South Africans venturing offshore (whether investing directly or setting up structures), have been accused of disloyalty to the country. There are several reasons why this is simply not true and why offshore should feature in the investment landscape of all South Africans and, to that point, all investors to the extent that there is no legal or other impediment to doing so.
The domestic horizon
The cornerstone of any investment philosophy is diversification (in order to spread risk). As such, venturing beyond South Africa’s borders makes sense. Whilst it is true to say that South Africa has a very well-serviced financial services industry, with numerous domestically-focused investments, the relative size of the investment landscape must be considered. The size of the stock market, the Johannesburg Stock Exchange (JSE), is less than 1.5% of world stock market capitalisation. In addition, there is a vast array of investment products available worldwide. Some of these are not available in South Africa; venturing offshore increases the range of opportunities available to the investor – different currencies, investment vehicles, asset classes and markets. More mature stock markets also have sectors representing viable industries that are not as well-developed in South Africa e.g. telecommunications, e-commerce and information technology.
Apart from the ability to access a wider investment universe by investing offshore, there is also the investment currency to consider. The South African Rand (ZAR) must be considered as an underlying currency for investment (versus hard currencies such as sterling, the US dollar and euro). As a useful indicator, consider the position on 1 July 1997 when South African individuals were able to invest offshore for the first time; the ZAR was 7.53 to sterling. It is currently around ZAR20.50 to sterling. Using a rough time value of money calculation, this equates to a ~4.45% depreciation per year. If this was the trend of the past 23 years (and prior), is there likely to be a reversal of fortunes? From an investor’s perspective, venturing offshore is thus a no-brainer.
The South African Wealth Report for 2020 (NW Wealth, 2020), published by New World Wealth, reflects another factor for consideration. The number of US dollar millionaires in South Africa reached a peak in 2010, numbering 48,600. In 2019, the number stood at 38,400. This represents a drop of some 20%. There are several reasons for this, including a decline in the value of ZAR, along with an underperforming property market. According to New World Wealth, this trend is expected to continue. The numbers of South Africans emigrating are also increasing. According to FNB’s annual estate survey, in the wealthiest segment (houses sold for R3.6 million plus), 25% sold their houses to emigrate as at Q2 2020 (van Heerden, 2020).
There are numerous other factors that will impinge on the decision to invest offshore. These should be considered from a macro and micro-economic perspective, considering both the country and the individual investor.
A vital cog
Currently, the country’s debt position is over ZAR3 trillion or approximately US$230 billion (Commodity.com, 2020). To this must be added the debt owed by State-Owned Enterprises (SOEs). The debts of South Africa’s provinces and local government are not counted as part of the country’s national debt which has been rising as a proportion of the nation’s GDP for some years. In addition, the Government has underwritten the debts of the SOEs which too is not calculated within the country debt.
SOEs represent a vital cog in maintaining the basic infrastructure of South Africa. Some of the main sectors where SOEs are dominant include electricity, transport, mining, water and telecommunications. Numerous SOEs are facing financial difficulties, which has led to credit rating downgrades and, in turn, increased financial deficits. All 3 rating agencies (Moody’s, Fitch and S&P) have downgraded South Africa’s sovereign rating to junk status in the last few years (Molopyane, 2020). This affects the willingness of international investors to invest in the country as they will perceive it as higher risk. The guarantees and exposure to SOEs pose a significant risk to South Africa’s fiscal position.
Ratings downgrades impact foreign investors’ views of the opportunities within emerging markets, such as South Africa, but also have a sizeable effect on domestic investment sentiment. There are numerous political and economic factors affecting South Africa as an investment destination. Some of these have been cited as reasons for the downgrades including unemployment, cost of labour, shortfalls in infrastructure and future political stability.
Whatever the position may be in respect of the South African domestic investment opportunity, the offshore investment opportunity is compelling, especially since local investors will be evaluating these same factors. This raises the next question…
How much and where to invest offshore?
Historically, the ‘magic number’ varied between 25 and 75%. Currently, the prevailing opinion seems to be to invest as close to 100% as practical. Funds to facilitate daily living and lifestyle cost should be retained domestically with the rest being invested offshore.
Venturing beyond borders
As is clear from the aforegoing, South Africans should consider investing offshore. Next comes the question of whether you invest directly with an investment manager or whether you hold and own the individual assets within a structure.
Structures are best used for clients with larger amounts to place offshore, looking to achieve long-term investment objectives. These will generally involve estate planning, intergenerational planning and more complex structuring. Where more complex planning is required and globalisation of a business is involved, offshore trusts and companies can be very powerful tools.
South Africans tend to favour English-speaking jurisdictions in the same time zone, where professional services are available, typically Jersey, Guernsey and the Isle of Man, with a handful of others, depending on what the client is seeking to achieve. For trusts, it tends to be English common law (rather than civil law) jurisdictions.
South Africans tend to be cautious about trusts, given that structures have not always been recommended for the most appropriate reasons and fees have often been opaque. However, Trusts can be very useful vehicles when utilised correctly.
When making any decisions about your family’s wealth, and your own, the key is to surround yourself with a team of trusted service providers (i.e. financial adviser, lawyer, trustee, tax adviser etc.) who understand both domestic and offshore private wealth planning. Always consider our top tips when evaluating your prospective investments and structuring:
1. Ensure you take tax advice as every investment or structure will have tax implications and those should be clarified beforehand.
2. Ascertain whether there will be tax implications in South Africa as well as the investment destination. To the extent that there are, ascertain whether there is a Double Tax Agreement.
3. Choose a jurisdiction where South African investors and settlors are well-understood.
4. Ensure the jurisdiction is well-regulated, has ease of communication internationally and has a large financial-services sector.
5. Pay careful attention to costs; make sure all costs are clearly set out at inception and details of the ongoing costs are known.
Note: VG does not provide tax, investment or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or legal advice. You should consult your own tax and legal advisors before engaging in any transaction.