South Africans moving their money offshore

South Africans are investing in global stock markets to protect themselves from a weak rand and a stagnant local economy and benefit from greater investment opportunities outside the JSE. 

The South African stock market has generated poor returns over the past decade due to a stagnant local economy, resulting in less domestic savings and foreign investors taking their money out of the country. 

Over the last seven years, foreign investors have sold R710 billion of South African equities, and local investors have recently joined in by investing an increasing share of their portfolios outside the country. 

Following the National Treasury’s decision to allow pension funds to invest up to 45% of their assets offshore, billions of rands worth of local assets have been sold in favour of offshore investments. 

The average Regulation 28-compliant fund now holds just 39% of South African equities, compared to nearly 70% eighteen years ago.

This is compounded by the shrinking investment universe locally, with listings on the JSE at a 30-year low. The number of companies listed on Africa’s largest stock exchange has more than halved since 1998. 

One of South Africa’s largest asset managers, Coronation, has said this is one of the main reasons local investors should increase their offshore exposure. 

The same diversification principle applies to asset classes also applies to spreading your investment risk and return opportunities across geographies and, importantly, jurisdictions.

The graph below, which shows the combined market capitalisation of the world’s top five exchanges, demonstrates the magnitude of investment opportunities outside our home market.

These exchanges have a combined market cap of over $83 trillion and comprise of close to 14,000 listed companies compared to the JSE’s ~$1 trillion valuation. 

When you widen your investment universe, you gain access to engines of innovation and growth, as well as deeper industries that may not be present in our home market.

This enables investors to diversify their investments more widely into new sectors that behave differently from those listed on the JSE, reducing the overall risk of a major capital loss. 

In addition to these benefits, investing in hard currency (i.e. in an offshore fund that requires you to convert your rands into another currency) offers investors a hedge against sovereign risk (for example, the imposition of tougher exchange control regulations). 

This may be more tax efficient, Coronation said, as currency gains and losses are not subject to capital gains tax in offshore funds.

In response to increased demand for offshore investments, asset managers have increased their offerings to include several ways of investing money in global markets. 

In many cases, these companies have tried to lower the barrier of entry to their offshore products to lower-income South Africans as demand has risen. 

Coronation has, for example, made its offshore funds more accessible by reducing the minimum initial investment to $500. 

Other asset managers have done this in a different way, with FNB increasing its offering of locally-listed exchange-traded funds (ETFs) that track global indices. 

FNB Wealth and Investments CEO Bheki Mkhize told Daily Investor 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. 

Conversely, lower-income clients tend to increase their offshore exposure through locally listed ETFs or exchange-traded notes (ETNs) that track 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. 

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

South African assets are cheap for good reasons, and whether this is a value trap can be debated. However, 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.