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Investing in listed property: time to bail or buy?
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Investing in listed property: time to bail or buy?
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SA’s economy to remain subdued until resolution of power supply crisis
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Exchange traded products industry review: second quarter 2015
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A Greek odyssey
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Listed property: some caution still required
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Profile: Daniël Kriel, CEO Sanlam Private Wealth
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From
the editor Investors are not surprisingly nervous. Recent strong headwinds have all of us worrying about protecting our investment portfolios from sudden drops in value and worse (gasp), capital loss. The portfolio attack comes from many sides, local and international. Whatever happens there – and readers will know when reading this if Greece is still part of the European Union – will affect our portfolios too. As John Travolta famously sang decades ago, “Greece is the word”. Trying to protect portfolios is the sensible thing to do, but investors should be careful about going overboard. A well-constructed portfolio should already have defensive measures in place. Don’t do extra things that might not be necessary. In these difficult situations, the best thing often is to just sit on your hands. On the topic of protection, though, many investors regard fixed income investments as the place to be. But they are not without risk, as Ian Scott of PSG Asset Management will tell you in his article. His advice when looking at fixed income is to put risk first. Read it. Related to the subject is Marc Hasenfuss who takes a look at investing in listed property. He poses the question of whether investors should be in or out, and if in, looks at the possible best opportunities. (Spoiler alert: they aren’t the big four property funds.) Also see Duncan Schwulst, from Prudential Investment Managers, on listed property. He warns that caution is still required. Colleague Vivienne Fouché has been on the run around and brings you a report on the FPI Convention. Guess what one of the topics debated was? You’re right – fees basis fees for advisers. Chris Hart, chief strategist at Investment Solutions, provides his usual outstanding column, this time asking what’s probably a provocative question: what if? He’s aiming it at politicians going against court rulings to get what they want, and the economy be damned. Exchange traded products continue to be a popular investment, though Mike Brown, MD of etfsa.co.za, says that while the industry continues to grow, it has been at a slower pace over the second quarter of the year. That’s not surprising, but see the report for some surprises. As always, there’s much more to read. Have fun. Until the next time, defensively yours,
Shaun Harris
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www.investsa.co.za Publisher Andy Mark Editor Shaun Harris | investsa@comms.co.za Managing editor Nicky Mark Copy editor Gemma Gardner Content editor & editorial enquiries Vivienne Fouché | vivienne@comms.co.za Feature writers Shaun Harris Marc Hasenfuss Layout and design Davida Smith Mariska Le Roux Editorial head office Ground floor Manhattan Tower Esplanade Road Century City 7441 Phone: 021 555 3577 Fax: 086 6183906
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Copyright COSA Communications Pty (Ltd) 2015, All rights reserved. Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications Pty (Ltd). The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or products or the reliance of any information contained in this publication.
16926/E/Balance
PROOF THAT WE’VE BEEN DOING THE RIGHT THINGS RIGHT, DAY AFTER DAY, MONTH AFTER MONTH. PRUDENTIAL BALANCED FUND ANNUALISED RETURN
CATEGORY AVERAGE RETURN*
OUTPERFORMANCE
1 YEAR
14.7%
11.9%
2.8%
3 YEARS
18.5%
14.7%
3.8%
5 YEARS
15.2%
12.3%
2.9%
7 YEARS
12.3%
9.9%
2.4%
10 YEARS
15.3%
12.8%
2.5%
SINCE INCEPTION (1999)
15.6%
13.6%
2.0%
*ASISA SA Multi-Asset High Equity Category Annualised Return Average
Source: Morningstar
To benefit from our consistent investment performance, contact our Client Services team on 0860 105 775, speak to your Financial Adviser or visit: prudential.co.za
Source: Morningstar data for periods ending 31 May 2015 in the relevant ASISA categories. Prudential Portfolio Managers Unit Trusts Ltd (Registration number: 1999/0524/06) is an approved CISCA management company (#29). Assets are managed by Prudential Investment Managers (South Africa) (Pty) Ltd, which is an approved discretionary Financial Services Provider (#45199). Collective Investment Schemes (unit trusts) are generally medium to long-term investments. The value of participatory interest (units) may go down as well as up. Past performance is not necessarily a guide to the future and the Manager provides no capital or return guarantees. Unit trust prices are calculated on a net asset value basis, which for money market funds is the total book value of all assets in the portfolio divided by the number of units in issue. Fluctuations or movements in exchange rates may also be the cause of the value of underlying international investments going up or down Unit trusts can engage in borrowing and scrip lending Unit trusts are traded at ruling prices. Commissions and incentives may be paid and if so, would be included in the overall costs. Different classes of units apply to the Prudential Collective Investment Scheme Funds and are subject to different fees and charges. A detailed schedule of fees and charges and maximum commissions is available on request from the company. Forward pricing is used. All of the unit trusts may be capped at any time in order for them to be managed in accordance with their mandates. Performance figures are sourced from Morningstar and are based on lump sum investments using NAV prices with gross income reinvested. Purchase and repurchase requests must be received by the Manager by 13h30 (11h30 for Money Market and 10h30 for Dividend Income Funds) SA time each business day. All online purchase and repurchase transactions must be received by the Manager by 10h30 (for all Funds) SA time each business day. General market performance data may have been provided for illustrative and explanatory purposes. This information is not intended to constitute the basis for any specific investment decision. Investors are advised to familiarize themselves with the unique risks pertaining to their investment choices and should seek the advice of a properly qualified financial consultant or adviser before investing.
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g n i m Co on• 07 s•o 0 2 in By Marc Hasenfuss
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Investing in listed property: time to bail or buy?
Considering the flurry of new property listings on the JSE in the last four years, it’s difficult to believe there are currently roughly the same number of real estate counters scattered across the market as there were in the mid-nineties.
I
property counters) has again swelled after a steady flow of new listings. But, in truth, the JSE – numerically speaking – now hosts the same number of listings as it did in the mid-nineties.
After a flurry of corporate activity – mostly mergers and acquisitions – in the late nineties and early noughties, the number of property listings on the JSE was whittled down to around 35 in 2007.
The big difference this time is that the collective market capitalisation of the JSE-listed property stocks is far, far vaster, closing in on R350 billion at last count. And while property in previous decades was largely seen as a boring yield sweetener, the sector is far more dynamic these days and has become an asset class capable of holding investors’ attention, with market beating performances and inspired corporate action. The scoreboard will show that holders of property stocks over the last five years would have shaped up rather
n 1995 – that is to say almost 20 years ago – there were around fifty listed property counters. Some of today’s real estate stalwarts were there – most notably Growthpoint and Hyprop – albeit then hardly as imposing a force on the local property counter as they are today. For the most part, there was a collection of mid-size contenders linked to financial institutions – like Metboard, Syfrets, Pioneer and Standard Bank Property Fund and Atlas – as well as weird and wonderful little companies like Prima, Propcor and Equikor.
well compared with the returns garnered by investors who were invested in a basket of blue chip shares. The other significant difference – aside from lingering exuberant market sentiment – is that the JSE’s property boards now show a marked increase in companies that hold properties exclusively outside of South Africa. But we’ll return to the ‘internationalisation’ of the JSE’s real estate boards later. The current quandary for property stockholders is whether the sector can continue to generate decent returns when it seems clear interest rates in South Africa could be hiked fairly shortly.
