Investing as a South African

Investing
investing

I have for a long time been a devoted reader of moneyweb, a good financial orientated website predominantly covering local South African events. I do not really enjoy news and moneyweb normally only cover news/political events if it has a large impact on the economy and finances (which in South Africa’s case unfortunately happens too often). It is a good filter and a good source of information on markets, investing, the economy and even personal finance.

There are many regular outside contributors to the site as well. One of the long-standing ones are Magnus Heystek. Although not always seen as a glass half full person, he has some thought provoking articles which is needed to form your own balanced view. In the beginning reading his articles made me morbid, thinking I should pack my bags and go. However, as the years progressed I have learned to use these articles to plan for the extreme scenarios while trying to keep a balanced view. I even bought a biotech ETF (IBB) which I agree with him on the long-term fundamentals.

One of his recent articles “Only the paranoid survive” was again one of these. This article was even shared with me by an estranged aunt who I doubt is a regular financial reader. Sometimes people read these things and emotions take over their decision making while not reflecting on everything they have. It is also important to understand that this is an opinion piece and with enough information you can and should form your own opinion as well. So, with this gloomy backdrop how should you invest in South Africa?

Balance

The short answer is I do not know, I am also not a financial advisor therefore my opinion cannot be used as proper advice. I can however elaborate on my approach and opinion of how I am trying to structure my investments as a South African citizen and worker.

As a foundation I believe balance should be maintained. What I mean by this is that investments should be diversified and phased. In this way you reduce risk, but still have skin in the game across many industries and sectors. By phasing in your investments over a period, you will achieve good cost averaging in terms of the market as well as currency where applicable. An example of this is that a lot of my US market gains from the recent bull market has been wiped out by the strengthening of the Rand (ZAR). This is however only if measured in our local currency, since I have a long-term outlook for those investments growth and cost averaging will start to play a bigger role measured from both sides. Long term the Rand should fundamentally weaken vs lower inflation major currencies. Therefore, I win overall without having to time the market or worry about these investments.

To achieve this balance, I will need to have investments in South Africa as well as in developed markets.

The case for South Africa

As a living and working South African I believe it is important to invest in the country you live in and generate an income from. South Africa might be in a bit of an economic euphoria at the moment since the new President took over and some bold moves at changing the country’s direction has been made. From an economic perspective many of indicators reflect the same. The currency has strengthened quite a bit, credit ratings have not moved and actually changed their outlook to stable, even retirement funds are now allowed to invest more offshore. All positive signs.

South Africa is also on the brink of exciting opportunities. The country has always been a bit of a frontier market according to me. In developed markets you would see certain industries that are very mature and developed. In South Africa the same industries might be entered through entrepreneurship by only having a slightly different/improved value offering. Foreign investment has also been low for the past decade. If stability is proved by the new leadership that money can very quickly flow back. This has been the case in Brazil with market returns outstripping its developed counterparts. Many believe this it is South Africa’s turn and that the next decade will be the best ever. Just look at the below chart of how the Brazil’s BOVESTA kicked off its growth in 2016 and actually over a 5-year period recently surpassed the S&P 500. Who would have known?

The case for offshore

Read the article linked in the introduction, case closed. Just kidding. As these risks are real I believe that some investments should be made into international markets. If cost effective it should be done that it is denominated in one of the major currencies or even safe haven currencies. In an emergency this can make transfers a lot easier. This does not only provide a hedge vs local events but also some skin in the game of other far larger markets. Looking retrospectively an investment over the past 5 years in the S&P 500 would have been far better than locally on in the JSE Top 40. The Top 40 was closely tracking international markets and then went sideways for about 3 years. See the Chart below.

The Plan

Looking at my net worth 85% of my assets are still in South Africa. The reason for this is that we have our paid-off house, two vehicles and two retirement funds. Strictly speaking retirement funds can invest 30% offshore and 10% in Africa, but let’s not over complicate matters. The goal is to increase my investable assets. Of these assets a larger portion should be offshore to compensate for the large local exposure, while not missing out on local investment opportunities. The long-term goal for me is to increase my offshore exposure to 50% of all assets. Once this is achieved any additional investable assets can be allocated according to opportunity and balanced regularly.

Here are the recurring steps required to execute this plan:

  • Continue to contribute monthly to my retirement fund.
  • Use our maximum allowance for TFSA contributions annually (similar to Roth IRA in the US). Structure these investments as a mix of local and locally listed global index ETFs.
  • Maintain our emergency fund balance in an interest-bearing account.
  • Continue to buy locally listed international market ETFs on a monthly basis for maximum cost averaging over the long term.
  • Save lumpsums into the emergency fund, once large enough transfer to my international brokerage account. Then BTFD…easy right?

This plan will allow for tax efficient investing while increasing international exposure and maintaining local opportunity exposure in our TFSA and Retirement funds. As we all know a plan is only as good as its execution and this thing called life also happens along the way. So, let’s see if it works and let me know what your take is.

Always grow your wealth for tomorrow while being content with your wealth today.

Scroll to top