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Why this might be the best time in years to invest offshore

The rand is strong and the JSE is a tiny bucket in the global sandbox.
The historical returns on the JSE versus the S&P 500 when compared in the same currency are worth looking at. Image: Shutterstock

Take a look at the graph further down comparing the JSE Top 40 index (expressed in US dollars) with the S&P 500. That in itself is a massive inducement to invest offshore, but there’s another factor that Pierre Cloete, CEO of specialist offshore advisor International Wealth & Prosperity (IWP), says South Africans should consider: “The rand has gone from R19 to around R14 to the US dollar in the last few months, which makes it extremely attractive at the moment to move funds offshore.”

Cloete also points to the historical returns on the JSE versus the S&P 500 when compared in the same currency.

Looking at the graph below the JSE Top 40, in red, looks decidedly pedestrian against the S&P 500, which returned 278% over 10 years against the Top 40’s 28.3%.

To put that in some kind of perspective, the S&P 500 outpaced the JSE Top 40 by a factor of 10 to one.

That’s in larger part because the constituents of the S&P 500 include behemoths such as Apple (up 60% over 12 months), Microsoft (37%), Amazon (33%), Google holding company Alphabet (68%), Facebook (44%) and Tesla (263%).

These giants are not available on the JSE.

Their outsized influence on the S&P 500 index over the last 15 months is due to the Covid lockdowns and the migration to online retailing and service delivery (the five largest companies in the S&P 500 are all tech stocks accounting for 20.6% of the index).

Some of the more interesting investment stories in the world are denied South Africans who confine their investment choices to the JSE. Take financial services, for example. Five of the top 20 stocks in the S&P 500 are banks and financial services groups: JP Morgan Chase, Visa, Mastercard, PayPal and Bank of America. These stocks are in the throes of a robust recovery after being hammered at the start of the Covid crash in April 2020.

The FTSE/JSE Top 40 index is massively weighted in favour of a few large shares: Naspers (19.28% weighting), BHP Group (12.83%), Richemont (10.56%) and Anglo American (10.53%).

These four stocks account for more than half the total weighting in the index, with 10 companies making up roughly 70% of the index. The entire universe of stocks of the JSE numbers around 400, as opposed to the thousands of stocks available to the offshore investor.

More important than the number of opportunities offshore is the quality of these stocks. The world’s largest retailers, tech companies, banks and consumer goods companies form part of the S&P 500. These are opportunities denied to South Africans who do not take advantage of their offshore investment allowances.

The JSE Top 40 index (in red) compared with the S&P 500, expressed in US dollars

Source: Morningstar Direct

“There is no question that a passive investment in the S&P 500 over the last decade would have materially boosted your net worth relative to putting all your eggs into the JSE,” says Cloete.

“The question then arises whether this trend is cyclical and likely to reverse – in other words, whether the JSE might outperform the S&P 500 over any reasonable time frame going forward. I doubt such a scenario might play out.

“The rand has been strong relative to the US dollar over the last year, but that is a trend we do not see continuing for much longer. In fact, the ideal time to invest offshore is when the rand is strong. The other structural issues that SA has to overcome before it regains its lustre as an investment destination are the looming fiscal cliff brought on by runaway state spending, and the perceived hostility towards business.”

Debt as a percentage of GDP is now 83%, having been as low as 27.8% in 2008. Foreign investors apply a discount to all SA stocks because of the perceived risks of doing business in a country where corruption and state capture have infested the economic bloodstream. The Zondo Commission into state capture has highlighted the depth of the problem, yet few of the culprits have been held to account.

“There are serious structural issues that have to be addressed in SA before we see any prospect of a return of foreign investment outside of the yield hunters in the bond market,” adds Cloete.

The JSE Top 40 index (in red) compared with the S&P 500, but this time expressed in rands

Source: Morningstar Direct

This comparison is only mildly more flattering to the JSE.

While there will always be pockets of opportunity on the JSE, these pale in comparison to the opportunities that are found offshore.

Cloete says passive investment in an index tracker-type fund is usually the most cost-effective way of gaining exposure to offshore markets. “Passive investment vehicles have shown over time that they outperform actively-managed funds. It’s important to bear in mind the higher costs of actively managed funds – which can be as much as 0.5% to 1% higher per year. These higher costs, compounded over 10 years, can seriously impair your overall returns. So our advice is to stick with lower-cost passive funds if you want to build your wealth offshore.”

Many South Africans, recognising that remaining overweight the JSE is the road to financial perdition, have started to maximise their offshore exposure. This allows them to maintain their wealth in global terms for any number of reasons: whether they plan to financially emigrate, or want to enjoy overseas travel and possibly have a bolt hole in case things go pear-shaped in SA.

To see how International Wealth & Prosperity (IWP) can assist you in building your global wealth, go to iwpsa.com.

Brought to you by International Wealth & Prosperity (IWP).

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.

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