Eight years later the JSE property boards (including the AltX, which hosts several
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However, more than a few property experts believe the real action may be found in some of the smaller counters that recently ventured onto the JSE. Size is not everything, but there are times when a larger portfolio offers much-needed leverage. If yields do come under pressure, then it’s conceivable that smaller property counters – especially those that listed recently – might seek out deals that ensure diversification of rental streams. But corporate could also provide an opportunity to hone the enlarged portfolio into a more compelling offering that might allow an easing in gearing by re-negotiating the loans package. There are already signs of consolidation in the listed property sector driven by larger players, as well as the divesting of non-core assets by bigger players into vehicles where these assets can move the yield needle. All the while, smaller players keep creeping onto the JSE – the latest being residentialfocused Indluplace – showing that there remains an appetite for the richer yields normally associated with more focused portfolios. Possibly Indluplace’s successful listing could prompt listed investment company Trematon to separately list its 50 per cent owned Resi Property Fund, with other similar ventures following suit. Other possible real estate listings could stem from gaming and leisure group Tsogo Sun, which has expressed a willingness to unlock value for shareholders by listing its valuable hotels and retail properties on the JSE.
The scope of interest rate increases is difficult to quantify at this juncture. Suffice to say that political considerations may sway the Reserve Bank to curb its enthusiasm for a series of hikes (like we saw in the late nineties when the rand was in free-fall). But there are also larger concerns – like the fact that South Africa’s moribund economy is not exactly conducive to driving commercial, retail, industrial or even leisure property. Throw in the inconvenience of Eskom’s load-shedding arrangements, and it's easy to start fretting about landlords’ ability to escalate rentals. The big four local property stocks – Growthpoint, Redefine, Hyprop and Resilient (collectively holding a market capitalisation of R170 billion) – offer some interesting pronouncements on prospects.
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The two biggest counters – sprawling Growthpoint (which holds a major stake in the iconic V&A Waterfront) and Redefine – trade on reasonable historic dividend yields of 6.6 per cent and 7.6 per cent respectively. Hyprop (which owns the Canal Walk shopping centre in Cape Town) and Resilient (which owns a sizeable property portfolio as well as influential stakes in other specialised local and offshore counters) trade on more demanding yields of 4.5 per cent and 4 per cent respectively. Investors who prefer to buy the big slabs of the property index would need to decide whether it’s prudent to opt for the stoutly diversified Growthpoint and Redefine, or back the management teams at Hyprop and Resilient to continue outperforming their peers for the medium term.
Other companies with substantial real estate on their books might also be tempted to make the most of a receptive market. These could include Rex Trueform (which owns some interesting development property in hip Salt River), Tongaat Hulett (which owns large tracts of development land in KwaZuluNatal), Hosken Consolidated Investments (which has already completed a few shopping centres) and Deneb Investments (which is turning unused industrial land into new developments for rental). Investors Monthly reckons some of the more interesting ‘smaller’ property players to watch for action this year would include Tower Property, Texton Equities, Arrowhead, Fairvest (emerging retail properties – including the vibrant Nyanga Junction in Langa), Ingenuity (an interesting property development play surely poised for a buyout) and the unsung Putprop (which recently raised fresh capital). What is also standing out on the JSE’s property boards is the consummate ease at which offshore focused property companies are able to raise huge dollops of fresh capital
by placing new shares for cash. Tradehold (a mix of UK and African property possibilities), NEPI (an Eastern European-focused fund), Rockcastle (an international hybrid), Delta International (Africa), Stenprop (UK and Europe), Sirius (German industrial parks), Investec Australia Property and Atlantic Leaf (UK and Europe) have all recently successfully tapped the market for funding.
For sale
Not surprisingly there is talk of more offshore-focused companies hitting the JSE. At the time of writing, Pivotal Property Fund had signalled its intention to bring an Africa-focused fund onto the JSE (via an inward listing) with Mara Diversified Property Holdings. Tradehold, which is controlled by retail tycoon Christo Wiese, has hinted at separately listing its Namibian properties. The allure of offshore property is obviously strong, with investors keen to externalise investment savings into assets that generate hard currency rental flows in countries where the mundane interest rates offer gearing advantages. Intu and Capital & Counties – formerly combined as Liberty International – would
still rank as the default international property stocks on the JSE, although the yield potential from newer and smaller funds will be sorely tempting. But it’s worth remembering that
management teams in new counters may lack deep experience in offshore territories, heightening the risk of overpaying for assets and also misreading market trends.
There’s only one Investment Solution In an industry riddled with jargon and complexity, we offer our clients investments they can count on, delivered with simplicity and transparency -- and we’ve been doing it for 18 years. So, when you need an investment solution, cut to the chase and go straight to www.investmentsolutions.co.za or call 011 505 6000. Follow us on twitter @InvestmentSolZA.
Investment Solutions. 18 years. With confidence Investment Solutions Limited is a licensed Financial Services Provider. FAIS licence number 711. Registration number 1997/000595/06.
A Member of the Alexander Forbes Group
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9
Who’s looking after your money:
your financial adviser or a default asset manager? By Shaun Harris
Who runs your investment portfolio? If you’re financially clever and have the time, you might run it yourself. But most investors use a financial adviser – or do they? Perhaps they only think they have a financial adviser, but somebody else is running the portfolio. 10 investsa
presentation by an asset manager, because the company has funds he knows will suit the client’s portfolio. He listens, takes notes, and perhaps gets to chat to the asset manager after the presentation. He then proceeds to adjust his client’s portfolio based on the presentation. The financial adviser is happy, and so is the client.
image and reputation is tarnished because of unregulated schemes and products.
But who is really running the portfolio? Technically, it’s the financial adviser: he has made the changes after all. But it is all based on what the asset manager presented. One could argue it is the asset manager then who is running the portfolio: in effect becoming the default financial adviser.
The above example was of an IFA innocently becoming a default asset manager. What about the IFA who deliberately becomes a default asset manager? Innocence flies out the window here, and things start to get pernicious.
