Business Day Insights Offshore Investment (August 17 2021)

INSIGHTS

INVESTMENT

Offshore options allow for portfolio enhancement

‘Inflation risks are fully priced into markets’; Fed seems in control

access to much broader and deeper markets than are available locally, he explains. The local equity market is relatively small on a global scale. It does not fairly represent a globally diversified portfolio. Ideally, an offshore investment portfolio should be exposed

year. A phased approach over a targeted time period should reduce exposure to a single currency level and also reduce the risk of emotional investment decisions,” he says.

When

consider investing offshore is because they can enhance their portfolio through diversification and get

depreciation trajectory. As long as you can avoid buying at an extreme low, the purchase price and timing becomes less relevant, particularly if the plan is to regularly externalise money which will allow you to end up rand-cost averaging. Reyneke van Wyk, head of Investment Management at Stonehage Fleming SA, agrees that trying to time the currency when investing offshore is not a good idea. We recommend following a disciplined and consistent approach year after

$10-trillion, creating concerns around inflation risks. The prevailing narrative is that the US Federal Reserve has lost its inflation discipline and is determined the run the economy hot says Philip Saunders, co-head of MultiAsset Growth at Ninety One. Central banks, he explains, have generally viewed higher inflation

Tamryn Lamb, head of

Distribution,

Servicing at

agrees that

influence

As South Africans we

to shift quickly between pride and despair, feeling both in equal measures she says. Decisions regarding how much to invest offshore versus onshore tend to get swept up in this rollercoaster so it s no wonder investors struggle to adopt and stick to long-term strategies. Her advice? Make sure you aren t buying two houses on the same street and that your portfolio is travelling more frequently than you are.

Ultra-high net worth individuals (UHNWIs) can apply to take out more than R10m a year if they submit a special concession application to Sars and the Reserve Bank, he says. A tax clearance certificate, in the prescribed format, must always accompany the application, and the individual needs to ensure their tax affairs are 100% in order.”

ESTATE CONSIDERATIONS

Before deciding to invest offshore, potential investors should consider the estate planning implications.

Many people simply look for the best returns but tax and inheritance issues are equally important,” he stresses, adding that it s a good idea to factor in the legal mechanisms which make offshore investing easier, with beneficiaries being nominated to inherit the assets abroad.

benefit is it can be done every year and there is no lifetime limit. What this means is over a 10-year period an individual could invest R110m offshore or R220m as a couple. He explains that investors can also use their discretionary R1m a year, which requires no clearance, to get that diversification and exposure. Money externalised in this way never has to be repatriated. It can be invested offshore or kept in a bank account for use when travelling or to educate South African children abroad.

Jurisdictions such as the US and UK are increasingly eyeing the estates of noncitizens investing in certain assets physically situated within their jurisdiction, says Sorour, explaining that this is called the situs tax. On death, South African residents are liable for estate duty based on their worldwide assets. Estate duty is currently levied at a rate of 20% in the case of an estate less than R30m, and at a rate of 25% on the value above R30m. However, both the UK and the US also levy an estate duty on certain situs assets. In the UK this is known as inheritance tax

and in the US it’s called estate tax. Collectively, they are known as situs taxes. In the UK, a 40% inheritance tax will be levied on situs assets, including fixed property, over the value of £325,000. Any amount falling below the £325,000 threshold is known as the nil rate band and is free from situs tax. Each individual receives this £325,000 exemption. In the US, the threshold for estate tax is much lower at only $60,000. The top bracket for estate tax is 40% on US situs assets. In contrast to the UK, the US offers no spousal exemptions or rollovers unless the spouse is a US citizen. In SA HNWIs may be liable for 20% SA estate duty, as well as a potential 40% situs tax on their US and UK situs assets, he explains. Although there are double taxation agreements in place, this would still result in a net tax of 40% instead of the 20% estate duty payable in SA.

ASSET SWAPS One of the primary motivations for taking capital offshore is to ensure access to capital abroad. If an investor s sole interest is the offshore

Compelling reasons to be looking offshore

Insurers seek new risk models as natural disasters balloon

•

GDP in 2020, many other countries, including SA, are not

hurricanes, it is battling to keepup with risks posed by snowstorms,hail, tornados and wildfire. These usedto cause relatively minordamage butare increasingly morphinginto something morecostly. Andthat is a problemfor companies in the US especially,since many Americanshave coveragefor such events.

