As savvy goal-based investors know, diversification is one of the keys to long-term portfolio success. We all know that it’s unwise to keep all our eggs in one basket, which is one reason investors often turn to alternative investments such as private equity real estate or venture capital to balance their portfolio and hedge the risk of more common investments such as stocks, bonds, and mutual funds. Yet there are more ways to think of diversification than simply the industry or type of fund you’re investing in.
Investing internationally is an excellent way to ensure that your portfolio will reap the rewards of being fully diversified on multiple levels. The data has proven many times that it’s important for people to invest in different asset classes and regions to maximize diversification and increase their portfolio’s odds of success.
Here are some of the ways your portfolio can benefit from international diversification:
Sophisticated investors who seek big potential upsides often seek out international investments—especially in emerging markets—which can be purchased at a discounted cost with measured risk. While the United States economy provides investors with numerous upsides, it remains relatively stable and mature, equating to limited growth potential. Emerging markets, on the other hand, are where all the growth is happening; investors simply can’t find these stocks in the U.S. economy.
Africa, for instance, is home to 10 of the fastest-growing cities in the world. In these locales, populations are growing, business is booming, and both domestic and international investors want a piece of the pie.
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In 2010, South Africa was listed as one of the top emerging national economies alongside Brazil, Russia, India, and China, comprising the influential group known today as BRICS. Cape Town’s luxury real estate market was even recognized as the second-fastest growing on the planet. With businesses flocking to Cape Town, Johannesburg, and other high-growth South African regions, the spike in investor interest is unsurprising.
One of the main benefits of international diversification is that these investments often follow different market cycles, as their performance is tied to different geo-political factors. For instance, while political pessimism in the United States may negatively impact our country’s stock market, other countries’ investments can remain unaffected. Therefore, when our economy is down, international investments can help boost portfolio performance by equalizing at-home losses with international gains.
International diversification means more diversification in currency, which can reduce expected volatility and risk in the long term. In addition, when the exchange rate between the U.S. dollar and the currency of an international investment changes, it has the potential to increase your investment return. By investing in international real estate, you will generate cash flow in a different currency to maximize diversification. Plus, you’ll get a lot more bang for your (American) buck. For example, in early December 2018, $1 (USD) would equate to 14.35 South African rand (ZAR).
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Thanks to OppenheimerFunds, we know that 76% of the world’s companies valued over $1B in market cap live outside of the United States. With so many international companies making waves in both the local and global arena, it would be unwise to dismiss such a huge potential for investment growth in international markets. Plus, recent data suggests the U.S. economy will account for a smaller percentage of the world’s wealth in years to come.
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According to finance guru Paul A. Merriman, “U.S. multinationals don’t give [investors] much exposure to value, small-cap, small-cap value or emerging markets — every one of which can be a powerful return booster.” Therefore, if you think you have a hand in international investing simply because you have invested in U.S. multinational businesses, you’re wrong. International diversification requires investments specifically made within foreign markets.
International Man claims that “foreign real estate is the new Swiss bank account.” Although there are a number of considerations to be made when adding international investments to your portfolio, international diversification can be an excellent way to help you achieve your long-term goals. Foreign real estate is one of the best places to get started.
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Durban, South Africa could easily be mistaken for paradise. With an inviting subtropical climate, endless expanses of sandy beaches, and a melting pot of races and background, even a casual observer could see why the city has been ranked as the South African city with the highest quality of life for the past four years (and counting).
Yet Durban is much more than a pretty face. Situated on the east coast of South Africa, the tourist hotspot is also home to the country’s largest container handling port, making the city a key contributor to the South African economy. Currently, top global brands are competing for a stake in South Africa, and Durban is an excellent gateway for these companies looking to solidify their presence in the African market.
Durban’s Busy Port Is Vital to South African Development
In addition to being the largest container port, Durban also handles the third-largest bulk and break-bulk volume in South Africa. Despite the port’s current success, data shows that it still isn’t operating at full potential, meaning there is excellent opportunity for growth.
In a 2018 report from PwC, the auditing firm claims that the Port of Durban is inclined to “become increasingly sophisticated due to [its] air links, proximity to highway networks and the internet as well as their access to a large hinterland.” The report even likened the port to other major ports worldwide, such as New York and Los Angeles for North America.
South Africa has pursued favorable trade agreements and important economic partnerships with various countries, including the United States and China. With growing ties to many countries, ports like Durban are as important as ever in attracting foreign direct investment (FDI). As South Africa attracts more trade partnerships, ports like Durban will become an increasingly important source of revenue and employment.
Come for the Beaches, Stay for the Food
Tourism is also an important economic contributor in Durban. The city’s coastal appeal is only the start—Durban is home to a number of historical, cultural, and natural attractions, and is known for its delicious cuisine.
