Batswana have historically invested in farming as their post-retirement activity to sustain their livelihoods. However, younger generations appear to be less interested in farming and more drawn to capital market-related investments, such as buying shares on the Botswana Stock Exchange – or even offshore. Easy access to information has increased awareness of and interest in well-known global brands as investors look to diversify their portfolios. Gaolatlhe Monyamane discusses the value and risk of investing offshore for the average Motswana.
Why consider investing offshore?
There are many compelling reasons to invest offshore. These are unpacked below:
Access to a wider variety of companies and sectors
Botswana is a small market with a population estimated at 2.5 million and a handful of sizeable companies. Other countries with far larger populations have multibillion dollar companies in their markets. Many of these companies are in sectors such as technology, energy and industrials, to name a few, where Botswana is still developing – lagging behind markets such as the US and China. If you are an investor looking to benefit beyond what is accessible in Botswana, foreign markets hold the answer.
Diversifying investment risk
“Don’t put all your eggs in one basket.” If all your investments are local, you take on the risk of your livelihood being negatively affected in the event of an economic downturn. As an investor, you can reduce this risk by investing in foreign markets as they may perform well while the local market declines, cushioning the adverse impact. In this event, investing offshore would present an opportunity to share in the growth of these markets.
Enhancing your retirement investment
Recent changes in the Botswana pension environment require a higher allocation of local assets in pension funds. Within the context of a small local market, these changes make a favourable case for you to enhance your retirement savings by investing offshore, over and above your pension savings. Offshore investments have historically yielded higher returns than local investments. P100 000 invested in a basket of companies represented by the Financial Times Stock Exchange World Index would have grown to P386 057 over the 10 years to the end of December 2024, compared to growth to P196 906 for the same amount invested in a basket of companies represented by the Botswana Stock Exchange Domestic Company Total Return Index over the same period.
Examining the potential downside
Although there are benefits to investing offshore, it has its risks and challenges. These are explored below:
Currency risk
Investing offshore exposes investments to currency risk, meaning the currency exchange rate can work in your favour or against you. If the offshore investment currency loses value against the pula, the value of the investment in pula will decrease. Conversely, the offshore investment currency gaining value against the pula would result in increased investment value in pula.
For example, in December 2014 US$1 was worth P9.51. Fast-forward to December 2024, US$1 was valued at P13.95 – a result of the US currency gaining 46.7% against the pula. If you had invested US$1 000 (approximately P9 510) in the United States in 2014 and that investment was still worth US$1 000 in 2024 (an unlikely occurrence), the investment’s value in pula would be P13 950, having gained from exchange movement. Historically, the US dollar, euro and British pound have gained value against developing market currencies, including the pula; this means investing offshore would have paid off.
Geopolitical risk
At times, geopolitical tensions, such as the current conflicts in Russia and Ukraine as well as the Middle East, negatively affect investment values as share prices plummet due to investor panic. For long-term, bottom-up investors like Allan Gray and our offshore partner, Orbis, this can present attractive opportunities to buy stocks as they become significantly cheaper than our estimate of their true worth.
Tax implications and repatriation of funds
When investing offshore, it is imperative to assess the tax implications and whether it would be possible to repatriate your funds when needed. In many countries, your investment may attract tax on income and capital gains. On the other hand, if you invest in a country that has a Double Taxation Agreement with Botswana, you may benefit in the form of tax relief. Some countries have restrictions on how much you can take home after investing, so ensure that you are equipped with the relevant information before investing.
Investment costs
There will be associated costs for the investment transactions that you make, including bank charges and trading costs to name a few. If you are investing through an investment manager, there will be investment management fees. Acquaint yourself with the fee structures so that you know how much you are being charged in exchange for expert input and investment performance.
Partnering with the right investment manager
Investing can be daunting, especially if you venture further afield into foreign markets. To simplify the process, you can invest in an offshore unit trust through a reputable investment manager. Make sure you find an investment manager whose investment philosophy and approach resonate with you. If you are not sure where to begin, consider enlisting the services of a trusted independent financial adviser to provide the support you need when deciding which foreign markets to invest in and how to invest in them.