It could all be perfectly innocent. But what if there is a blow up and that change based on the asset management presentation goes horribly wrong. The client, the investor, is furious. Who is to blame, the financial adviser or the asset manager? The financial adviser is ultimately responsible, although if things get really nasty, he may try and blame the asset manager. He might argue, for example, that the asset manager said the fund in question was low risk and should offer safe returns for the long term. The reply from the asset manager would be that past performance cannot guarantee future returns. There’s a lot of pressure on financial advisers and it comes as one of the most comprehensive reports on independent financial advisers (IFAs) has been published. The report was compiled by Insight Discovery, a Dubai-based strategic intelligence company, which conducted an in-depth survey of South African IFAs. The survey was co-sponsored by Investec Asset Management. According to Jaco van Tonder, director for advisory services at Investec Asset Management, the report offers exceptional insight into the challenges facing the South African IFA and wealth manager market, and really highlights how they are impacted on by the ongoing regulatory and market changes.
I
t’s not a Sherlock Holmes mystery but something that happens quite often, in everyday practice. And your financial adviser might not even realise he or she is doing it. Doing what? Perhaps it’s easiest to explain by example. Your financial adviser attends a
With this concern about their image, there should be, and probably is, sensitivity about those IFAs who are deliberately using asset managers as default financial advisers. The question is why, and what can be done about it?
In some cases, it might happen because the IFA is, to put it plainly, lazy. That happens in all industries. Far worse is the IFA who becomes a default asset manager on purpose because he knows this can generate additional fees, and also ties him into a service where he can continue to generate additional fees. The client comes second, and so does the default asset manager. This IFA is just chasing as much money as he can get at the expense of everyone else. This is harmful not only to the industry image but also the future fees IFAs will be able to earn. Fees are important and should not be jeopardised by IFAs taking a chance. Sixty nine per cent of the IFAs in the survey believe that the downward pressure on fees is the main challenge. “A highly sophisticated industry will, over the coming year, face a number of challenges and opportunities – only some of which relate to the general move towards compensation by fees for service.” There are a number of issues facing IFAs, with fees a primary concern. That’s why they work. The dropout rate is already high, with many IFAs, especially those that run smaller, familyowned firms, looking at succession plans.
Regulatory changes are a big issue for IFAs, with 60 per cent of participants in the survey saying changing regulations are the main challenge facing them. But their relationship with asset managers is an important part of the survey as well. “This report seeks to answer one key question: what is it that IFAs want from the asset management companies, platform operators and other financial services companies that they deal with?” says Nigel Sillitoe, CEO of Insight Discovery.
It’s difficult to ponder what IFAs can do about their concern with changing regulations. It is a problem for them, but the body making the changes, the FSB, runs the show. How do you try and get regulatory changes through the entity that controls those regulations? A more balanced outcome seems at play with asset managers, default or not. In the survey, 87 per cent of IFAs say they work with products of three or more asset management companies. That implies there is a good working relationship between these IFAs and the asset management companies.
IFAs are worried about their image, with 97 per cent saying the Financial Services Board (FSB) should do more to monitor unregulated schemes and products. Further, 91 per cent think the investment industry’s
Ultimately that will benefit the investor. Asset managers need IFAs to sell their products. IFAs need asset managers so that they can sell the products. If this relationship works well, it’s the investor who scores in the end.
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17
Alternative investments
Delivering outcomes that matter Old Mutual Investment Group recently held its first responsible investment conference, themed ‘What does tomorrow look like?’. By Vivienne Fouché IDEAS Managed Fund: project examples
Renewable energy
Economic infrastructure
Social infrastructure
Cookhouse Wind Farm
Bakwena Platinum Corridor Concession – toll road
Afhco Holdings – affordable housing
Greefspan & Herbert Projects – renewable energy infrastructure
Matola Gas Company – power plant
Jeffreys Bay Wind Farm
N3 Toll Concession (Pty) Ltd – toll road
Kathu Solar Energy Plant
New Limpopo Bridge (NLB) – toll bridge
Lesedi and Letsatsi Solar Plants
New Limpopo Projects Investments (NLPI) – railways
MetroWind – Wind Farm
Trans African Concession (TRAC) (Pty) Ltd – toll road
Imvelo Consortium (Dept. of Environmental Affairs) – office accommodation Mangaung Correctional Centre (Pty) Ltd – prison Rainprop (Pty) Ltd (Dept. of Trade & Industries Campus) – accommodation Sethekgo Private Party (Pty) Ltd (Dept. of Basic Education Campus) – office accommodation
Umoya Energy – Wind Farm
T
he event aimed to generate debate around the state of responsible investing in South Africa and looked at how Old Mutual applies environmental, social and governance (ESG) principles to its investment decisions, as well as where opportunities for responsible investing lie for South African businesses.
entitled ‘Delivering outcomes that matter’. He clarified, “The Alternative Investments boutique has a large team of 50 investment professionals with more than 500 years of combined investment expertise in Africa. The boutique has a long track record with a history of delivering attractive, uncorrelated returns.
Paul Boynton, chief executive of Old Mutual Alternative Investments, gave a presentation
“Alternative Investments has R52 billion in assets under management. Its three
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investment pillars are: private equity; infrastructure – including toll roads – utilities, renewable energy, railways and bridges; and development impact, which includes affordable housing and education projects.” Boynton spoke on the Infrastructural, Developmental and Environmental Assets (IDEAS) Managed Fund, which is South Africa’s largest domestic infrastructure equity fund. It invests in economic infrastructure
IDEAS Managed Fund Performance: December 2014 Two examples of the IDEAS Managed Fund investments in renewable energy
24% 22,1% 22% 20% 18%
19,3%
Cookhouse wind farm: Cookhouse, Eastern Cape
18,4%
17,9% 16,6%
16,1%
16%
Total Fund 14% 12,5%
12,2%
12,6% Fund Excl. Cash
12% 10%
Infla?on + 7%
8% 6% 4% 2% 0%
12 months to date
5 Years
(roads and railways); social infrastructure (housing and public-private partnerships); and renewable energy infrastructure (solar, wind, and hydro-generation projects). The IDEAS Managed Fund has a performance objective of inflation (CPI) plus seven per cent over a rolling three-year period. The Alternative Investments team believes that effective infrastructure is vital for economic growth and ultimately leads to the upliftment of the broader community. The projects in the IDEAS Managed Fund serve to create employment and develop skills. Some of the projects that the IDEAS
Since Incep?on
Managed Fund has invested in across South Africa are set out in the table. Old Mutual Alternative Investments manages the fund in which Unity Corporation, representing eight local trade unions, has a 50 per cent shareholding. The graph shows the performance of the IDEAS Managed Fund as at December 2014 for 12 months, five years and since inception in 1999. Boynton commented, “Since inception, the IDEAS fund has delivered close to 13 per cent real return excluding cash, and 11 per cent real return including cash. Equity markets globally over the last 10-odd years have delivered five to seven per cent real return.”
