Protect your wealth from a weak rand

South Africans should invest a substantial portion of their wealth outside the country to protect it from a stagnant economy and a weak currency that erodes their purchasing power. 

South Africa faces many problems, including poor economic growth, an unstable political environment, high crime rates, and collapsing infrastructure.

Some skilled South Africans move to countries like Australia, the UK, Canada, and the United States to live in a safer and more stable environment.

However, many people continue to enjoy the country’s great weather, food, family, and friends and need to protect their wealth from South Africa’s poor economy and, specifically, its weakening rand. 

Daily Investor asked investment specialists how they suggest South Africans invest their money to protect their wealth.

The most common threat investors have to guard against is inflation, which erodes their purchasing power over time, Old Mutual Wealth investment strategist Izak Odendaal said. 

There is an easy solution to this threat—invest in assets that provide long-term inflation protection. Historically, equities are the asset class with the best long-term return since companies tend to grow earnings above inflation. 

Unfortunately, equities can be volatile in the short term, which brings us to Odendaal’s second great risk – a permanent loss of capital. 

This usually takes two forms: investing in something that is completely overvalued because it has a great story attached to it or investing in something that is completely undervalued

Another way is to panic when markets are volatile and sell out after prices have fallen. This emotional approach to markets can lead to serious capital loss. 

Some people would highlight a third threat to your wealth, namely confiscation.  This can mean either an unexpected jump in taxation or a weakening of property rights such that what you thought was yours is suddenly not. 

This is a low-probability but high-impact outcome and can best be countered by geographic diversification.

Old Mutual Wealth’s Izak Odendaal

Eric Enslin, CEO of FNB Private Banking and Advisory, said investing some of your savings offshore is the best way to protect your wealth from a weak rand. 

He explained that the ideal offshore allocation is different for each investor and is not a one-size-fits-all solution.

However, here are some broad principles and suggestions that investors should follow when investing their money outside of South Africa. 

Offshore investment has multiple advantages, including asset and currency diversification, access to a far larger set of investment opportunities than those available in South Africa, and exposure to other currencies. 

Investors can make offshore investments in two ways  –  directly or through feeder funds and South African companies with significant offshore earnings. 

Direct offshore investment entails changing rands into foreign currency and provides additional diversification away from local geopolitical risks. 

Direct offshore investment is not without pitfalls. Enslin warned that forced inheritance rules relating to property, global inheritance tax considerations, and other taxes must all be planned for. 

Asset swap investments such as feeder funds, on the other hand, allow investors to get offshore exposure in rands without the need for tax clearance, with lower minimum investment levels but require additional expenses. 

High-net-worth clients frequently choose direct offshore investments, transferring their rands into foreign currencies, whilst lower-income clients typically grow offshore exposure through locally listed ETFs or ETNs. 

CEO of FNB Private Banking and Advisory Eric Enslin

Odendaal agreed that geography is important and should be a part of every investor’s portfolio but stressed that they probably need less than they think. 

He explained that the amount of offshore exposure is specific to each individual, but it is not necessarily as much as people think. 

This is because JSE equities have a strong rand-hedge component and because rand weakness doesn’t raise inflation by as much as people believe. 

Odendaal said many of the largest companies on the JSE have significant offshore operations and earnings in foreign currency. 

These companies include global mining houses such as BHP Group, Glencore, and Anglo American. It also includes Richemont, AB InBev, Investec, and Bidvest. 

Thus, investors in a basic JSE Top 40 index-tracking fund have global exposure. 

In terms of inflation, Odendaal said the consumer price index does not rise as fast as the rand falls. 

The answer to the question of offshore allocation has a lot more to do with the fact that the global opportunity set is so much bigger than domestically than rand weakness in his opinion. 

Investing abroad should be seen as an opportunity to achieve a higher level of diversification and get a better portfolio balance rather than obsessing over the rand. After all, the rand can appreciate, Odendaal said. 


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