Most South Africans have a
local investment mind-set. The most prominent reasons for this being
regulation 28 of the Pension Funds Act and historically stringent foreign exchange controls. Introduced in 1956, the Pension Funds Act includes regulations governing numerous aspects of pre-retirement investment strategies. The Act enshrines exchange control limitations which currently do not allow more than 25% offshore exposure for
retirement funds. Yet Foreign exchange controls can be traced to the outbreak of World War ll in 1939 and have remained in place in one form or another ever since. Consequently, the outflow of investor capital from South Africa has been prohibitive and bequeathed a local investment mind-set.
There has, however, been an
easing of foreign exchange controls over the past two decades. In 1998 the private individual foreign capital allowance was increased to R400 000 per annum. This has been gradually increased up to R10 million in 2015. In 1995 approval was granted for Institutional investors (long term insurers, pension funds and unit trusts) to
invest offshore via an asset swap transaction. Asset swap allowance regulations have also increased from an initial 5% up to 35% in 2010. The relaxation of foreign exchange controls, coupled with the approval and increase of asset swap transactions has provided South African citizens with the facility to break free from a pure local investment mid-set and to develop a globally diversified investment strategy.
When looking at the graphs below, we can clearly see that the South African stock market makes up a mere 0.7% of the world stock market and that the South African GDP is just 0.45% of the World GDP. It is abundantly clear, therefore, that South African investors should adopt a
global diversification mind-set to enjoy the benefits of a slice of a larger global investment ’pie’.