In 2018, Durban hosted Africa’s greatest horse race, the Vodacom Durban July (VDJ), investing millions of rand (over 10 million dollars) to support crowds of more than 50,000 people. Events like these are becoming more commonplace as Durban seeks to make it easier for domestic and international tourists to visit. A new Durban direct flight from London is the perfect example of how the city continues to deepen ties with international countries.
Durban’s Property Market Continues to Appreciate
You can’t blame people for wanting a piece of Durban’s rich economy and picturesque beaches. According to a local real estate agency, buyers are particularly drawn to areas such as Durban North, Berea, and Hillcrest. Ongoing developments and investments, continued economic growth, and a “complete restructuring” of the waterfront all point to Durban being an excellent location for real estate investors looking to capitalize on the growing South African economy.
It also comes as no surprise that many global brands have established branches in this booming port town. Unilever, PwC, Deloitte, Toyota, and Novartis all have a presence in Durban, and we expect that many companies will soon follow suit. Compared to South African cities like Johannesburg and Cape Town, Durban is relatively affordable, which makes it a great choice for businesses seeking to expand their presence in SA.
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Picture this—a vast cityscape punctuated by thousands of buildings and looming skyscrapers as far as the eye can see. No, this isn’t Hong Kong or New York—we’re talking about Johannesburg. Since gaining popularity as a gold mining settlement back in the 1800s, this South African city has remained an economic force both in South Africa and throughout the continent, maintaining its places as top contributor to the overall $326 billion GDP of the South African economy.
Johannesburg Leads South Africa in Economic Output
Known more commonly as “Joburg” or “Jozi,” Johannesburg is the largest city in South Africa and the country’s primary economic and financial hub. The bustling city is also the provincial capital of Gauteng––South Africa’s wealthiest province.
The Human Sciences Research Council notes that Joburg’s economic growth is “relatively superior” when compared to national and provincial levels. According to 2018 Gauteng Province Socio-Economic Review & Outlook, formerly high “unemployment rates have declined to levels last seen before the 2008 global economic crisis,” which bodes well for the city’s labor force.
Tourism continues to be an important economic driver for the city thanks to impressive historical attractions such as the (Nelson) Mandela House, Apartheid Museum, and Constitution Hill, among others. Like other South African cities, Johannesburg has benefitted from favorable trade acts with global leaders such as the United States. Currently, South Africa’s top trading partners include the European Union, Sub-Saharan Africa, and China.
Global Brands Have Long Betted on South Africa
A number of top global brands and companies currently compete for opportunities in South Africa, choosing cities like Johannesburg and Cape Town as their gateway into the rest of the continent. Jozi and Cape Town in particular have earned a reputation for nurturing innovation and entrepreneurship, making them likely candidates for international companies looking to expand.
From accounting firms like Deloitte, PwC, and Ernst & Young to big-name tech companies such as Microsoft, Oracle, Cisco Systems, and SAP, chances are your favorite brands have already laid claim to a piece of the Johannesburg pie. Seeing huge potential in the African market, Facebook selected Jozi for its first location on the continent back in 2015. Other big-name companies with locations in Johannesburg include Philips, Barclays, Burger King, and Unilever.
How Joburg’s Economic Opportunities Are Rocking the Real Estate Market
According to data from JLL’s Q1 2018 Market Report, Johannesburg remains the first pick for businesses who are looking to break into the South African market with a presence in the city. A stable demand for space in Jozi has increased developer interest, particularly in the Sandton, Rosebank, and Waterfall nodes.
Sandton has long been called the richest square mile in Africa, and while many businesses still select office locations downtown, Sandton remains a highly concentrated pocket of wealth that draws businesses from around the world. Overall, numbers indicate that “developer confidence is strong across the main centres with pockets of optimism and opportunities for solid investment.”
With a rich, innovative environment that stimulates economic growth, Johannesburg holds special importance for both South Africa and the continent as a whole. A blossoming corporate scene has created an abundance of wealth in the landlocked city, attracting entrepreneurs and investors from all over the world.
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With rich biodiversity, sprawling beaches, and a vibrant cityscape, it’s easy to see how Cape Town has become a well-known tourist destination both locally and internationally. Yet the bustling port city is also an economic force to be reckoned with, boasting a rapidly growing labor force that’s driving property developments and skyrocketing rental rates.
Cape Town has long been one of the top economic contributors to the overall $326 billion GDP of the South African economy. The coastal city is home to South Africa’s second-busiest airport, and the country’s top-rated university, the University of Cape Town. It also boasts numerous high profile tourist destinations such as Table Mountain, as well as some of the world’s largest sporting events, including the famous Cape Town Cycle Tour and the Comrades ultra-marathon.