Winter Storm Uri, which poundedTexas inFebruarywith snowand subfreezingtemperatures, is a good example. Uricaused $15bninlosses, makingitthe largestlossfroma winter event in US history, Swiss Re said. While thejury is stillout on whether climatechange is directlyto blameforUri the idea that warmingmakes the polar vortex unstable is not conclusive the safest bet when the climate ischanging isthat weird things aregoing tohappen alot more. Severe weather, including hail andtornadoes inCentral Europe in June,accounted for about$4.5bnin lossesandhave been linked to climate change. SwissRe thinksthis typeof event is a trend it needs to get on top of. Theinsurance industry needstoupscale itsriskassessment capabilities for these lesser monitored perils to maintain and expand its contributionto financial resilience, Bertogg said in its report on the losses. That is easiersaid than done, said ErdemKaraca, whooversees catastrophic perilsin the Americas for Swiss Re “Modelsare lessmaturefor secondary perils, he said. Aperillike wildfireisalso impacted byhumans 90% of ignitionsare causedbyhumans, so it isdifficult to quantify through models.

Still, the industry is determined toget better.Over recent yearsmodellers havebecome much more sophisticated at predicting flood risk, Karaca said. In the US, more sophisticated flood modellinghas causedthe Federal Emergency Management Agency, which handles 95% of residential flood insurance, to initiateits first new flood-ratemodel in50years.

Private insurance companies are also racingto deploybetter models for fire prediction. For many people, better information willtranslate into higher premiums. Inthe meantime,catastrophicweather keepscoming. Losses fromGermany s floods are not countedin this recent report, which covered January to June. They may be as much as

$6.5bn, Swiss Re estimated. Andhurricane seasonhas hardlyhitits peak;inthenorthern hemisphere thatcomes in the third quarter of the year. Tropical Storm Fred, which is passing over theFlorida Panhandle,is expectedto docomparatively little damage. But Grace and otherstorms are on their way,and losses aresure to mount. /Bloomberg

expected to do so until well into 2023. This will act to curtail global inflation. The fourth consideration centres around global debt levels. The underlying health of the global economy has a major influence on how quickly it can recover from shocks. One concern is the relatively high amount of debt that was held prior to the pandemic and which has subsequently been increased by fiscal stimulus measures. The IMF notes, for example, that public debt-to-

of advanced economies was 105% in 2019, in contrast to 72% before the 2008/9 financial crisis. This debt burden will likely prove deflationary in the years ahead. Given that US 10-year bond yields have recently fallen to 1.2%, Matthews says it appears the market is less concerned about inflation and agrees with the Federal Reserve that inflation in the US will settle close to the its average target, but is more concerned with growth. He says investors should consider positioning their portfolio for the inevitable fading of the reflation trade as the market comes to realise the global economy will continue to face challenges.

Diversified, multinational companies with robust balance sheets tend to be less volatile and more resilient, making them more predictable and less likely to come under pressure in the months and years ahead if growth and inflation don t live up to the elevated expectations currently being priced into the market, he says.

Investors should be looking at companies that are market

leaders with strong brands and pricing power, have robust balance sheets and cash flows, and produce goods or services that are integral to the lives of their customers, he says. These qualities enable them to perform well in an inflationary environment and when times are tough.

Companies such as Procter & Gamble, for example, have continued to deliver strong revenue and earnings growth throughout the pandemic by selling a diversified range of consumer goods around the world. Their recent dividend increase was their 65th consecutive increase in annual dividends, says Matthews. Microsoft is another business that has successfully navigated the pandemic and benefited from an accelerated digital transformation, he says, adding that the business has flourished in the past year. Another good example of a company that has continued to perform

Agency Staff

China s Ningbo-Zhoushancontainerport, theworld s third busiest, remainedpartially closed for a sixth day on Monday amid ongoing concern over whetherthe shutdownwilldisrupt trade from theregion in the longer term.

The port hasnot published any updates on its operations since Wednesday, when it halted all inboundand outboundcontainer services atits Meishan terminal afterone employee tested positive for Covid-19. Consultant GardaWorldestimated the terminal accounted for about 25%of container cargo through theport, though Ningbo-Zhoushan hadsaid it would redirect ships to other terminals andadjust operating hours at other docks.

Anemployee attheport s media centresaid theyhad no newinformation tosharewhen contacted byBloomberg News onMonday. Nonewinfections hadbeen reportedat theport since the initial case.

Shippingfirm YangMing Marine Transport Corporation warnedclients ofpotential port congestion dueto thepartial