Is SA a place you want to invest in?

As a South African resident your default investment destination is South Africa. When you start working and make your first investment it would most probably be in a retirement annuity which by law may invest only 30% of your funds offshore. That means 70% of your funds will be invested in SA. When you buy your first property it would be in SA and most probably the biggest investment you make for the next decade or two. When you start saving for something you would most probably put your money in a savings account at a South African bank, earning interest in rand. These are investment decisions that happen naturally and result in your fortunes being tied to those of South Africa, as far as risk and rewards are concerned.

 

The question is whether this is the right thing to do? If you were born in the USA, you would most probably have no investments in SA and 100% in the USA. The same goes for residents of any country for that matter. You start investing in the country you live in. The answer to whether this is the right thing to do, is that timing unfortunately plays a big role because international investment returns are often cyclical. Before 1997 the countries that were known as the Asian Tigers performed very well. In the 2000s your SA shares did very well but shares in the USA did not. Over the last five years shares in the USA outperformed everything else and now in 2022 we see SA shares doing better than the US shares again.

 

The biggest risk is perhaps not the investment risk, but rather the political risk. Asset classes will be in favour or out of favour based on supply and demand, which will be driven by interest rates, GDP growth, pandemics, technological innovation and so many more, but if the government of the country you live in makes some grave political error, the consequences can be dire. The pain will be felt in the currency of the country. We have seen this in Zimbabwe, Argentina, Turkey, Venezuela and Lebanon. South Africa has been flirting with a currency meltdown for a while now but we seem to be keeping our head above water for now.

 

As we have said before, investing in equities must be seen as a longer-term investment due to the volatility inherent in the asset class. The best protection against any kind of unforeseen risk is diversification and basing your investment approach on cash flow requirements. South Africa is and will always be a volatile place in which to invest your money. Many people preach at you to invest in US$ and spend in rand, purely because of the political risk of our currency. A big part of our monthly spend is on imported goods and if your rand-based investments devalue against the dollar, pound or euro, you will pay more. Perhaps one should do a regular affordability check, where you look at all your assets, convert them to dollars, and then see what you would be able to buy if you had to replicate your life in the USA or somewhere else.

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