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By Arin Ruttenberg*
As I learned more about investing, I made a strategic shift towards offshore investments. This is now the cornerstone of my investment strategy and also the key recommendation for my clients. There are several reasons for my decision to look beyond the South African market, to ensure that I grow my clients’ (and my own) wealth in an increasingly interconnected global economy.
South Africa’s markets are very small compared to global markets
My first investment experience was when, at 13, my mother invested my Bar Mitzvah Money into the Coronation Top 20 fund, a superb investment at the time as the JSE was headed for one of the biggest commodity booms of my generation, boosted by a world cup soon to follow. It got me thinking later in my journey about how exactly the JSE is made up and what events back home can change the structure of such a portfolio. One of the primary reasons for investing offshore is South Africa’s minimal contribution to the global economy. With less than 1% of global GDP, the opportunities within the domestic market are naturally limited. To tap into the vast potential of the global market, diversification beyond South African borders is not just beneficial but essential. This strategy allows for participation in the economic growth of larger, more dynamic economies, thereby enhancing the potential for higher returns.
South Africa previously held a significant position in the MSCI Emerging Markets Index, with a weighting of around 17%. However, this influence has waned dramatically, now standing at approximately 3%. This decline reflects broader economic challenges and diminished investment appeal within the global emerging market landscape. As a result, it has become increasingly prudent to seek opportunities in other emerging and developed markets where growth prospects and economic stability are more favourable.
Political challenges and governance concerns
The political environment in South Africa has also influenced my decision to invest offshore. The governing body, the African National Congress (ANC), has often seemed more focused on its internal dynamics and power struggles than on fostering economic growth and stability. The emergence of parties like the Economic Freedom Fighters (EFF) and movements such as MK, driven by agendas of power and retaliation, further complicate the political landscape. This political volatility discourages domestic investment and drives capital to more stable environments. For me personally, the ANC has become more of a football club or religion to its ‘’fans’’ who together with their leaders place the ANC above South Africa.
Impact of far-left policies
Policies such as BEE, NHI and proposals such as expropriation without compensation and those that mandate pension fund investments in specific sectors have further heightened my concerns. These radical policies, while well-intentioned in certain areas, often lead to economic inefficiencies and deter investment. They create an environment where capital and skilled professionals are more likely to seek opportunities in countries with more favourable and predictable economic policies. This capital and labor flight are trends I have observed increasingly among peers and clients.
Offshore exposure of JSE-listed companies
Interestingly, many of the larger companies listed on the Johannesburg Stock Exchange (JSE) with substantial offshore operations, such as British American Tobacco, BHP Billiton, and Richemont, can be purchased directly in foreign markets. This reality means that international investors do not need to bring capital into South Africa to invest in these firms. Consequently, the local market loses out on potential foreign capital inflows, reinforcing the need for South African investors to seek direct offshore investments.
Innovation and business environment
Innovation is a key driver of economic growth, and it is clear that innovative companies will continue to thrive in environments conducive to business. Unfortunately, South Africa’s challenging regulatory and business environment hampers such innovation. By investing offshore, I ensure that my capital is placed in markets where innovation is not only possible but actively encouraged. These markets provide the stability and support that innovative companies need to succeed, thereby offering better long-term investment prospects.
Conclusion
In conclusion, my offshore investment strategy is shaped by a combination of South Africa’s limited global economic role, declining influence in emerging markets, a challenging political and policy environment, and the greater opportunities available in global markets. By diversifying investments internationally, I am able to mitigate risks and tap into the growth potential of more robust and innovative economies. For my clients, this approach is not just about seeking higher returns, but also about securing their financial futures where their currency is depreciating against the currencies of developed markets. Life is more expensive in an ever-evolving global landscape where we use products and services denominated in USD. Investing offshore remains a prudent and necessary strategy for any South African investor looking to navigate the complexities of today’s financial world effectively.
When I look at a company , I look at management, cash flow, barriers to entry or competitive advantage. This in South Africa’s terms would equate to its currency the rand (its share price), its cash flow (balance of payments and tax revenue) and what it does with it. Its management (the ANC) and comparative advantage (commodities) has become fraught with complex regulation driving out capital to other commodity countries.
Would I invest in the company SA Inc at this time? No. Is there potential for an allocation? YES! But the margin of safety is not wide enough for me and until there is radical change you can find my capital offshore in traditional markets and even in certain crypto projects.
* Arin Ruttenberg is an advisor at Brenthurst Wealth Sandton. [email protected]
Brenthurst Wealth Management
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