Economy Archives

Five Mistakes to Avoid When Investing Offshore

19/01/2021 14/05/2021

With Fitch and Moody’s downgrading South Africa’s credit rating even further and the political and economic climate becoming increasingly erratic it’s perhaps unsurprising that more and more people are electing to move their money offshore.

While this may seem to be a simple solution for those looking for stability it is also easy to make mistakes that could ultimately cost a lot of money and undermine the benefit of investing overseas. We take a look at five of these potential pitfalls and share some tips on how to avoid them.

“An investment in knowledge pays the best interest” (Benjamin Franklin)

It can be tempting to look at South Africa and the bad news that seems to hit us like freight trains one after another, and immediately consider moving all your money offshore. There is however far more to consider than simply your gut feel, and predictions of woe as investing offshore comes with a lot of difficulties and more than a few unique problems.

Here we look at some of the most common errors people make, to steer you clear of losing your investments.

A bank account is not an investment

Perhaps the largest mistake that new offshore investors make is panicking. In their emotional state they open an offshore bank account and start moving money overseas, but this is a mistake.

Bank accounts, particularly in Europe, often pay less than 1% interest and any money that is sitting in one is certainly not even keeping up with South African inflation. As with local investments offshore investors should be looking to craft a diverse portfolio that includes quality global equities to ensure they aren’t just throwing money away.

Understand the market

Before leaping into an offshore investment, it’s important to have a clear picture of the currencies, returns, fees and taxes associated with the different options, and the respective risks that might need to be managed from the outset.

In many jurisdictions fees can end up being a significant player in the profitability of the investment, to the point where they may result in an ongoing shrinkage of offshore assets. This is particularly true if an investment is held in the name of a company, trust or pension, where director or trustee fees will usually be charged on top of the advisory fees.

On top of this, investors in many European countries often pay significantly more in fees for absolutely no added benefits, compared to local investors.

Rental properties aren’t simple

Many people consider buying a rental property in a foreign country the ideal investment, especially if they are considering emigrating there at some stage. A number of countries also offer passports to investors provided they purchase property in those countries, which can also lead to this kind of investment.

There are, however, a number of ways that a rental property can end up becoming a money sinkhole instead of offering the expected stable returns.

International property investors should not simply buy into whichever development the internet or sales agents are suggesting. Do your homework and fully understand the laws, taxes and unique conditions around the country, city and suburb you hope to invest in. Even if the property you are about to buy seems like a good deal, if it is in an area where there is too much rental housing and you struggle to find a tenant, it will end up costing you a small fortune instead.

Investors need to also make sure they do their research on the companies they are working with to ensure they are not uncertified or unscrupulous. Fortunately for investors there is the Association of International Property Professionals (AIPP), an international body that is committed to regulating the industry. If you partner with an AIPP member, you are assured that they have been vetted and approved.

Arranging finance in a foreign country is possible, but again comes with a need for caution. What is the track record of the company offering the finance and just what are the terms they are offering in their contracts? Laws in other countries may not be the same when it comes to finance, and there may not be the same protections that are on offer in SA relating to allowable interest rates and what happens in the event of a default.

Applicable laws need to be checked regarding tenancy too. Are there protections in place if your tenant does not pay the rent? What happens if someone refuses to move out or damages the property? The best solution is to team up with a reputable letting agent who knows the laws, and who has your best interests at heart to ensure you don’t fall foul of some trick of local law. Of course, using an agent results in additional costs, but in the scheme of things this is likely to be money well spent.

In short, research and research again. This is not something to rush into because you saw a flashy Power-point presentation.

Double Taxation

With the laws around taxation of foreign income recently changing there is a lot of uncertainty, and numerous rumours have arisen as to just when tax is applicable, whether disclosure is necessary and just how much is due. The basic rule is that South African tax residents are subject to tax on their worldwide income regardless of where that income derives or whether it has already been subject to tax in the country where it was earned.

It gets more complicated though, because the South African government has numerous Double Tax Agreements (DTA) with various countries, which seek to prevent double taxation. These are not always helpful however as they don’t always protect the investor from paying two sets of taxes.

The DTA signed with the UK for example clearly outlines in Article 6(1) and 6(3) that where a South African receives rental income from letting immovable property in the UK, such income may be taxed by the UK. It does not however say that South Africa is then not allowed to also tax the income. Article 21 tries to provide protection from double taxation, but there are numerous limitations.

This is then further complicated by the fact that there are some domestic laws which seek to help prevent double taxation in some circumstances, but these laws don’t always apply and come with onerous documentary requirements. Basically, consult an accountant to go through the particulars of your case to determine if any tax is owed and what to do about previously undisclosed income to avoid falling foul of the law.

Waiting for the right time to invest

Perhaps the simplest error to correct is the one where, having already decided to invest offshore, the investor decides to hold onto their money, waiting for the right time to jump into the foreign market.

It may seem wise to wait for the Rand to strengthen or the global equity markets to offer up some value, but this is advised against. Commonly, when people are waiting to move funds, they place large sums of money in money market funds, sometimes for years, looking for the right time to jump in, all the while accruing local income taxes at the marginal rate. This more than undoes all the good that a small strengthening of the Rand could present.

If you are going to do it, there is no better time than the present.

