Independent international family office; Stonehage Fleming South Africa says that wealthy South African investors should look to invest 100% of their long-term surplus assets offshore.
Surplus assets need to be defined for each individual or family, taking into account their total wealth and their unique long-term strategy and risks.
The process is then about understanding assets that would not be required in South Africa for at least the next ten to fifteen years. It is important to retain sufficient assets to live comfortably, whilst preserving a buffer for business interests and unexpected contingencies.
The previous perception was that 30% was sufficient to hedge against import inflation, however Reyneke van Wyk, Head of Investment Management, South Africa at Stonehage Fleming, said that they have advised families for years to follow a disciplined and consistent approach to invest surplus capital offshore every year, which has typically resulted in foreign allocations of between 50-80% of total assets.
“In contrast to a strengthening global economy, South Africa’s economy is struggling, government debt has increased to over 50% of GDP, from below 40% in 2000. We have a current tax shortfall of R50 billion and are experiencing high levels of political uncertainty in the build-up to the ANC leadership conference at the end of the year and the general election in 2019,” said van Wyk.
“Should South Africa receive a further downgrade of our local debt by Standard & Poor’s to below investment grade, our bonds will fall outside of the Citigroup’s World Government Bond Index, which could lead to significant foreign bond outflows.
“If the probability of the downgrade increases closer to the decision expected early next year, the markets will probably start to react well in advance of the actual decision by the rating agencies. We experienced strong foreign outflows from our equity market last year and already R90 billion this year to date with a quarter still to run.”
For investors in two minds about taking further capital offshore now, van Wyk considers both possible political outcomes for South Africa over the next couple of months.
A positive outcome with strong, ethical leadership to drive the required structural reforms and move the economy in the direction, could see the Rand strengthen in the short-term. This would mean an increase in value of domestic assets such as business, property, lifestyle and other assets, which will be an encouraging outcome. However, as a structurally weak currency, the Rand will continue to devalue in the longer term. A negative outcome could see the Rand devalue by a greater margin and in this instance, investors will have thus missed out on investment opportunities and will be on the back foot should they look to move assets offshore at this late stage.
However, Stonehage Fleming has cautioned investors not to invest offshore for the potential currency gain alone, but rather for the ‘right primary reasons’, which van Wyk said include risk diversification and access to opportunities not available in South Africa. Long-term devaluation of the Rand is a secondary reason.
“Stonehage Fleming does not hold a pervasive negative view on South Africa and we remain fully committed to our country. We believe reforms will gain momentum and that our strong entrepreneurial culture will continue to create good business opportunities to stimulate growth and create more much needed jobs in the long-term.
“However, if you step away and look at the world from the outside in, as such a small contributor to the global economy, we would not recommend investing the majority of one’s assets in South Africa,” Van Wyk said.