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Higher offshore allowance, Ukraine, and the Resilient Rand

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Higher Offshore allowances

The SA Reserve Bank has increased offshore limits for all investments, including retirement funds to 45%, which is up from 30% outside of Africa plus an additional 10% in Africa ex-SA.

What is significant in this move is that the new total of 45% can be invested outside of Africa versus the previous ceiling of 30%.

This is very positive news as it relaxes exchange controls and allows more important diversification and flexibility to invest in global opportunities.

How much should I invest offshore?

The biggest benefit of investing offshore is that it provides far more choices and wider opportunities. Although this improves important diversification, it does reduce your Rand earnings, which will add to short-term investment fluctuations. Therefore, the extent to which you invest offshore needs to be carefully considered in your overall financial plan.

A few critical questions to consider before investing offshore include: what percentage of assets, direct or indirect, where, what product, which investments, what asset allocation, what geographical spread, the taxation effects, estate planning /duty implications, and timing?

We answer these questions with our 18 frequently asked offshore investing questions.

The Ukraine conflict’s effects on markets

Russia’s invasion of Ukraine took global markets by surprise. This is a most tragic event, and the outcome is unknown. However, Ukrainians appear to be resilient and therefore there may be a lot more fighting to come.

Global economic growth will be negatively affected by commodity shortages from Russia, general trade disruptions and resultant higher inflation. Higher inflation is likely to be more persistent, which is a concern for markets as it will lead to higher interest rates, which is generally negative for markets.

Commodity prices during Russian Invasion of Ukraine

Politically, this could be the start of a new world order as Russia flexes its muscles with the support of China. This could be the resumption of another “cold war”.  However, longer term, this will be more detrimental for the Russian economy as the West finds ways not to rely on Russian commodities.

For SA markets, higher commodity prices are very positive, despite them being inflationary. Both SA equities and bonds still offer attractive value, and relative to the rest of the world, SA is unlikely to be too negatively affected. The biggest risk is far higher oil prices, which will hike inflation and suppress consumer spending.

The Resilient Rand

The Rand has remained remarkably resilient relative to other Emerging Market currencies. This is because the SA economy benefits from higher commodity prices, such as Copper, Iron Ore, Palladium and Gold.

Although we believe the Rand is fundamentally overvalued, our long-term fair value is 17.5 to the US dollar, more support from high commodity prices should keep the Rand relatively firm as the trade balance of payments remains positive.

What should Investors do?

Panic-driven / emotional decisions in a time of crisis are often more detrimental in the long-term. If anything, check to see when last you reviewed your financial plan and its associated investment strategy. Click here to start your Financial Plan.

Investment markets are always forward looking where much of the downside of a crisis is priced into markets quickly, and often it’s too late to react after the market has experienced an initial reaction/fall. The graph below shows an analysis of market drawdowns around previous global geopolitical frictions and the number of days to recover.

Time for markets to recover during a crisis

The analysis shows that markets most often recovered quickly after a crises event.

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