Oct 11

Safeguarding your wealth

Vic Hodoul, Warwick Turnpoint Advisory Partner on the Importance of Offshore
Investment Diversification for South African Residents.

In today’s global economy, South African residents must prioritise offshore investment diversification due to the country’s limited global economic footprint. Despite being the most developed African economy, South Africa contributes less than 0.5% to the global economy. This exposes local investors to regional and concentration risks. Factors like currency volatility, political instability, and structural challenges within the nation can significantly impact domestic investments.

Diversification is a crucial risk management strategy that involves spreading investments across various asset classes and geographical regions. For South African investors, international diversification acts as a buffer against the country’s economic volatility. It helps protect the overall value of portfolios during domestic economic turbulence, of which we have our fair share!

To understand the benefits of international diversification, it’s essential to compare the performance of the Johannesburg Stock Exchange (JSE) with developed market exchanges
over the past decade:

JSE vs. S&P 500

Comparing the JSE to the S&P 500, which represents the top 500 US companies, reveals a significant disparity. Over the last ten years, the S&P 500 has outperformed the JSE with a 259% return in Rand terms (176% in USD terms) compared to the JSE’s 78% return. This gap underscores how the developed world has outpaced South Africa. Over that time, the JSE has been losing listings, and newer local bourses haven’t fulfilled their expected promise.

JSE vs. Other Developed Markets

A similar trend continues when evaluating the JSE against other developed market indices like the FTSE 100 (UK), DAX (Germany), and Nikkei 225 (Japan). These markets consistently show superior returns and stability.

Rand Depreciation

In addition to market performance, the South African Rand has depreciated significantly against the US dollar and other major currencies over the past decade, weakening by 83%. This erosion of purchasing power is a compelling reason for global diversification. Investing in stronger currencies through international diversification not only preserves wealth, but also offers growth potential. In fact, holding US Dollars under the proverbial mattress has outperformed the JSE equity index by 5%, with lower risk over the past decade.

Conclusion

The imperative of offshore investment diversification for South African residents cannot be overstated. Relying solely on the domestic market exposes investors to unnecessary risks due to the country’s limited global economic influence and its unique challenges. International diversification allows investors to prudently manage risk, access a wider range of investment opportunities, and potentially achieve better returns. The performance comparison over the last decade, coupled with the significant Rand depreciation, highlights the urgency for South African investors to embrace global diversification as a crucial strategy to secure and enhance their financial well-being.

A Caveat

Given the above, it’s essential to recognise that the process of converting assets from Rand to global diversification involves complex tax, estate, legal, and technical issues. It is therefore critical for individuals to partner with their Wealth Specialist or financial planning professional who can navigate these complexities and provide guidance throughout the process.