When is the right time to invest offshore?

Offshore investing provides South Africans a far broader choice of opportunities with the benefits of more diversification and exposure to different foreign economies and markets. While there are risks associated with investing offshore, the potential rewards outweigh the risks.

In this newsletter, we explore the benefits of offshore investing, compare the performance of local and offshore investments, and consider whether there is any benefit in trying to time the volatile Rand exchange rate.

Investing money offshore is an excellent way for South Africans to diversify their investment portfolios and benefit from opportunities in foreign companies, economies, and markets. Some benefits of offshore investing include:

• More investment opportunities: South Africa represents less than one percent of the world economy. Limiting portfolios to local investments only is an opportunity missed to invest in some of the biggest and most successful businesses and markets in the world.
• Protection against inflation: Investing offshore can help to hedge against currency risk and domestic inflation. Investing in different currencies can help to offset any losses that may occur due to changes in the value of the South African Rand.
• Mitigating political risk: Political and economic events in South Africa can significantly affect local investments. By investing offshore, you can potentially reduce the impact of these events on your portfolio.

Performance of Local vs Offshore Investments

The table below compares the past performance of the South African stock market (JSE) and an index of global stock market constituents (MSCI world index).  Performance is quoted in rands, i.e. from the perspective of a South African investor:

It’s worth noting that much of the MSCI World Index’s outperformance of the JSE All Share Index over the long term (10 years) is due to rand depreciation. Rand depreciation adds to the offshore investment’s total return calculated in rands, and rand appreciation detracts from the overall return.

Rand depreciation over the past 10 years

Does timing the exchange rate matter over the longer term?

A recent study by Ninety One Asset Managers investigates whether the rand/dollar exchange rate at the time of an initial offshore investment has a meaningful impact on the overall longer-term return.

To measure this, they looked at the performance of the Ninety One Global Franchise Fund from April 2007 to December 2022 and split the data into two series:

1. One-year periods where the rand was stronger in the year before an investment into the fund was made.
2. One-year periods where the rand was weaker in the year before an investment into the fund was made.

The analysis found that of the 165 one-year periods, approximately one-third were periods where the rand strengthened, and two-thirds were periods where the rand weakened.

Performance of the Ninety One Global Franchise Fund following periods of rand weakness and rand strength

The analysis found that the average performance of the fund was not dependent on the initial strength or weakness of the rand. The average annualised returns were similar for periods of rand strength (13.1% p.a.) and rand weakness (12.3% p.a.) – a difference of only 0.8%. The maximum annual return was also very similar for both series. This suggests that the exchange rate entry point is not as significant as many investors may think.

This can be further explained when we look at the relationship between global markets and the currency.

The chart below shows how there is often an inverse relationship:

Ninety One argue that the rand tends to be a risk-on/risk-off currency (i.e. a cyclical asset):

In a risk-on environment, investors switch exposure from developed markets (DMs) to emerging markets (EMs) in search of better returns. This leads to EM asset prices outperforming DM asset prices. In a risk-off environment, the reverse is true, with investors moving their allocation back to DM assets, resulting in weakening EMs and the rand, which then acts as a ‘shock absorber’ for an offshore investment.

In summary, when the rand is strong, global markets tend to be relatively expensive. When the rand is weak, markets tend to be cheaper. Investors should therefore take a longer-term view when investing offshore and look past the shorter-term movements in the currency.

Review your investment strategy

Offshore investing is a specialised area of financial planning. It is essential to consider the associated risks, including exchange rate volatility, geopolitical risks, and regulatory and legal risks. It is also essential to ensure that you have a clear understanding of your selected investment instruments or products.

At Investonline, we can assist you with these critical investment decisions, and advise you on structuring your offshore investments to meet your goals and as tax efficiently as possible.

Speak to a Portfolio Manager