• Generation capacity: 140 Megawatts • Implied number of households powered per annum: 150 943 • Implied carbon offset (tons per annum): 379 776 • Implied water saved (litres per annum): 728 064 000 • Local content expenditure to end Sep 2013: R168 million • Permanent jobs: 30 • Construction jobs: 200 Lesedi and Lesatsi solar plants: Northern Cape/Free State provinces • Generation capacity: 130 Megawatts • Implied number of households powered per annum: 111 635 • Implied carbon offset (tons per annum): 278 036 • Implied water saved (litres per annum): 536 476 000 • Local content expenditure to end Sep 2013: R648 million • Permanent jobs: 60 • Construction jobs: 700
Laurium Flexible Prescient Fund. Boutique manager performance at its best.
www.lauriumcapital.com
Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CIS’s are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. There is no guarantee in respect of capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. CIS prices are calculated on a net asset basis, which is the total value of all the assets in the portfolio including any income accruals and less any permissible deductions (brokerage, STT, VAT, auditor’s fees, bank charges, trustee and custodian fees and the annual management fee) from the portfolio divided by the number of participatory interests (units) in issue. Forward pricing is used. The Fund’s Total Expense Ratio (TER) reflects the percentage of the average Net Asset Value (NAV) of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio. A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TER’s. During the phase in period TER’s do not include information gathered over a full year. The Manager retains full legal responsibility for any third-party-named portfolio. Where foreign securities are included in a portfolio there may be potential constraints on liquidity and the repatriation of funds, macroeconomic risks, political risks, foreign exchange risks, tax risks, settlement risks; and potential limitations on the availability of market information. The investor acknowledges the inherent risk associated with the selected investments and that there are no guarantees. Laurium Capital (Pty) Limited is an Authorised Financial Service Provider (FSP No.34142).
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Allan Gray
Are we snookering ourselves with
confirmation bias? Jeanette Marais, director: distribution and client service, Allan Gray
T
here are many different psychological theories to explain investor behaviour, one of these being ‘confirmation bias’ – the tendency to gravitate towards news and opinions that confirm our own views. In our information overloaded world, novice investors and professionals alike can easily find evidence to support their own theories. With evidence in hand, we can justify our actions. Confirmation bias can manifest itself in the newspapers we read, the websites we frequent and the people we listen to. Online we are deliberately manipulated by search engines, news sites and social media networks that are cleverly configured to deliver us just the information we are looking for, based on our historical behaviour. The result of this bias aggregated across the market often leads to misleading popular market sentiment.
What is to be done? As we consume information daily, it may help to develop more self-awareness around our own biases, and a targeted strategy for consuming financial media. Many decisions about buying, selling and switching (or not switching) investments are informed by what we read, so it is worth examining how to filter this flow of information. 1. Separate the wheat from the chaff If you are focused on a long-term goal, the short-term noise is just that – noise. Buying and selling based on everyday events and market moves may cause you to lock in losses that may have otherwise been avoided. There are some investors who time the market well, due to a combination of luck and skill but, on average, changing your investments in response to a change in your circumstances is a more rewarding strategy.
Emotions can be our worst enemy when it comes to investing. Driven by fear and greed, many investors buy high and sell low and tend to invest based on past performance. Jeanette Marais, director of distribution and client service at Allan Gray, discusses what causes this counter-productive behaviour.
Generally, unit trust investors need not worry about how to respond to day-to-day events; your fund manager will take these into account, as necessary, during the research process. Similarly, if you use the services of a good, independent financial adviser they will adjust your overall portfolio as the long-term need arises. There are only a few news events that should encourage you to check in on your unit trust: • News about significant changes at your investment management company (e.g. your unit trust company abruptly changes its investment philosophy). • News about changes to your specific funds (e.g. the benchmark, mandates or fee structure changes). • News about legal changes that may have an effect on your investments (e.g. government changes legal restrictions on endowments or retirement funds). • For the more sophisticated investor with niche investments, news about significant shifts in countries or industries (e.g. if you have a mining-specific unit trust and there is a change in laws around mining licences).
3. Filter for facts In theory, underneath the opinions and ideas you read in the media there should be a foundation built on facts; facts that you can follow back to their source. Reading the source material allows you to question the interpretation you are given with a deeper understanding. Always try to get the full picture rather than acting emotionally on the first story you read. 4. Watch out for weasel words and orphan opinions Extraordinary claims are often delivered with words such as ‘likely’, ‘probably’, ‘virtually’, ‘almost all’ and ‘seems’. These words are designed to encourage you to believe the truth of a statement, which may, at its core, be baseless.
2. Challenge your world view
Another new trick is the use of orphan opinions such as: “Experts say …”. This should lead you to ask: which experts? In some cases, the text may indeed quote an expert opinion; but more often than not the headline is selling the paper. In most cases, an opinion worth listening to will come from someone willing to put their name next to it.
The ‘team of rivals’ approach can help you break out of your safe opinions. The idea is to actively seek alternative views and was used by Abraham Lincoln, who appointed his rivals to
Become critical about what you read, see and hear: don’t let confirmation bias snooker you. Reserve the right to react only after careful consideration.
In most other cases, you should only consider making changes to your investment if your goals or personal circumstances change.
Allan Gray Proprietary Limited is an authorised financial services provider.
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cabinet to challenge him. Reading and trying to understand viewpoints that differ from your own can give you fresh insights and leave you with a more holistic view of a situation.
Asset management
Fixed Income -
risks and opportunities across the curve When investing in fixed income, or any other asset for that matter, it is important to put risk first. When it comes to investments, risk can be measured in a variety of ways, from tracking error to standard deviation, volatility and drawdown risk.
however, also an expensive asset class at present. As a result, this is currently our least preferred fixed-income asset class. Domestic cash
Listed property
This is our default position. If we cannot find good opportunities, we will wait in cash, giving us firing power when opportunities arise.
Property falls into the same category as bonds right now. If we consider that most of the property counters trade at a premium to net asset value (NAV), this is currently another expensive asset class.
Floating rate notes
A
good way to look at investment risk is to view it as the probability of incurring a permanent capital loss over a particular time period. Using this framework, you would then put risk at the forefront of investment decisions. A fixed income team constantly looks for pricing asymmetries across fixed income curves. This entails hunting for instruments offering an appropriate real yield given credit and duration risk, and it can mean walking away from tempting yields where there is little or no margin of safety. Of course, it is also important to look at the credit agency ratings, but in our experiences their assessments might not always be correct. Calculating your own ratings is, therefore, an essential discipline. Investing in fixed income has a high probability of also being a credit decision that entails determining true cash flow, valuing assets realistically and ensuring that we have access to the underlying security. The pricing spread is also important to indicate that investors are being compensated enough for taking the risk. Currently, there are some good opportunities to earn excess returns in the fixed income market: they are just not everywhere and nor are they obvious. Let’s look at these in order of the risk curve.
Floating rate notes protect investors against adverse moves in interest rates and moves in conjunction with market rates. We think these notes are good instruments to be invested in for conservative investors. NCDs In the light of the changing capital requirements for banks, we are finding good value in certain areas of the Negotiable Certificate of Deposit (NCD) curve. We think there are good opportunities here at the moment. Bonds: government Government bonds carry a low probability of default or credit risk. This is an expensive asset class at the moment, so we will wait for more attractive opportunities in this market.
