By: Willem Oberholzer
South Africa has abundant resources and strategic geographic position, yet faces numerous economic, political, and social challenges that make local investment a high-risk endeavour. Given the current landscape, it is prudent for South African investors to consider diversifying their portfolios by investing internationally. What are some of the critical reasons for this strategy and its potential benefits for South Africans who remain in the country?
South Africa's economic growth has been erratic, marked by a sluggish recovery post-COVID-19 and further exacerbated by structural issues such as power shortages and logistical bottlenecks. The inflation rate has been volatile, reaching 6.9% in 2022 due to spikes in food and fuel prices, while the South African Rand has depreciated significantly, undermining the value of local investments. In contrast, many international markets, particularly in developed economies, offer more stable and predictable economic environments. Investing abroad can thus provide South African investors with a buffer against local economic instability, ensuring more consistent returns.
Political instability and corruption are pervasive issues in South Africa, affecting investor confidence and economic performance. Frequent policy changes and regulatory inconsistencies create an unpredictable business environment, further deterring investment. By investing in more politically stable countries with transparent governance structures, South African investors can mitigate the risks associated with local political volatility.
Diversifying investments internationally spreads risk across different economies and industries, reducing the impact of adverse events in any single market. This strategy is particularly pertinent given South Africa's high exposure to sector-specific risks, such as those in mining and energy. International investments allow investors to tap into global growth opportunities and hedge against local market downturns.
Developed markets often provide better growth opportunities and higher returns due to more mature financial systems and robust economic policies. Additionally, emerging markets outside of South Africa are showing promising growth trajectories, driven by rapid industrialization and expanding middle classes. By investing internationally, South Africans can benefit from these growth dynamics, which might be absent in the stagnating local economy.
For South Africans who cannot or choose not to emigrate, international investments can still offer significant local benefits. Firstly, the foreign exchange earnings from these investments can provide a hedge against the depreciation of the rand, preserving the purchasing power of returns when converted back to local currency. Secondly, the income generated from international investments can be reinvested locally, fostering entrepreneurship and job creation.
Successful international investments can contribute to personal financial security and stability. While South Africa offers unique opportunities, the current economic, political, and social challenges make it a high-risk environment for investors.
Diversifying investments internationally provides a prudent strategy to mitigate these risks, offering more stable returns and growth opportunities. For South Africans unable to emigrate, the benefits of international investments include financial stability and the potential for positive local economic impacts through reinvestment and community support. In a volatile and uncertain local landscape, international diversification emerges as a sound investment imperative.
* Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice.*
* * Oberholzer is a director at Kisch Tax Advisory Services.
PERSONAL FINANCE