Investing Offshore – The Currency Risk

Investing Offshore – The Currency Risk

One of the great hazards facing South Africans as they plan their offshore investments is the rate of exchange.

In November 2001 the local currency suddenly crashed from R9.80 to R13.86 against the USD – a depreciation of approximately 41%.  There was a headlong rush to send money abroad.  However, not long after, the Rand had appreciated to R8.59 to the USD and then further to R7.84 by March 2003.   It took a further 13 years to fall to its 2001 post- crash level.

Since that dramatic time in 2001 and the subsequent recovery, there have been periods of weakness and strength.  In 2009, just after the global financial crisis, through to 2010, the Rand was strong.  Between December 2010 and January 2016 the local currency was weak due to the expected economic recovery in SA failing to materialise coupled with political woes surrounding the position of the Finance Minister.   Between January 2016 and December last year, the Rand was strong again with local equity investments delivering almost three times global returns.   This year the Rand has once again been weak and has depreciated substantially against the USD and other major currencies.

Will we see a rebound as has happened so often in the past?   Only time will tell.  Generally, notwithstanding the gyrations in the exchange rate, we expect the Rand to continue to depreciate by 5% per annum over time.  In fact, over the last five years it has depreciated by 9.5% per annum against the USD.   Currency fluctuations seem these days to have more to do with global influences than local ones.

We illustrate this to emphasise that as far as the exchange rate is concerned, timing is almost impossible when making offshore investments.  It therefore cannot be the only consideration when deciding to invest abroad.  The need for asset diversification should be of equal importance.

How much of one’s investable assets should be in offshore investments?  There are differing opinions but as a rule of thumb – at least 30% to 40% seems a sensible amount to aim for.

  • 15 Oct, 2018