Conclusion Global fixed income markets have been in an extreme environment for a long period of time. This has consequently resulted in extreme valuations in many securities. There will inevitably be corrections, which tend to happen sharply. Fixed income assets with higher durations will become cheaper as interest rates rise, and we will deploy our cash holding when these assets reach our hurdle rate. We believe our portfolios are well constructed to handle the current environment, as we are avoiding low quality and/or expensive equities. We only allocate money to fixed instruments that offer sufficient yield for the commensurate risk, and we remain comfortable holding cash.
Bonds: corporate Not all corporates are created equal. We think there are opportunities in selected corporate names. At the same time, we would avoid quite a few corporates at the moment due to expensive valuations. Bonds: inflation-linked Government inflation-linked bonds carry a low probability of default or credit risk. They are,
Ian Scott, head of fixed income, PSG Asset Management
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Barometer
HOT
NOT Business confidence continues to decline The second quarter Rand Merchant Bank survey, conducted by the Bureau for Economic Research (BER), dropped from 49 in the first quarter to 43 in the second quarter. The quarterly business confidence index continued its decline as demand fell. A drop in confidence among new vehicle dealers and retails, as well as rising petrol prices and electricity tariffs, dented confidence.
CEO confidence decreasing
Retail sales on the rise Despite load-shedding and deteriorating consumer confidence, Statistics SA reported that retail sales increased by 3.4 per cent year-on-year in April 2015, higher than the expected increase of 2.1 per cent and up from the 2.5 per cent rise experienced in March 2015. The main contributors were general dealers (contributing 1.3 per cent) and retailers in textiles, clothing, footwear and leather goods (contributing 0.7 per cent).
China’s FDI rises China’s foreign direct investment increased 7.8 per cent year-onyear to $9.25 billion in May this year, and 10.5 per cent for the year to date when compared to the same period last year.
$100 million to ease African trade corridor
The Merchantec CEO confidence index dropped to 45.5 points in the second quarter – an 11.7 per cent decrease from 51.4 points in the first quarter. It reported that South African CEOs are losing their confidence in their ability to generate business and profitable returns due to the inconsistency of the country’s power supply, with 82 per cent of local CEOs believing that load-shedding would continue for at least another two years.
Local companies opt to invest outside SA borders According to the 2015 World Investment Report by the United Nations Conference on Trade and Development (Unctad), South Africa’s outward foreign direct investment flows amounted to $6.9 billion in 2014, up from $6.6 billion in 2013. Foreign direct investment inflows to South Africa also declined from $8.3 billion in 2013 to $5.7 billion last year. It was reported that electricity supply disruptions and strikes could have impacted on investment decisions.
The World Bank will clear $100 million to aid Burkina Faso and Ivory Coast in reducing mutual trade and transports costs on the Abidjan-Ouagadougou trade corridor, which is estimated at approximately $438 million annually. The World Bank reported that the high costs of transporting goods are a constraint to economic growth and lowering the costs can facilitate trade and promote regional integration.
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SA’s credit rating affirmed but outlook remains stable Standard & Poor’s Ratings agency has affirmed South Africa’s credit rating outlook as stable and affirmed their long and short-term view foreign currency sovereign credit ratings on South Africa at BBB-/A-3. It was reported by the ratings agency that the real GDP growth in South Africa will be limited to 2.1 per cent this year due to, among other factors, electricity supply shortage. The stable outlook, however, reflects the agency’s view that GDP growth will slightly improve in 2015-2018.
Chris Hart
What if? The rule of law is important for stability in a country. Usually, it is associated with criminal matters such as murder, robbery and rape. But it also has critical economic and investment implications. The rule of law forms part of an enabling environment for participants in an economy.
I
n an ideal world, laws are put in place to protect people from each other, but they also form part of the checks and balances of the exercise of power. No one should be above the law, including legal entities such as companies and organs of state. In practice, there are inevitable deviations. But a prosperous economy depends on the rule of law. Property rights, for example, are defended through the courts. The alternative to the rule of law is the rule of might, where the vulnerable in society are held hostage by the powerful. The checks and balances within a constitutional democracy mean institutions such as the courts are independent of political institutions and processes. It stands to reason that if a court makes a ruling, all stakeholders within that country must abide by it – including the government. The rule of law collapses if governments do not abide by court rulings. And yes, courts can get it wrong, which is why decisions can be appealed to higher courts. But what if a government does not defer to a court ruling? What are the economic and investment implications? In Russia, for example, ownership and tenure are compromised by the whims of politicians. Property rights are not respected, and the courts are not independent. As a consequence, assets are among the cheapest in the world. Across large parts of Africa, assets are also cheap for the same reason – economic activity occurs at the pleasure of political patronage. So what if a country happens to have one of the best constitutions in the world and its government starts to defy court rulings? There may well be compelling circumstances for it to
do so. What if a foreign head of state visits that country to attend a conference but is wanted for crimes against humanity? A court rules that the head of state may not leave the country and must be arrested in terms of international law and the law of the country. What an awful decision for the government. If the court is obeyed, the political fallout and consequences will be exceptionally inconvenient. But if the rule of law is to be upheld, political considerations should be secondary. The politicians decide in their own interests first and defy the court order. For the ordinary citizens of that country, there is no immediate effect. The trouble is, it is not a big stretch for a government that defies politically inconvenient court orders to move on to ignoring commercially inconvenient court orders. For instance, that government wants to subject the country to crippling contracts such as purchasing nuclear power plants (a completely arbitrary example). The court rules that the government cannot do so, but it goes ahead anyway. That government starts to complain that the courts are behaving like the opposition and are preventing the majority from ruling. Some might even assert that arresting a cabinet minister is tantamount to a coup d’état. Whatever the assertions, the government is now undermining the courts. The next step is the government undermining property rights: always ‘for a good cause’,
such as ‘in the public interest’. And the courts are the only mechanism for individuals and companies to seek redress against the hegemony of the state. The economy very quickly descends into a system of patronage that suits political interests. Wealth producers get expropriated in favour of the rent seekers. Investment falls and poverty increases. The connected elite get much wealthier at the expense of the poor and productive. Reform becomes increasingly difficult as the politics of ‘take’ overwhelm the efforts of ‘make’. In such a country, its citizens seek protection by externalising their assets. Investment timelines are shortened, cutting out much economic potential. Infrastructure also suffers as it requires long investment timelines. Fortunately for South Africa, it is a democracy with one of the world’s finest constitutions. The ruling party brought that freedom to the country. It is the custodian of that democracy. But what if that changes?
