Finance

Five Mistakes to Avoid When Investing Offshore

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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

Businesses: How to Survive the Coronavirus Panic

No one knows for certain just how serious the eventual economic fallout from the COVID-19 coronavirus pandemic will be, but at the very least businesses will face their most challenging times since 2008. Quite possibly it will be a lot worse.

For the moment you will want to concentrate on business survival, to which end we share some practical ideas on how you can respond to the crisis.

Businesses that react calmly and sensibly in this time of panic won’t just maximise their chances of survival; they could even end up strengthening their position in readiness for the inevitable recovery and upturn…

Never let a good crisis go to waste” (Winston Churchill)

Globally, the COVID-19 coronavirus has spread panic amongst societies and markets. Businesses are suffering their most challenging times since the 2008 Global Financial Crisis.

This is the time for urgently reviewing how events have affected your business and how you can respond to the seeming chaos.

Cash is king

When faced with great uncertainty, conserve cash and shore up all your credit lines. This will give you greater flexibility when strategizing a response to the coronavirus. You may, for example, be able to buy a crucial stock item for a discount from one of your suppliers, thus ensuring that you can continue operating. Apart from strengthening your position with your competitors, this could help the supplier to remain in business – relationships are important, and this supplier will be grateful to you.

Trim costs wherever you can – some of this is being done for you as many companies are cancelling travel, resulting in many meetings and conferences being called off. Capital expenditure is being pruned globally and there may be opportunities to delay some of your current capex.

Keep your staff healthy

Apple has already told staff to work from home to reduce the risk of catching or spreading the coronavirus. Desks are being spaced to reduce the possibility of catching the virus and meetings are being cancelled or are taking place electronically.

Make sure the risk of staff catching the virus is minimised and have a succession plan if some key members are incapacitated by the coronavirus. Take particular care of staff members who have health issues, as they could become seriously ill or die if they catch the virus. As health authorities are advising people to frequently wash their hands, ensure that you have enough hand washing dispensers.

As many of your staff will be working from home using smart phones and their own desktops, have your IT department mitigate the risks of hacking or computer viruses getting into your IT platform.

Perhaps, most importantly, communicate often with your employees and managers. Regularly follow updates from the World Health Organisation and the local Department of Health. This is a time of uncertainty, as there is no definitive knowledge on how the coronavirus will evolve and thus sharing the information you gather on the disease, will improve the health and morale of staff in your business.

The Occupational Health and Safety Act imposes obligations on employers to provide a healthy environment for their staff. Much of the above is in line with ensuring that you comply with that Act’s requirements, but you need to ensure your organisation is compliant with the legislation.

Your supply chain

This is clearly a key area and working out the risks of suppliers and contractors being unable to supply you is a key task. Some of the important areas will be changing your safety stock holdings, reviewing your contracts with stakeholders and assessing the risks and the consequences of default. This is where it really pays to have cash.

As we said above, keep in mind the long term relationships with suppliers.

You also need to review your insurance policies – will they pay out if certain scenarios unfold? Do you need to take out different policies?

Reacting, planning and preparing strategies will ensure you have the agility to ride out this crisis and may even strengthen your position with competitors.

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)

How To Detect and Dodge Financial Scams

Financial scams have always been around but their scale in today’s world is truly amazing – estimates of annual losses in the USA alone reach $120 billion.

The good news is that there are positive steps you can take to protect yourself, and perhaps the first and most important of these is getting to grips with the different types of “con” and how they work.

First question we ask ourselves therefore is “What is a ‘quick con’, and what distinguishes it from a ‘long con’?” Then – the really important bit – we look at what types of people are most vulnerable to the con artists. Make sure you aren’t one of them!

“If it sounds too good to be true, it probably is” (wise old adage)

In the USA, $40 billion is lost every year to scammers. When you consider statistics suggesting that 65% of scam victims don’t report their losses (usually they are too embarrassed to admit they have been conned), as much as $120 billion could annually be skimmed from gullible people.

Scammers normally target people who are financially vulnerable (they have lost their jobs or their business has folded) or they take advantage of economic downturns where a large percentage of people experience financial hardship.

The quick con

Typically, it is difficult to fully get to grips with the scheme they sell you as the scheme’s workings are hard to fully understand. But the conmen tell you that the real issue is you will get astronomical returns and they will show you for example pictures of yachts cruising in the Mediterranean – messaging you “this is the life you will lead once you have made your quick fortune”.

Because they prey on the financially vulnerable, the conmen spin conspiracy theories – the reason you have fallen on hard times is the system has crushed you and this scheme bypasses all the financial regulation “nonsense” – and the like.

Conmen are also hard salesmen and they will pressurise you into making this “investment”.

The long con

You need to be really careful of these as you are up against some sophisticated operators. The main principle is to get assurance from people in your social circle that the scammer or the scheme is credible and achieves high returns (these people are wittingly or unwittingly part of the con). In addition, the scammers can point you to well-known financial experts who will vouch for the scheme (they typically are part of the con).

It is usually a Ponzi scheme which will operate successfully until no new funds come into the scheme. It then unravels very quickly, and the vast bulk of investors lose their investments.

Another type of scam is “pump and dump” where salesmen extol a little-known share, and this drives the price up. These salesmen make aggressive pitches to unsuspecting victims who get carried away by the upward momentum of the share. Once the share has gone way over its value, the conmen sell it short (the dump of the scheme) and the share price collapses.

Who is vulnerable to these scammers?

Strangely enough it is often well-to-do people (usually men) who are experiencing financial stress and are happy to take on risk. These people are well educated and financially literate.

The combination of factors that makes them gullible is (apart from being under financial stress):

  • Being put under pressure by the conmen (they need to get in “before it’s too late” and their friends “are making a killing”)
  • The scheme can be complex or opaque and so they rely on their intuition
  • Most of these people are decent and trusting, so they tend to believe the conmen and they don’t want to let the conmen down (no doubt the scammers are aware of this vulnerability)
  • Greed is a very powerful emotion and can lead to impulsive decisions which you will regret later.

Sir Isaac Newton was a great genius, but he lost all his money in the South Sea Bubble scam in the 1720’s.

So before you get caught up in a scam step back and think rationally. You should also analyse yourself and if you have any of the above traits, then be very careful of any investments that are “too good to be true”.

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)