The Falling Rand and a Case for Investing Offshore

The South African Rand has lost around 50% of its value since 2010 (according to the South African Reserve Bank who measured it against 20 major global currencies).

It lost 25.2% against the US dollar in 2015, and was the third worst-performing currency among the world’s 31 most-traded before gaining 0.23% this year (Bloomberg).

The country is also moving closer to recession and there’s a persistent threat of a credit-rating downgrade to junk status as investors lose faith in the ability of President Jacob Zuma’s government to stem the slide.

From this, it’s clear that everyone in South Africa should be seriously considering preserving their wealth. Not only from a portfolio diversification point of view, but also for risk mitigation — and a good option is by investing money offshore.

Hedge against the depreciation of the Rand

Money invested within South Africa (onshore) will usually be invested in local companies and in the South African Rand. This means your wealth will be exposed to the local economy and the uncertainty of South African politics.

The South African economy is heavily weighed towards the natural resources sector and mining, and makes up less than 1% of the entire global economy.

As an emerging market, South Africa is subject to volatility that developed economies are not.

In addition to this, the low commodity prices and the risk of a rating downgrade could see the rand fall even further.

The long-term downward trajectory for the rand against the major global currencies is likely to remain in place for many years. If you want to preserve your wealth, then it’s best to not keep all of your savings and assets in local currency.

Mitigate your risk

To handle the volatility of the rand, where possible, you should diversify and include shares or unit trusts that have some offshore investments.

Money invested internationally gives you exposure to potential growth in global markets, rather than just local markets. Also it gives you an opportunity to invest in international pensions, equities or funds to potentially earn greater foreign currency returns — which protects you against the falling rand.

There’s a reason why 32% of South African High Net Worth (HNW) individuals hold their wealth offshore. If you’re serious about your financial wellbeing then you need to consider investing a portion of your total portfolio offshore too.

But don’t get carried away, you should always follow the same basic principles of sound investment:

1. Don’t put all your eggs in one basket — diversify.

2. Invest for the long-term — short-term investments can be very volatile.

3. Have a sound financial plan — don’t be driven by fear or greed, it leads to knee-jerk reactions.

If you don’t already have some of your savings investment held internationally, it’s certainly worth considering, due mainly to the diversification benefits for your overall portfolio.

Allocating a portion of your investment offshore spreads your risk across different economies and geographical regions and opens up the possibility of earning greater returns. If you invest regularly over a long period, the relative value of the Rand can be smoothed out over time.

As with all investing, you need to have clear objectives, a time-frame and an understanding of the risks involved. Always try to invest in funds that are approved by the Financial Services Board (FSB) and avoid investing in unregulated schemes.

Engage an independent investment professional or wealth manager – they’ll help you navigate the waters as part of your overall investment plan.