Investments: Local or Offshore

Investments: Local or Offshore
Craig Kiggen, Consolidated Wealth’s Managing Director

With the current market outlook, should South Africans be buying local investments or taking their money offshore?

The current market outlook is stressful for South Africans who are looking to invest. On April 6, 2020, the Rand was trading at R19,26 to the US Dollar but by November 27, our currency had strengthened significantly against the greenback to R15,19, at the time of writing, its best level since the first week of March.

Craig Kiggen, Consolidated Wealth’s Managing Director, says this strengthening of the Rand leads to a question that is regularly fielded by financial advisers: should a client invest locally or take their money offshore and when? The answer he says is not straightforward as there are many factors that need to be taken into consideration.

“For a client looking to invest in the long-term, a well-diversified portfolio that includes both Emerging Market exposure and offshore investments will help them to achieve their goals,” Craig explains. “Buying asset classes at the right price is however critically important and today, given what is happening with the Rand, sending a part of your investment strategy offshore is worth more than just modest consideration.”

Craig says there are several short-term factors that are currently dominating the Rand’s movements:

Over the past five months, South Africa’s current account went into surplus as commodity prices (our biggest export) were strong and the oil price (our biggest import) was very low. During November however, this trend swung and oil is now up by 27%.

The US Dollar is somewhat weak.

The investment world turned bullish for Emerging Markets post the US election. This can be attributed to the fact Biden will most likely bring some stability to America / China trade relations and as a result, a larger US economic stimulus is expected.
The international emergency loans flowing into South Africa during Covid-19 had to be converted to Rands, which has provided a synthetic short-term boost for the currency.

The negatives are more medium-term in nature, but the impact will be far more severe:

The same international hard currency loans that have bolstered the Rand in the short-term will need to be repaid and this will be done off a lower credit rating.

Growth in South Africa will remain hamstrung as our nation now has the worst credit dynamics of all Emerging Markets. Yet the Rand appreciated as foreigners are using it as a high-beta liquid exposure/entry to Emerging Markets.

South Africa’s Debt / GDP is now critical and seems to be getting worse.

Another point for investors to note, says Craig, is that since June the EM FX index has been flat, whilst the Rand kept on surging as per the factors already outlined.

“It’s crazy and won’t last. According to our analysts, this current wave of liquidity and vaccine-induced bullishness could push the Rand to 14.50 even! We believe however, that the Rand will revert back to a long-term mean. Simply put, it is a buying opportunity to externalise some of your local cash,” Craig explains.

If you are looking to invest offshore and you still have questions, Craig says it is best to chat to your financial planner as they will be able to ensure that this is aligned to your long-term financial plan.