Increased Reg 28 Offshore Limits Have Real Benefits

Money will be spent in South Africa at the end of the day. But you only benefit from this by investing in a globally diversified portfolio – Attila Kadikoy of Levantine & Co.

By Sımon Brown 6 November 2023

SIMON BROWN: I’m chatting now with Attila Kadikoy of Levantine & Co. Attila, I appreciate the early morning. The increase in Regulation 28 offshore allocation is being criticised by some. I spoke with Nick van Rensburg from All Weather Capital back in September. He says it’s bad for the market. He says it’s bad for the economy. You disagree. You say, hang on a sec, actually there are some real benefits here, and the increased limit is actually good news for investors – and ultimately the country.

ATTILA KADIKOY: Probably the best place to start from is our purpose here as investment professionals. It is to optimise the returns based on our individual clients’ risk profiles. So if optimising our client’s returns is investing offshore, we invest offshore. The political story in a part of it is a separate thing.

But along with that one has to also consider that once the client, the investor, the pension holder for example, is increasing returns in their portfolio, what does that mean for the economy in the long run? That means that purchasing power is going to increase in the long run.

If the individual has, for argument’s sake, 35%, 40% of their portfolio investing overseas, a diversified portfolio, and that is yielding higher than if they were investing 100% in South Africa, well, that individual’s purchasing power is s going to increase at the end of the day.

Let’s take a simple example. Let’s say there’s no currency control in South Africa and you have two accounts. You have a current account with rands and you have $1 000 in your South African bank, you’re holding credit … interest, everything. Now, if that $1 000 against the rand appreciates, what happens to the purchasing power of the individual in the country? That’s I think quite a simple calculation.

SIMON BROWN: And the simple theory there is that we are in South Africa. There will be tax on sales and the like. But, more importantly, that money will come back into the economy and be spent locally because this is where we are living.

ATTILA KADIKOY: Absolutely. There’s a difference between someone emigrating overseas and [someone] investing overseas, living in South Africa, because you’re contributing to the economy anyway by living here. You’re a business professional, your house is here, you’re spending your income here. Now you’re taking a portion of that overseas. And then think also, we are sitting in front of a computer and we’re using Microsoft software. We may be driving an imported car. And when you invest in these companies, these growing companies, you’re going to be benefiting from their income.

The thing that’s important is it’s not up to the individual to fund the country’s economy. There’s a lot of capital available for South Africa as long as there’s growth and there is fiscal stimulus, a growing economy. Then globally there is – if we consider complete global assets under management – about $110 trillion globally. Around 10% is allocated to emerging markets, 6.5%, 7% to emerging market debt. So a portion of that, if there’s good opportunity, will come to South Africa. We’re not dependent purely on individuals here.

SIMON BROWN: I take your point on that, and it goes back to your original statement right up front, which was quite simply that, as investors, we want to find the best place to invest. Now there are some great companies on our JSE, but we don’t want to be restricted to that. We want to be able to say [that] at points in time there are great companies in the rest of the world, and it’s a big market out there.

ATTILA KADIKOY: Yes. And we’re not the youngest people on the block. You will recall before the 2008 global financial crisis [in] the global economy there was more normal. There was interest, there was a bit of inflation. And with [Alan] Greenspan starting the rate-cut cycle, it got close to zero.

In 2008 we had this huge crisis, and since then we’ve had this abnormal environment where there’s been almost – globally, of course I’m talking about – minimal or zero inflation, zero interest rates, maybe even negative interest rates, and a huge amount of liquidity.

That cycle ended in 2022 and now you have, let’s call it, a risk-free rate of almost 5% on the US dollar. That is the US government saying to you, I will pay you 5% per annum if you buy my Treasury bill or my bonds. That’s a substantial amount of return, even on fixed income now, that one cannot ignore.

And there have been arguments I’ve heard like linking the weakness in the rand in the last year, year-and-a-half, to Reg 28, while I would recommend listeners to look at the dollar index on their computers at [the US dollar Index Chart] DXY, and whenever you see volatility in your currency, check if it’s just your currency or the US dollar, for example, appreciating. You’ll see it’s to do with the rate cycle.

Since 2022 the dollar has been appreciating pretty much against every currency.

SIMON BROWN: That’s a good point because, as South Africans – and I often wonder if other emerging markets are the same – we kind of look at our rand as the rest of the world sort of voting on us. Every time it’s weaker we feel like the Proteas, and when it’s stronger we feel like the Springboks. But truthfully, more often than not we are just a buoy on the ocean. And it’s all about what the dollar is doing.

That comes back to that point – you want to be investing where the money is and, truthfully, a lot of that is the largest market in the world, and 5% on US government debt. That is a phenomenal return.

ATTILA KADIKOY: Yes. Look, we are global investors. We manage globally diversified portfolios. For example last year, believe or not, the best market for us was Japan.


ATTILA KADIKOY: [That was] due to the weak yen, and our Japanese position appreciated over 20%. Now, that’s something a South African investor benefits from. Money, like we said, will be spent in South Africa at the end of the day. But you only benefit from this by investing in a globally diversified portfolio.

SIMON BROWN: Yes, of course.

ATTILA KADIKOY: And that’s only a portion of your total assets.

SIMON BROWN: Yes. And that Reg 28 gets wrapped up. There’s tax, you get yourself an annuity, there’s tax, so you’re going to pay it all back in tax. We’ll leave it there.

Attila Kadikoy at Levantine & Co, I appreciate the early morning insights.

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