Junk Status Is Not The End – It Can Get A Lot Worse!

20/01/2020 14/05/2021

There is a perception that we will be scraping the very bottom of the barrel if Moody’s does indeed downgrade our debt to the dreaded Junk Status – that ‘There’s no way to go but up’, that ‘This is the beginning of our rehabilitation process’ and so on.

Regrettably that’s not so at all. If our economy continues to go the wrong way there could be much worse in store for us – have a look at our table of the various categories used by Moody’s in its “Investment Grade” and “Non-Investment Grade” rankings.

We discuss the implications, and our way forward.

It is now widely expected that sometime in the next year or so Moody’s will downgrade South Africa’s debt to junk status. Many see this as the beginning of the process to rehabilitate ourselves. True, initially we will go through a difficult period as ±R150 billion of our debt will be sold as many offshore institutional investors cannot hold junk bonds which leads to a fall in the currency, higher interest rates and lower economic growth. But then we knuckle down and begin to reform the economy and embark on the process of returning to investment grade.

However – things can get much worse

Source : Moody’s

We are currently Baa3 with Moody’s and are on a negative watch with them which means they will put South Africa on Ba1 (i.e. junk status) if we don’t get economic growth on an upward path and rein in our rising debt.

As you can see, we can keep dropping to Ba2 and all the way down to C which means South Africa has defaulted on its debt obligations and there’s little prospect of recovery.

It can happen – just look at Venezuela and Zimbabwe – where optimistic assumptions are made on economic growth and government expenditure but in fact the country just raises taxes, incurs more debt, until you need to borrow money just to pay off debt that falls due. Each drop on the Rating Matrix raises the cost of borrowing and the downward spiral continues.

The ultimate problem with this scenario is that it eventually becomes irreversible, which is when default on debt becomes a distinct possibility.

The reality is that until genuine reforms are put in place, we will continue to descend along the Rating Matrix ladder.

What should we be doing?

Paying off as much debt as possible is a good start. We should also carefully consider any future expenditure and analyse just how necessary it will be, particularly if it is in foreign currency. Some analysts recommend that we should become as self-sufficient as possible (e.g. boreholes, solar power).

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

What Will The Next Decade Bring Us?

20/01/2020 14/05/2021

As we settle into 2020 let’s all, with the wise old saying “Failing to plan is planning to fail” in mind, start thinking about not only what the next year or so holds for us, but about what our world could look like in 2030.

Of course that means predicting the future, a notoriously difficult exercise at the best of times and perhaps a particularly challenging one in these days of increasingly frenzied change.

We can however identify a number of global trends emerging which will at the very least get us pointed in the right general direction. So let’s have a look at some of them…

“If we can win the Rugby World Cup three times, surely it is not asking too much of this country to take the High Road twice when its future is on the line? When push comes to shove, ordinary South Africans can do extraordinary things!” (Clem Sunter)

The major global trends that have recently emerged and are widely predicted to continue to dominate the world are:

A rising tide of nationalism and anger at the status quo which manifests itself in trying to stop immigration into Western Europe and the United States, an increasing move away from free trade and more and more civil unrest. If you put all this together, it will result in slower global economic growth and rising tensions within countries and conflicts between nations (India and Pakistan, Turkey and the Kurds/Syrians, the USA and Iran to name a few).

For South Africa, which is dependent on growing trade, this will put more pressure on an already struggling economy. Civic unrest is also a significant trend here and hopefully we can recreate the 1990s when we stunned the world by negotiating a peaceful transition to democracy.

Superpower tensions as China vies to overtake the USA both economically and militarily. Russia is also showing global ambitions. So far this has played itself out in US tariffs against China and sanctions on Russia, but you can expect this to hot up.

South Africa is a long way from these battle grounds and should be spared any conflicts that arise. In fact, we will probably benefit as the superpowers vie for influence which should translate into investment into our declining infrastructure.

The last decade has been characterised by easy money and low interest rates, which opens the distinct possibility that there will be another economic crash similar to the one in 2008.

This would not be good news for South Africa as our economy is already stretched by rising debt. We survived the last crash well as we had strong economic fundamentals and were able to fight the effects of the crash with an economic stimulus program but now we have no leeway to counteract a global recession, should there be a crash.

Another factor is whether we will drop to full junk status which will be detrimental to the economy.

Shadowing and shading everything is climate change which has arrived and is making itself increasingly felt. Already we have seen how a disastrous drought was one of the causes of the Syrian civil war and we know how dry parts of South Africa are. Rising levels of carbon dioxide are making the world hotter (already temperatures have risen by 1 degree centigrade and continue to rise) – if temperatures rise half a degree, it will cost the world $56 trillion to deal with the effects.

The problem with climate change is that it compounds all the above problems like rising numbers of refugees, less food etc. Desertification will drive more people into crowded cities along with more extreme weather events.

More and more climate change specialists are saying we are getting closer to a tipping point whereby climate change becomes irreversible. Why don’t we all commit in our own small ways to reduce the carbon emissions we cause and to look to ways to conserve water?

None of our problems are insurmountable!

Although we are clearly going through increasingly risky global and local times, none of our problems are insurmountable. With will and a spirit of compromise we can achieve surprising things – nobody realistically expected South Africa to win the Rugby World Cup, but we did.