Chris Hart, chief strategist, Investment Solutions
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SA’s economy to remain subdued
until resolution of power supply crisis By Vivienne Fouché
South Africa’s growth has been slow in its current business cycle, which began in the second half of 2009, and is fading further. We are not seeing a robust recovery and are unlikely to until the ongoing issue of South Africa’s constrained power supply is resolved.
T
his is according to Nedbank economist Nicky Weimar, keynote speaker at the annual 2015 Nedgroup Investments Treasurer’s Conference in June.
Graph 1: SA growth slow and fading in this cycle
Weimar commented, “Growth has been very slow in recent years. The best we have seen recently was 3.2 per cent in 2011, and we have been slowing ever since. In 2014, we saw growth of only 1.5 per cent, partly as a result of the five-month mining strikes. We did see some momentum in the final quarter of 2014, but this came off a low base. South Africa’s growth is particularly slow for an African country.” Weimar says that both the International Monetary Fund and the South African Reserve Bank have warned that the country’s potential economic growth is limited to between two and 2.5 per cent, which is largely attributed to the limited power generating capacity. According to Weimar, the constraints on South Africa’s economic growth include the following: • Absolute structural constraints, notably the lack of power generating capacity since 2008. • Relative constraints on cost competitiveness, including the cost and productivity of labour; inefficient public services, legislative burdens and red tape, and corruption; and the high tariffs on power, road, rail, ports and communication due to limited economic infrastructure.
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Source: Stats SA and Nedbank calculations
• A patchy global economy, marked by modest growth rates in key export markets. • Unsustainable government spending and ‘murky’ local economic policies. Weimar says, “Electricity production has fallen from its 2007 peak despite a considerable investment by Eskom. In reality, supply is even more constrained now than it was then. South Africa first saw load-shedding in 2008, when
the reserve margin for emergencies was too low. The public was informed that Medupi power station’s contribution to the national grid would be online by 2012. In March 2015, one unit – out of six in total – from Medupi came online, namely Unit 6. Unit 6 was only expected to produce its full 800 megawatts of power by the end of June 2015, with Medupi as a whole expected to be running at full load only in 2020.
Economic commentary
“We currently have less existing total capacity for availability to the national grid than we had in 2008. Unplanned outages mean that the country’s actual capacity is even more reduced and this obviously impacts on investor confidence. It makes it particularly difficult for SMEs. The impact on the country’s GDP worsens in the short term as electricity demand breaches supply. It is, however, expected to lessen as Medupi and Kusile power stations start coming on stream.” Weimar said that according to Nedbank’s calculations, between 0.5 and one per cent of GDP is shaved off annually due to the ongoing power constraints. “The longer the constraints continue, the more damaging the cumulative effects,” she added.
She added that we have also seen a rapid and unsustainable growth in government spending. “The government has propped up the economy by expanding the civil services, and the public sector wage bill is its fastest growing expenditure item. Public sector wages have increased well above inflation and wages in the private sector. We are borrowing money to finance public sector wages. This policy did prop up growth for a while by creating consumers, but the rate is becoming unsustainable. The composition of spending has to move back to investment rather than consumption spending.”
She concluded by giving some positive input: “We do expect some improvement over the next two quarters, helped mainly by last year’s low base, steady household spending and some improvement in manufacturing production as global growth improves and the rand weakens later this year. “However, considerable downside risks remain. The biggest concerns are load-shedding, possible setbacks in China, persistently low international commodity prices and renewed waves of disruptive industrial action.”
Graph 2: Impact on SA’s GDP as electricity demand breaches supply: Lessons as Medupi and Kusile come on stream
On the government’s economic policies, Weimar said, “Increasingly, the government has been sending a very confused policy message to business. Its goals are often very well intentioned but cumulatively hurt investor confidence and hurt employment growth. “Recent examples include farm size restrictions, restrictions on foreign ownership of property, restrictions on majority foreign ownership of private security companies, the national minimum wage, and the strategic mineral designation in the Mineral and Petroleum Resources Development Amendment Bill. The bottom line is that they cause confusion over property rights and future returns on investment.”
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Exchange Traded Products industry review:
second quarter
2015
The market capitalisation of all Exchange Traded Products (ETPs) listed on the JSE rose from R123.8 billion at the end of 2014 to R128.0 billion as at 30 June 2015. The industry has, therefore, continued to grow, but at a slower pace than experienced in recent years. Overall industry review
Performance issues
The listings on the JSE of Exchange Traded Products are therefore split 54 per cent between Exchange Traded Funds (ETFs) and with the remainder in Exchange Traded Notes (ETNs). The greater liquidity, better tracking error and other benefits attributed to Exchange Traded Notes, rather than physically backed Exchange Traded Funds, is not always fully understood by local investors, but the local institutional and retail market has been more ready to adapt to ETNs than the retirement industry.
The first six months of 2015 have been an uphill struggle for the general SA equity markets, with the All Share Index appreciating by only 4.79 per cent on a total return basis and the Top 40 index by 3.4 per cent on a total return basis over this six-month period. For the past quarter, the total returns on these indices have been flat.
Faced with this unfavourable backdrop, the broad market access offered by the number of diversified ETPs has assisted asset managers and investors to continue to deliver market beating (alpha) returns over this period by diversifying into asset classes other than South African equities. The table below shows a selected range of ETFs that have provided market beating performance over the past six and 12 months, using the FTSE/ JSE All Share Index as the benchmark.
Table 1 The table below shows the market capitalisation per issuer of ETPs.
The key feature of the first six months of 2015 has been a significant reduction in the market capitalisation of commodity ETFs, as the general perception of stagnant global commodity markets has sunk in. The NewGold ETF, which invests purely in physical gold, has seen a market capitalisation fall from R15.3 billion to R12.5 billion over the past six months, for instance. Investment in other precious metals, palladium and platinum has been more stable, and these ETF products have continued to maintain their market capitalisation size.
South Africa Exchange Traded Products – 30 June 2015 (R million)
Nedbank Capital
590.5
590.5
The chief sector that has seen constant new issues of securities and a concomitant rise in market capitalisation has been foreign ETFs and ETNs, covering both developed markets and emerging markets. The scope provided for direct investment in global indices in randdenominated Exchange Traded Products, listed on the JSE, which thereby also provide rand hedge protection, is rapidly gaining awareness as a primary means of obtaining international equity market exposure for local investors, at both low cost and full transparency.
Rand Merchant Bank
1 347.1
1 347.1
Satrix Managers
13 944.9
13 944.9
Standard Bank
8 047.7
Standard Liberty
2 838.8
Totals
69 403.2
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Issuer
ETFs
ETNs
Total
Barclays/Absa Capital
32 297.2
105.6
32 402.8
50 900.0*
50 900.0*
4 235.0
13 875.0
BNP Paribas Deutsche Bank
9 640.0
Grindrod Bank
697.0
Investec Capital
697.0 1 795.1*
* Share capital issued. Source: JSE Limited / Profile Data (30/6/2015).
