Five reasons to invest offshore

“Should I invest offshore?” is a question many are grappling with today. The prospect of buying shares in less familiar companies on international stock exchanges and in a foreign currency often creates doubt in the minds of investors.

Marriott offers five reasons to help put your mind at ease when deciding whether to invest offshore:

1. Offshore investments don’t need to feel foreign

Many offshore companies have brands that transcend national boundaries: Unilever soaps, Colgate-Palmolive toothpastes, Kellogg cereals and Nestlé chocolates can be bought in supermarkets all around the world. These brands are household names in South Africa too, despite being listed on First World exchanges.

2. It’s sensible to diversify

Financial assets, unlike lifestyle assets (home, car, etc.) and skills, are relatively easy to export. Considering that we typically derive our salaries from South African businesses and have all our lifestyle assets in this small and volatile economy, investing offshore makes good financial sense when it comes to safeguarding our financial futures.

The chart below illustrates the relative size of stock markets around the world:

3. Currency fluctuations are diluted in the long term

Over the short term currency movements can create volatility when you invest offshore, but over the long term the primary drivers of returns are re-invested dividends, and capital appreciation. For example, if you assume a 10% p.a. total return for 10 years in US dollar terms and the rand strengthens by 20% (R15/$ to R12/$) your investment will still have doubled in value when converted back to rand.  

In essence the more time you give your offshore investments, the less you have to worry about currency fluctuations.  

4. Better quality companies

Companies listed on First World exchanges usually have bigger balance sheets, longer track records, more customers and stronger brands. Consequently, the operational risk inherent in these businesses is a lot lower than that found in South African companies. 

Take Nestlé for example. With over 2 000 brands and 10 000 products, Nestlé sells over 1bn products daily, making its products among the most prolific in the world. Nescafé is the world’s best-selling coffee and accounts for over 40% of the instant coffee market.

Consumers globally drink on average 5 500 cups of Nescafé every second of every day. Other examples of Nestlé brands include 5.2bn packets of Maggi noodles sold every year and 650 Kit Kat fingers consumed every second of every day.

Although there are many well-run South African listed companies, none can equate to Nestlé in terms of size, track record, global diversification and number of brands. Investing offshore opens the door to companies of superior quality, increasing the certainty of a satisfactory investment outcome.

5. The returns are likely to be better

Not only are the risks likely to be lower but the returns should be better. The investment landscape over the next decade is likely to be shaped by global consumerism as the emerging middle class continues to grow.

Described by McKinsey as “the biggest growth opportunity in the history of capitalism”, it is estimated that by 2025 annual consumption in emerging markets will increase by $18tr and account for half of the world’s consumption.

Multinational consumer-facing companies listed on First World exchanges are likely to be major beneficiaries of this consumption boom.

Data from a Colgate-Palmolive financial report indicates that in approximately 15 years’ time there will be an additional 3bn people buying goods and services.

Marriott believes the answer to the question, “Should I invest offshore?” is yes, although it is important to take into account the personal circumstances of each individual.

Not only does it make good financial sense, considering the risk of having all of one’s net wealth invested in a small, developing economy, but offshore investments also offer better prospects for good returns over the long term, and with a lot less risk.