It's been a tough few weeks for South Africa.
It all started when finance minister, Tito Mboweni, unveiled yet another bailout for Eskom. The R59 billion taxpayer band aid then spooked international investors and prompted announcements from ratings agencies Fitch and Moody's.
Both echoed the usual concerns about slowing growth, rising government debt and the inability of our policy framework to address the issues.
The message was driven home on Tuesday when the Quarterly Labour Force Survey for Q2 was released. Unemployment in South African jumped to 29%. That's the worst figure since 2008.
The terrifying number is “youth unemployment”. A whopping 56.4% of South Africans between the age of 15 and 24 have no job, are not training or are not in the formal education system.
Yet, in a dark week, there was a glimmer of hope. Last night, the US Federal Reserve cut interest rates. This is also the first interest rate cut in the US since 2008.
And, while this is likely to be currency negative (the ZAR took another leg lower to 14.37 at the time of writing this), this could potentially give the South African Reserve bank a little wiggle room when it comes to cutting rates here at home. And, historically, lower rates mean higher equity markets to come.
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So, what should you be doing?
There is no question there has been a rapid escalation of private funds leaving the country. Unless you’ve been living under a rock, with no access to any form of media, you’ll be aware of the structural issues facing South Africa.
And, while domestic rate cuts would provide some sweet relief to immense pain facing local equity investors, lowering the price of money can only do so much. It can’t address the fundamental issues facing the country.
Now, believe it or not, I am actually a SA optimist. The greater the issues facing South Africa the more opportunity there is to make business, solve problems and generally improve the lives of those around you.
But, when it comes to investment, I cannot understand anyone who doesn’t have at least some of their nest egg offshore.
If you can afford it, or have your funds structured in a way which allows direct offshore investment, the only sensible option is to move a portion of that money internationally.
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, I’d be happy to help you personally with the various tax clearances, reserve bank reporting and booking a cross-border rate.
To maximize efficiency, you should try to move a minimum of R100,000 at a time. At that value it can be extremely cost efficient when done correctly.
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But what if direct offshore investment is not an option?
Maybe you just don’t have the required funds to go direct. Or perhaps you’ve already used up you offshore allowances. Perhaps your funds are structured in a local trust or company. Or maybe you’re thinking about funds sitting in a Regulation 28 retirement product.
There are many reasons you may not be able to go fully international. You may feel frustrated when you can so clearly see the dangers facing the rand and your local cash.
The good news is: You are not helpless!
There are plenty of methods you can use to increase your offshore exposure without actually doing a cross-border transfer. Let’s look at how, with a little fancy footwork, we can bring international markets to the local stoep.
Method #1: Locally listed offshore companies.
The most obvious way you can access offshore markets with local funds is via secondary listings on companies like ABInBev or Richemont. They’re listed locally and you can simply buy them in your local stockbroking account.
These fully offshore companies often have very minor exposure to South African markets. As our local economy stutters along, these companies are unaffected by local politics and weak markets. Their revenue is earned internationally, and they will benefit from ZAR weakness.
Method #2: Locally listed ETFs
A second workaround comes from the world of Exchange Traded Funds, or ETFs for short. There are quite a few JSE listed fully offshore ETFs.
If you’re looking for a US market tracker you could consider something like the Coreshares S&P 500 ETF (CSP500) which links your performance to the 500 largest US companies.
You might want to go more global and check out the Satrix MSCI World ETF (STXWLD).
You’re also not limited to share-based ETFs. If you’re looking for more of a fixed-income type product, consider the Ashburton World Government Bond ETF. (ASHWGB).
These ETFs give you one of the simplest and most efficient ways to get offshore-linked performance without doing a cross-border transfer.
The added benefit is they come with instant diversification. You don’t need to pick underlying shares and your risk is reduced through a wider spread of underlying investments holdings.
Method #3: The ZAR hedge
Perhaps, you really want to go FULLY offshore but you’re not currently able to send the funds out. Perhaps you’re waiting for the sale of a local property or you’ve already used up your foreign exchange allowance.
It’s actually very cheap and cost effective to put on a currency hedge. You can do this on all the major currencies and effectively lock in today’s rate on any future flow of funds.
For example, you know your R1 million allowance will reset on 1 January 2020. We can use either a currency forward or an FX contract to lock in the rate on next year’s transfer.
If you’re interested in finding out more about the methods of investing above feel free to drop me an email on firstname.lastname@example.org
Rand Swiss, Wealth Manager