1 576.6*
1 795.1*
9 624.3 2 838.8
58 612.3
128 015.5
FIA etfsa.co.za awards
Table 2 Exchange Traded Products – Total Returns (with dividends reinvested) Product
Sector
6 Months (%)
1 Year (%)
FTSE/JSE All Share index
SA Broad Equity
5.65%
4.79%
DB China ETN
Global Emerging Markets Equity
20.84%
40.90%
BNP GURU Asia ETN
Global Emerging Markets Equity
23.28%
33.64%
CoreShares PropTrax Ten ETF
SA Listed Property
5.09%
30.08%
CoreShares Dividend Aristocrat ETF
SA – Smart Beta Equity
10.69%
27.83%
DBX Tracker MSCI Japan ETF
Global Developed Markets Equity
18.81%
23.91%
Satrix INDI 25 ETF
SA Sector Indices Equity
7.53%
13.42%
NewFunds SWIX Top 40 ETF
SA Broad Equity
7.48%
8.53%
CoreShares Low Volatility ETF
SA – Smart Beta Equity
9.24%
18.76%
NewFunds GOVI ETF
SA Bonds
1.37%
7.35%
Source: Profile Data / etfSa.co.za (30/6/2015).
The list above shows a number of passive index tracking ETFs among diversified market sectors and asset classes that have outperformed the general market benchmark. This enables the asset manager, or individual investor, to construct multi-asset portfolios using such ETFs as the building blocks. Properly diversified portfolios, taking into account risk adjusted returns, volatility and concentration risks, can be constructed using passive (beta) products to produce fully diversified
portfolios than can match or outperform active multi-asset managers. This method of producing alpha returns, sometimes called ‘synthetic alpha’ by using passive products in portfolio construction, is becoming increasingly popular on a global basis. This is particularly the case for pension funds, or other retirement fund managers, where low costs, consistency of performance and the ability to deliver a strategic asset allocation strategy with limited volatility are key factors.
Mike Brown, managing director, etfSA.co.za
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FPI convention
Embracing Change
By Vivienne Fouché
The 2015 FPI Professionals Convention took place on 24 to 25 June at the Sandton Convention Centre. This year’s theme was ‘Embracing Change’ and the event was attended by over 1 000 delegates. The convention featured a range of presentations and workshops focusing on regulatory updates, advice for the financial planning industry and an overview of the future of the profession.
Left to right: Godfrey Nti (FPI), Wouter Fourie (FPI) CFP®, Sankie Morata (FPI) and Laura du Preez, Personal Finance
Some of the highlights at this year’s convention included: • Insights on the regulatory updates, including the Financial Sector Regulation (FSR) Bill, Retail Distribution Review (RDR) and Treating Customers Fairly (TCF). • Advice from CERTIFIED FINANCIAL PLANNER® professionals on ways in which financial planning professionals can transition and overcome the fee-based challenges. • Advice and support on strategies to
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Captain Nick Sloane
help consumers and businesses better understand financial plans. • The announcement of the 2015 FPI Financial Planner of the Year award.
Day
1
Day 1 opened with a presentation from the opening keynote speaker, Captain Nick Sloane, whose topic was entitled ‘rising to the impossible: the case of Costa Concordia’. South African Master Mariner, Captain Nick Sloane, is known for successfully uprighting and refloating
FPI’s David Kop, CFP®
the wreck of the Costa Concordia after its tragic grounding off the coast of Italy in January 2012, with the loss of 32 lives. Known as a humanist with a genius for improvisation, he spoke on leadership, strategy, vision, risk and the convention’s theme, ‘Embracing Change’. He ended by quoting Nelson Mandela, reminding the delegates, “As Mandela said, ‘It always seems impossible until it’s done’.” Three separate breakaway sessions took place. ‘Risk profiling and behavioural finance’, presented
Left to right: FPI CEO Godfrey Nti and FPI chairperson Sankie Morata.
included Katherine Gibson (National Treasury), Leanne Jackson (FSB), David Kop, CFP® (FPI) and Phil Billingham (a CFP® from the UK). Lunch was followed by two breakaway sessions: ‘The Launch of the FPI transition to fee toolbox’, presented by David Kop, and ‘Liquid assets: mergers and acquisitions – a new revenue source?’ presented by the United Kingdom’s Dr Mike Sweeting. The afternoon featured Dr Clem Sunter, who was recently awarded an honorary doctorate by the University of Cape Town, presenting on ‘The world and South Africa beyond 2015: the latest scenarios, flags and possibilities.‘ The final presentation of the day was by Andrew Bradley of Old Mutual Wealth. He spoke on ‘Wealth and happiness.’ The day ended with the FPI Awards Gala Dinner and the announcement of a number of prestigious awards. MC for the evening was Leanne Manas, of Morning Live fame, with one of South Africa’s most famous comedians, Barry Hilton, entertaining the delegates with his particular brand of side-splitting humour. The evening ended with the announcement of the 2015 FPI Financial Planner of the Year, Wouter Fourie, CFP® of Ascor™ Independent Wealth Managers.
Day
One of the panel discussions
Economic journalist, Bruce Whitfield
2
As the winner of the 2015 FPI Financial Planner of the Year the previous evening, Fourie addressed the delegates at the first session of the day. Fourie’s dedication and determination was apparent as he described how, in 2010, he had re-drafted the company’s five-year plan to expressly include, as one of his personal goals, entering the FPI Financial Planner of the Year in 2015, the same year in which Ascor™ Independent Wealth Managers, the company he had co-founded with fellow director Martin de Kock, CFP® would celebrate its tenth anniversary.
Leanne Manas
by Paul Resnik of FinaMetrica; ‘Research – CPD compared’, was a panel discussion featuring Lelané Bezuidenhout, CFP® (FPI), Dr Loffie Naudé (SAQA), Caroline da Silva (FSB), Joe Samuels (SAQA) and Godfrey Nti (FPI CEO). ‘Spouses’ views of gender roles: financial management in marriage’, was presented by Dr Liezel Alsemgeest, CFP®, of the University of the Free State.’ After tea, a wide-ranging panel discussion took place on current regulatory updates, including the FSR Bill, RDR and TCF. The panel members
Fourie said, “This competition has assisted me to benchmark myself against the best in the industry, receive feedback from other professionals, and raise my personal and business standards to the next level... I will use my position as chairperson of the FPI North Region Committee, non-executive director of FPI, and now the FPI Financial Planner of the Year 2015, to motivate and inspire fellow members and clients to rise to the challenges and learn from each other – to make a difference in this beautiful country and leave a legacy of hope and prosperity for our children and future CFP® professionals.” Fourie’s address was followed by an insightful presentation from Candice Burt of Simplified. Candice, a plain language lawyer, was admitted as an attorney of the High Court of South Africa in 1997. She has been a passionate proponent of the value of plain English even before the Financial Services Board (FSB) began regulating with the Treating Customers Fairly (TCF) approach.