The Port of Cape Town is the third largest container handling port in the country, with approved plans for a multibillion-rand upgrade to the facilities now set in motion. The largest three sectors in the city are wholesale and retail trade, catering, and accommodation; finance, insurance, real estate, and business services; and agriculture, forestry, and fishing.
Cape Town contains a labor force of around two million people, which means the city has the second largest number of people employed in South Africa and is responsible for over 61% of all employment in the Western Cape. In fact, the growing economy and high job potential has recently attracted many migrants looking for work.
The city contains four major commercial nodes and is a manufacturing base for several multinational companies such as Adidas and Johnson & Johnson. A variety of companies are headquartered here, representing a diverse array of industries that span everything from petrochemical companies to fashion designers.
Information Technology (IT) companies, including Amazon and Dimension Data, have also found great success in the bustling city, making it an important destination for South African professionals in this industry. Investors worldwide have touted Cape Town as a growing hub for both innovation and entrepreneurship, especially within the tech space.
According to Economic Performance Indicators, 16.4% more building plans were submitted to the City of Cape Town in the fourth quarter of 2017. And it’s easy to see why. With a staggering 4.23 million people living here, the “Mother City” is home to more people than some of America’s largest cities, including the City of Los Angeles. In fact, Cape Town is the second-most populated city in South Africa after Johannesburg.
In 2017, the city’s luxury real estate market earned recognition as the second-fastest growing in the world, outperforming a number of notable cities, including Seoul, Frankfurt, Paris, and Sydney. A combination of factors, which include increasing demand and unique supply restrictions, have contributed to the growing housing market in recent years.
According to the JLL Cape Town Office Market Report, 35,000 square meters were in the development pipeline by the end of 2017. They also noted a 6.9% vacancy rate which is down almost a percent year over year. The South African Property Owners Association believes that a sustained improvement in the office vacancy rate is dependent on the long-term strength of key economic drivers such as economic growth and business confidence. If recent investments in the city’s infrastructure and a growing interest in Cape Town’s economic potential from both domestic and international businesses is any indicator, we believe trends will remain positive for years to come.
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The United States is a key investor in the South African economy thanks to important legislation like the African Growth and Opportunity Act (AGOA). First enacted nearly 20 years ago and valid through at least 2025, the AGOA “significantly enhances market access to the US for qualifying Sub-Saharan African (SSA) countries.”
Furthermore, the United States and the Southern Africa Customs Union also signed a Trade, Investment, and Development Cooperative Agreement (TIDCA) back in 2008. This agreement, “establishes a forum for consultative discussions, cooperative work, and possible agreements on a wide range of trade issues, with a special focus on customs and trade facilitation, technical barriers to trade, sanitary and phytosanitary (SPS) measures, and trade and investment promotion.”
Together, these trade agreements have encouraged a bounty of healthy trade among the United States and South Africa—a clear benefit for investors seeking to break into the booming African market.
How Africa Benefits From U.S. Trade Policies
While all of Africa benefits from the AGOA, South Africa has been the largest beneficiary of the trade agreements. Trade figures from the Office of the United States Trade Representative record U.S. goods and services with South Africa at an estimated $16.1 billion in 2016 alone. That same year, exports were at $7.5 billion, while imports were $8.6 billion.
According to the U.S. Embassy, more than 98% of South African exports enter the United States duty free under various trade preference programs. These figures demonstrate the desire of the United States to continue investing in South Africa.
In 2016, South Africa’s foreign direct investment (FDI) in the United States (stock) was $3.1 billion, up 5.8% from the year prior. South Africa’s direct investment in the U.S. is led by wholesale trade, information services, and real estate.
A New Era: U.S.-South Africa Relations Under President Ramaphosa
For eight years, South African President Jacob Zuma’s corrupt regime wreaked havoc to the otherwise sound and growing economic opportunities of the country. But in 2018, the arrival of South Africa’s new President, Cyril Ramaphosa, was met with great optimism and excitement both at home and abroad.
Thanks to the fresh change in government, high net worth individuals from the United States, China, and other countries are investing more heavily in South Africa. With a legacy of positive trade relations, the United States is in a great position to benefit from the new leadership.
How U.S. Investors Can Take Advantage of South African Growth
As a result of trade legislation like the AGOA and TIDCA, the United States and South Africa have become heavily integrated, providing a stable bridge for other Americans to begin investing in South Africa, one of the prominent developing nations of the world. Currently the U.S. has over 600 firms with offices in South Africa, which generate more than 10% of the country’s annual GDP and employ over 200,000 South Africans. A specialist on the matter says this rich network provides both a strategic and stable platform for American investors to pursue more opportunities within the region.
With South Africa’s luxury real estate market outpacing most of the world in its growth, many sophisticated U.S. investors are seeking to break into South Africa by investing in private equity real estate.
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