Accessing offshore equity and commodity markets safely


Braam Bredenkamp | Financial Advisor | GraySwan | mail me | 

Structured products enable diversification into offshore markets while controlling risk. Any investor worth their salt understands the importance of diversification, particularly in a contemporary economic environment characterised by such volatility and uncertainty.

Spreading investments across industries, asset classes and geographies is a key component of risk reduction in an investment portfolio, as should one investment fare poorly, the others should ideally offset this, resulting in consistent return. This is fundamental to achieving long-term financial security.

Exposure to investment opportunities

Bearing in mind that JSE-listed stocks represent merely 1% of the total listed equity market capitalisation in the world, investing offshore can help you gain exposure to investment opportunities and markets that may not be available in South Africa.

It can also help to hedge against a stubbornly depreciating rand (although it is worth noting that JSE-listed companies derive almost two-thirds of their revenue from global markets, meaning that investing in the JSE comes with an inherent rand hedge). Moreover, while investing based on short-term trends and sentiments is inadvisable, those concerned about political and socioeconomic instability in South Africa can mitigate these risks through greater offshore exposure.

Nevertheless, while this serves as an effective strategy to reduce risk, investing offshore is not without its own risks. These include currency exchange volatility, tax implications and the sheer complexity of choosing sensible investments among the staggering wealth of options available.

Building in protection

When gaining exposure to offshore equity or commodities, particularly with market uncertainty remaining high after an unpredictable 2022 followed by a very strong equity market recovery, it’s important to build in protection. Structured products are a good way to do so.

Structured products are pre-packaged, fixed-term (typically three to five years) investments that provide private investors with easy access to offshore equity and commodity markets, with a predefined risk and return profile over a predefined investment period, these also provide varying levels of downside protection with adequate upside participation.

Structured products are offered in both offshore and local currencies, linked to a specific underlying asset. Issuers use asset classes such as equities, bonds, and derivatives to structure the performance and risk profile for the investor, also known as the risk-return payoff profile. This risk-return payoff profile refers to the balance between downside protection and upside participation.

More conservative investors may opt for a higher capital protection level with a corresponding lower market upside participation, while more aggressive investors may prefer less capital protection and a higher level of growth participation, with the possibility of leveraged returns.

Tax implications

As with any investment, it’s crucial to weigh up the tax implications of a structured product. The first point is that these vary depending on the term of the investment: if the investor withdraws from or cancels early, it may be taxed as income; otherwise, capital gains tax applies.

Investing structured products through wrappers such as sinking funds or endowments can offer benefits in terms of tax and estate duty, too.

Beneficiary nominations avoid the complications of potential offshore inheritance tax and executors’ fees, although the value will still form part of the investor’s South African estate for estate duty purposes. Moreover, in a life wrapper, the value is protected from creditors after the investment’s first three years have passed.

Weighing the risks

There’s no worthwhile investment without risk, and structured products are no exception. These products don’t pay dividends, and as they are fixed-term, investors need to ensure they do not run into liquidity issues.

Moreover, the financial institution issuing the structured product needs to be able to deliver on its promise of guarantee, capital protection, or enhanced return at the maturity of the structured product. Such risk can, however, be managed via a collateralised product option if the investor does not wish to be exposed to counterparty or credit risk.

Structured products

In the past, it was necessary to rely on third-party providers offering structured products on an ad-hoc basis. However, we found that these were often not ideally suited to client needs.

While we will continue to utilise these external products in the future, we now also have the capability to proactively construct tailor-made structured products for our clients.

To this end, we have established a partnership with a Swiss-based platform with an investment-grade credit rating three levels higher than that of South Africa’s top-rated banks. Any level of capital protection can be selected, along with a guaranteed or non-guaranteed investment return linked to a specific underlying offshore asset. Available options include various indices, instruments (for example, exchange-traded funds and actively managed funds), single stocks or a combination thereof.

We have continuously been researching various structured product options to complement our clients’ traditional offshore equity and commodity investment portfolio holdings.




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