Why do you want to invest offshore?

By: Martiens Barnard, Marketing Actuary at Momentum Investments

Martiens Barnard

Navigating the murky waters of financial markets, especially with the looming uncertainty that the upcoming elections create, leaves many of us with two pivotal questions: Will our local equities continue playing second fiddle to offshore markets, and what’s the deal with the rand? Will it continue to weaken? These questions drive many individuals to invest offshore, but should they be the main reasons to do so?

Let’s first look at these claims in isolation.

Analysing the first claim: Do offshore markets truly outperform?

Last year, the MSCI World Index provided a return of 34.54% in rand terms compared to the 8.98% return from the JSE Top 40. This is an outperformance of more than 25%.

Performance of the local and international markets

Source: IRESS, MSCI and APEX, December 2023

This outperformance is a short-term trend, as since 2000, the number of times where one market has outperformed the other in rand terms is split equally at 12 each – although the local market outperformed on a cumulative basis over this time.

The long-term relative returns

Source: IRESS, MSCI and APEX, December 2023

Yet, the chart below shows the same relative performance (in blue), and alongside it (in red) the difference between the performance of the JSE Top 40 in rand terms and the MSCI World Index in US dollar (USD) terms.

The long-term relative returns

Source: IRESS, MSCI and APEX, December 2023

When viewed like this, we see that about 10% of the outperformance in 2023 was due to the rand weakening. We also see that the MSCI World Index, when viewed in USD terms, offered meaningful outperformance in only six of the last 24 years (2003, 2013, 2016, 2019, 2020 and 2023).

What will the rand do?

If your reason to invest offshore is based on your belief that “international equity markets will consistently outperform our local equity market”, consider how much your judgment has been influenced by the weakening of the rand in recent years as it has depreciated five out of the six years.

Then again, some people invest offshore to benefit from the weakening of the rand. This is not a wrong reason to do it, but it remains a risky approach as currency movements are difficult to predict and their movements can be substantial. Since 2000, in seven of the nine years where the rand strengthened (appreciated), it was by more than 10%.

Looking at the below chart of how the rand compared to the USD, the direction of the movements is fairly difficult to predict, especially in the short term.

Year of rand appreciation/depreciation

Source: APEX, December 2023

Today, the valuation of the rand in purchasing power parity (PPP) terms suggests it is oversold, but there are many fundamental reasons why it could weaken.

With all this being said, the question remains: Why should you invest offshore when offshore markets don’t necessarily outperform (without the help of a weakening rand), and if the movement of the rand is so difficult to predict?

Reasons to invest offshore

In general, investors should invest offshore as a means of diversification: international markets offer a much larger opportunity set and exposure to asset classes, industries, companies, and geographies that are less accessible in the local equity market.

This can lead to a better diversified investment portfolio, leading to a smoother overall return profile. For example, let’s examine an investment portfolio that is split evenly between the JSE Top 40 and the MSCI World Index.

Since 2018, the undiversified portfolios would have at times returned -8.31% and -12.74% compared to the diversified portfolio’s respective returns of -0.59% and -4.27%.

Diversifying a portfolio

Source: IRESS, MSCI and APEX, December 2023

Investing offshore is also a good idea to maintain your offshore currency spending power. If you are planning to live abroad for a while or permanently, or for your children to study there, it might be sensible to have your money there already.

How to invest offshore

You can invest offshore by using either of our investment platforms: Momentum Wealth locally, or directly offshore through Momentum Wealth International by using your yearly foreign currency allowance.

With Momentum Wealth locally, you can invest by investing rands into:

  • Rand-denominated international funds
  • Funds denominated in a foreign currency (when making use of an endowment or a retirement product)

Our comprehensive range positions us as leaders of international investment solutions tailored to meet every client’s offshore investing needs. Your client’s offshore investment isn’t just another investment. It’s personal to them. And with us, investing is personal. We can help you with your clients’ offshore and local investment solutions to help them achieve their goals.

Read more on our offshore investing page on momentum.co.za.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406).

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