Is it wise to park my money in offshore stock markets?

As a retail or an institutional investor, returns are at the forefront of your thought process. In the environment that we are currently operating in, you probably have found that locally, there may not be as many options as you would have imagined.

From, one entity dominating the bourse supported by mainly five other counters to rising interest rates driving the valuation of your bond portfolio downwards.

Will the derivatives that the NSE give you more options? Maybe, but when realistically? Will your portfolio survive the looming global recession? If it does, to what extent will your real return be positive? (The real return of any portfolio or investment is the return your investment gives you minus the inflation rate, the higher this figure the better).

Is it worth seeking a safe haven to either preserve your current portfolio or better still, make good returns as we navigate the tough economic times?

Let us delve into offshore investments as a possible answer to your question.

What are offshore investments?

Offshore investments are those that are made in a foreign or a different country from the one that a person presently resides.

There are many types of investments that you may consider which may include offshore mutual funds, venture capital or commodities like precious stones.

If you are already familiar with the space, then you will know that some of the indices to look at are the MSCI indices that track the performance of various international markets.

Read: Pensions raise investments in offshore, private equity

For example, the MSCI emerging markets index should give you a good indication of how the emerging markets are performing.

How do they operate?

Should you choose to invest offshore, it is important to get the lay of the land to understand the requirements for investment, here a good investment professional or investment bank should come in handy.

You must also be deliberate in understanding the business environment that you want to venture in, even as you hire the right professionals to help you get into this space.

An ideal portfolio mix at the end of the day is the desired outcome.

Pros?

Offshore investments done right offer many benefits to the investor, some of these are;

Diversification

Diversification is imperative for an investor who wants to hedge themselves against risk, both anticipated risk and unforeseeable risk.

Further, diversification will grant you the opportunity to gain higher than normal returns in an imperfect market before it stabilises.

However, the law of risk and return demands that for a certain level of return, an investor must be open to accepting an equivalent level of risk. Therefore, the higher the risk, the higher the returns gained and vice versa.

Counters a depreciating shilling

We have seen in the recent past just how much a weakening shilling comparative to the dollar affects not only the macroeconomic environment but also our households.

Having an offshore portfolio that is domiciled in dollars could help stem this tide.

Offshore investments also ensure that you have enough foreign currency reserves especially when there is a shortage of foreign currency as is the present situation in the country.

Take advantage of foreign tax laws

There are territories that have favourable tax laws compared to Kenya. Such territories may desire to grow their economy and by extension invite or make it easy for foreign entities to trade.

Some countries have relaxed their investment requirement which makes it favourable for offshore investments.

Markets with potential for growth

Large-scale investors may consider investing in markets that are under-priced and/or under-developed which presents a great potential for growth.

Such markets will enable you to set your footprints early on and ensure that the market recognises you and your services even as it grows.

Cons?

Unfavourable tax laws and higher costs of doing business.

Without doing your due diligence, you run the risk of investing in markets that will diminish your return due to more taxation and increased regulatory scrutiny that offshore jurisdictions and accounts face.

It is important that both you and the intermediary understand the economic environment and keep track of the changes thereafter.

Read: Pension assets post muted growth amid weak markets

Political instability

In territories where this is prevalent, the economic outlook tends to be very volatile. Here investor sentiment, especially if it is a market dominated by FDI, (Foreign Direct Investments) tends to determine returns on investments.

This is more apparent in the equity asset class, where price discovery is determined by buyers and sellers at a particular counter.

Knowing when to enter these markets and when to exit may very well determine how much you make from this “asset class”.

Offshore investment offers an opportunity for investors to diversify their portfolios and potentially make more returns compared to their local markets.

Correctly done and contingent on the macro-economic environment of these markets, whether developed, emerging or frontier, positioning oneself to profit off windfalls or continuous small gains should leave you with a richer portfolio, both in terms of asset mix and value.

Who you use to enter these markets is also key and meeting with a financial advisor to come up with a plan that is tailor-made to you and your expectations is key.

So, is it worth parking money in offshore investments? This depends on your financial plan, the horizon within which you expect to reap the rewards of your investments and the correct partner to walk the journey with.

Mr Otenyo is a consultant on retirement solutions. | [email protected]