE. 

This is feedback from FNB Wealth and Investments CEO Bheki Mkhize, who told Daily Investor in an interview the bank is seeing sustained demand from clients to increase their offshore exposure. 

Mkhize said protection from a depreciating currency is not the only reason for this. Investors want the best returns, and those are currently found outside of South Africa. 

“People want returns, and where those returns come from, they do not really mind,” he said. 

The local economy has performed poorly compared to its international counterparts. South Africa’s GDP growth rate has not exceeded 5% since 2007.

This has and will continue to inhibit the performance of equities on the JSE.

Furthermore, the consistent depreciation of the rand versus the dollar has made it challenging to earn a real return in dollar terms by investing in South African companies.

There is also an overlooked reason why South Africans want to invest offshore – there are more investment opportunities outside the country.

The South African market is tiny compared to global equity markets, with limited options for investors looking for diversified exposure across sectors.

In particular, the JSE does not offer investment opportunities in technology, biotech, pharmaceuticals, and climate.

The combination of these factors has driven the increasing popularity of offshore investments in South Africa, with demand often exceeding that of local investment products.

Mkhize also pointed out the increasing number of local asset managers partnering with global counterparts to increase their access to foreign equities and leverage their expertise as a factor. 

Mkhize said that high-net-worth clients have driven the trend of South Africans taking their money offshore, but lower-income segments are also increasingly trying to increase their international exposure. 

Both sets of clients want to increase their exposure to global investments, but they do so in different ways. 

High-net-worth clients tend to convert their rands into foreign currencies and invest using those to completely nullify the effects of rand depreciation. 

Mkhize said these clients tend to wait for periods of rand strength to convert to dollars, euros, or pounds and that there are noticeable spikes in demand for offshore products during these periods. 

On the other hand, lower-income clients tend to increase their offshore exposure through locally-listed exchange-traded funds (ETFs) tracking international indices or through exchange-traded notes (ETNs) tracking the performance of global companies. 

Mkhize explained that this does not mean people are not investing in South African companies. Demand for local assets, particularly fixed-income assets, is still strong. 

There are still some very good companies in South Africa with excellent management teams that produce strong results, he said. 

However, these are confined to pockets of the market, as much stronger economic growth is needed to see a wider improvement in company performance. 

He said South African assets are cheap for very good reasons, and it can be debated whether this is a value trap. But there are still good companies in the country that investors are interested in. 

Mkhize also noted that many of the largest companies listed in South Africa generate a substantial portion of their revenue outside of the country, giving many local investors a hedge against rand weakness.