Offshore investment is essential with SA’s shrinking local equity market

This article was originally published on The South African

Over the past year, 22 companies delisted from the JSE, including Peregrine Holdings, Taste Holdings and Tiso Blackstar. This brought the total number of listed companies to a record low of 331 in March 2021. The JSE has been shedding holdings since 2009 and shows no sign of slowing. What does it mean for South African investors? The spread of listed stocks on the local exchange is becoming increasingly limited.

Concentration in the SA equity market

The top 10 companies on the JSE All Share account for 60% of the total market:

• Naspers
• BHP Group
• Richemont
• Anglo American
• Firstrand
• Impala Platinum
• Sibanye Stillwater
• Mondi Plc
• Standard Bank
• MTN

Naspers alone is well over 20% of the index. 

It has always been pipped as a Rand hedge since the majority of its value comes from its international exposure, primarily its stake (through Prosus) in social media and gaming giant, Tencent Holdings, which gives investors an indirect exposure to China. 

The size of Naspers in the local index makes local investors particularly vulnerable to concentration risk. As it is, local equity managers have to use a FTSE/JSE Capped SWIX All Share benchmark which caps the maximum holding per share to 10% in order to reduce the concentration risk.  

Concentration risk in respect of shares can be defined as the potential of capital loss should a share or group of shares move together in an unfavourable direction. For example, in November 2020 the Chinese government released draft antitrust rules to curb monopolistic behaviour by tech companies, which sent Tencent Holdings sideways. It has been declining since the beginning of 2021 and Prosus and Naspers have followed suit.

This article is not intended to cast a focus on Naspers but on the increasingly limited spread in the local market that makes investors vulnerable. With its size, Naspers is the most pertinent example.

How South African investors can combat this concentration risk

To reduce concentration risk, specifically when it comes to concentration in SA, the solution is to diversify beyond South African borders. Diversification means splitting your investments across companies, sectors and further across investment styles. Diversification is used to reduce the volatility a portfolio experiences and ultimately reduces the risk of loss to an investor.

South Africans tend to follow the “home-bias” principle, which is to invest in local companies because they are familiar. However, the South African local equity market represents less than 1% of the global stock market, which is only shrinking as more companies delist from the JSE.

In order to fully appreciate the scale of South African’s equity market, consider that local giant Naspers weighs in at merely 0.16% of the All Countries World Index (ACWI) market cap. For comparison, Apple Inc sits at 3.51%.

How South Africans can invest offshore

All South African residents over the age of 18 can transfer up to R1 million offshore each calendar year without tax clearance from the government using their discretionary allowance. South Africans also have a foreign investment allowance that permits you to transfer up to R10 million out of the country if you have a Foreign Tax Clearance Certificate from SARS. With a special Letter of Compliance from SARS, it’s possible to send a larger amount out of the country. However, compliance letters are issued on a case-by-case basis.

We can assist you with transferring your funds offshore and structuring your investments to be tax-efficient and well-diversified.

Retirement and regulation 28

South African pension, provident and retirement annuity (RA) funds are subject to a regulation (Regulation 28), which limits offshore exposure to 30% of the overall investment.

Unfortunately there is no way around this so long as you are currently residing in South Africa. However, once you reach retirement age (55), you can retire your retirement savings into an offshore living annuity, which is not subject to Regulation 28.

A living annuity pays you a regular income from your investment and any remaining capital can be passed to heirs. It enables you to continue to grow your wealth after retirement and preserve it for generations to come.

We can assist you in moving your retirement investments into a living annuity using an asset swap mechanism that allows 100% of the funds to be invested offshore. 

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If the above interested you, and you would like to chat about offshore investments or cross-border financial planning advice, email us at wealth@sableinternational.com or give us a call on +27 (0) 21 657 1540 or +44 (0) 20 7759 7519.