Chris Potgieter, Managing Director, Old Mutual Wealth: Private Client Securities, Treasury Advisory, Fiduciary Services
The surge in household net wealth recorded during the COVID-19 pandemic has created an ideal opportunity for South African households to take control of their financial affairs by developing comprehensive strategies focused on their individual goals.
The Bureau for Market Research at UNISA found that South African households’ real net wealth increased by an estimated R1 trillion from the onset of the second quarter of 2020 to the end of the year. This happened despite COVID-19, the lockdown, job losses and an economic contraction.
This recovery follows an estimated decline of R772.8 billion during the first quarter of 2020 that resulted from the introduction of lockdowns in many countries. The increase in household net wealth was even more spectacular when measured in nominal terms (current prices). It is estimated that household net wealth increased by almost R2 trillion from the end of Q1 2020 to the end of Q4 2020.
What contributed to this net wealth increase?
According to the researchers, all asset classes performed well during 2020, but households with financial assets benefitted most. Huge fiscal support, lower interest rates, the injection of liquidity into financial markets, news of a possible vaccine and a recovery in employment contributed to higher share prices and lower bond yields over the course of the year. This rally caused the real value of pension funds and financial assets to recover and increase beyond the levels registered before the pandemic.
The 2020 South Africa Wealth Report found that equities are currently the largest asset class (29%) for high-net-worth individuals (HNWIs), followed by real estate (25%), business interests (20%), cash and bonds (16%), alternatives (8%) and collectibles (2%). Furthermore, households that experienced a surge in positive net wealth have their wealth in retirement funds; financial assets such as share portfolios, unit trusts and savings, and non-financial assets such as homes.
The opportunity of offshore investment
Based on the dramatic increase in household net wealth, households can further enhance this gain by increasing their exposure to offshore investments. Although South Africa constitutes less than 0.5% of the global economy and less than 1% of investable opportunities, wealthy South Africans have between 66% – 80% of their wealth tied locally. The average South African HNWI currently holds around 20% of their wealth offshore, up from 14% a decade ago – a 43 % increase over that period.
As HNWIs increasingly look offshore for growth opportunities, households wanting to protect their wealth and to grow with the rest of the world must also invest with a global perspective. For those households that have emerged stronger since the pandemic, there should be consideration to diversify more globally and work with suitably equipped advisers.
Clearing up the misperceptions
Yet despite the clear advantages of offshore investment, a few misperceptions exist which have led to investors not fully exploiting this opportunity. These include:
- It’s too complex
The perception of complexity and high costs often prevents clients from executing on their plan for offshore diversification. But offshore investing is as accessible and affordable as local investing and can be tailored to individual needs.
- Attempting to time the currency or market
Currency movements are impossible to predict over the short term – even 12 months is short term. However, the long-term trend of depreciation of the rand versus the US dollar and other developed market currencies is firmly in place. Prior to the rand’s recent bout of strength, the currency has steadily depreciated against the dollar at an average rate of over 6% per annum since 1994.
It’s also important to consider that if the rand strengthens in the short term, you’re typically buying more expensive global investments. Conversely, when the rand weakens, you may be paying more for hard currencies, but you’re more likely buying less expensive assets.
- Short-term thinking
Panic selling when markets decline leads to permanent capital loss. Investors who want to earn a return greater than cash must accept volatility and maintain a long-term perspective during periods of market corrections or crashes. This was again made clear in 2020, when equity markets fell over 30% in March and then quickly recovered to deliver a strong return for the year. It is highly probable that exiting the market during periods of heightened volatility will result in investors missing the upside that inevitably materialises.
In conclusion, offshore investing is not a luxury reserved for a few but rather a key financial planning priority for households seeking to protect and grow their wealth. Investors must, therefore, work with partners who have the skills and experience to provide them with the support and expertise to navigate the world of offshore investing successfully.