Delegates were then given a choice of three breakaway sessions: ‘Anatomy of bad advice’ constituted a panel discussion looking at case studies from the past year and what could have been done differently, featuring Louis van Vuren, CFP® of Finlac and Marc Alvers, FAIS Ombud; ‘Cyber threats: how safe are your clients’ files and data?’ was presented by Danny Myburgh of Cyanre, the Computer Forensic Lab; and ‘Comparing South African annuity options at retirement’ centred around a recent case study presented by Jeannie De Villiers-Strijdom of Stellenbosch University. After the tea break, a second set of breakaway sessions took place. The first option was a panel discussion on ‘How to transition to and overcome fee-based challenges’. Panellists featured Craig Kiggen, CFP®, of Consolidated; Ian Beere, CFP® of Netto Invest, and Magnus Heystek of Brenthurst Wealth Management. At the same time, delegates were also able to choose to attend ‘A snapshot of South Africa’s savings culture’, presented by René Grobler of Investec Cash Investments, or ‘Equity risk in a retirement investment portfolio’, co-presented by Paul Snyman CFP® and Professor Nico Smith of the University of Johannesburg. Dr Adrian Saville of the Gordon Institute of Business Science (GIBS)also spoke on ‘Agility & Absorption: surviving and thriving in the wealth management industry‘. The final session of the day was an instructive presentation from Dr Nikolaus Eberl of The Networking Company on ‘LinkedIn – are you getting results? Learn how to connect the dots with this powerful lead generation tool’. Final thoughts from Financial Planning Institute (FPI) CEO, Godfrey Nti Godfrey Nti gave his thoughts on the positive outcomes of the convention, as well as his input on what new tweaks FPI would like to bring to the 2016 convention. The answer to the latter may surprise you. “The convention was a major success for FPI,” he said. “The numbers of delegates exceeded our expectations, coming in at around 1 000 people. We were happy with the overall feedback that we received as well as the networking opportunities that the convention offered our delegates to engage with their peers. We also felt that the speakers were on point regardimg the theme of ‘Embracing Change’. It seemed that many of our members came out feeling that change can bring opportunities rather than being something to be feared. “Next year, we would like to make sure that we add a consumer presence to the convention. We have obviously focused in the past on technical and regulatory aspects of financial planning. In 2016, we would like to bring in some consumers to speak to our financial planners/advisers. We should not assume that we actually understand the consumer. By bringing consumers into the next convention, our members can hear firsthand what consumers need from their financial planners and make sure that they are truly serving their consumers’ interests.” investsa
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Global economic commentary
A Greek
odyssey
The end of June and early July was dominated by severe negative reactions in global stock markets towards China’s equity market fall and the effect on the Eurozone of Greece defaulting on its June IMF repayment.
B
efore the June repayment deadline, the Greek Prime Minister called for a 5 July referendum to assess Greek citizens’ readiness to accept a bailout deal. Greece and its creditors differed on pensions, taxation, cuts in military spending and the privatisation of state-owned enterprises. The European Central Bank (ECB), in response, capped the Emergency Lending Agreement (ELA) at €89 billion, which until then was needed to provide Greek banks with liquidity in the face of significant deposit withdrawals. The Greek government had to respond by imposing capital controls and by closing the banks until after 5 July. The Greek referendum delivered a ‘no’ vote, vastly complicating matters for European creditors and Greeks, with little likelihood of a positive outcome for Greece. June’s repayment default was only the first milestone in the most recent part of the beleaguered nation’s odyssey. Greece still faces a host of debt services payments over the next few months, which include a further €6.0 billion due in July and other maturing debt and interest payments of €4.1 billion and €2.9 billion still to come in August and September respectively. The Greek ‘tragedy’ has also temporarily diverted global markets attention from other ongoing geopolitical issues, despite Greece’s GDP being less than two per cent of the Euro area GDP and Euro area banks having significantly reduced exposure to Greece since 2011. A potentially more serious consequence of a Greek exit is a souring European-Greek relationship and further erosion of Greek political stability. The Syriza government
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is already actively engaged with Moscow, regarding the construction of a Russian gas pipeline through Greece, despite US administration objections. A deepening Greek economic crisis is likely to bring Athens and Moscow closer together with serious military implications for NATO. Even China cutting its benchmark interest rate to a record low 4.85 per cent and lowering the required bank reserves further was dwarfed by the Greek news flow. These changes, however, are significant as the Chinese government tries to avoid a ‘hard landing’, particularly as there are now more Chinese stock trading accounts than there are members of the Communist Party. More than $3.2 trillion in market value has been wiped from the Shanghai and Shenzen stock exchanges since mid-June. To put this in perspective, the Greek total debt was €360 billion in 2012 and has been reduced to around €280 billion by 2015.
pressure, in sympathy with the global Greek-related sell-off. Company reports and guidance from executives still point to ‘challenging trading conditions’ as they are weighed down by the Eskom energy crisis, which places a drag on economic output growth. This also complicates the National Treasury’s funding burden, which is compounded by the need to bail out a number of major public sector enterprises, but constrained by the need for fiscal consolidation to prevent further credit rating downgrades. However serious the Greek crisis is perceived to be in its own right, it has definitely highlighted global uncertainties, which if nothing else emphasises our view of further market volatility, including the South African stock market, as we traverse the second half of the year.
In the US, the Federal Open Markets Committee (FOMC) unsurprisingly kept rates unchanged. There are varying market views regarding the interpretation of the FOMC statement; from an increasing likelihood that the first rates rise will be in September to it being delayed until at least the first quarter of 2016. The looming potential ‘Grexit’ may have influenced the rate decision for now. Ultra-low interest rates have resulted in companies buying back their own shares, which is arguably justifiable as long as the dividend is higher than the rate at which excess funds are being invested. Even the South African stock market, which had performed relatively well for most of June, was hit with the rand coming under renewed
Bradley Mitchell, head: research, Sasfin Wealth
Investment strategy
like property and pushed yields even lower (and prices even higher). Following the 10 per cent sell-off in listed property since the start of May, the one-year forward distribution yield for SA REITS (used as a valuation measure), currently at around 7.2 per cent, is above the recent lows seen in the first quarter of this year. However, it remains in the bottom (expensive) half of the historic range for the sector. In addition, listed property, when compared to cash, nominal bonds, and inflation-linked bonds, still looks somewhat expensive. Consequently, it is still vulnerable to further de-rating.
Listed property:
some caution still required Although some investors may be tempted to put their money into listed property following a 10 per cent decline in the asset class since the start of May, when it comes to investing in the sector going forward they should exercise some caution.
L
isted property had produced a total return of 38.2 per cent for the 12 months to 30 April 2015, far outstripping the next best performing asset class (14.8 per cent recorded by the FTSE/JSE All Share Index). However, since then, listed property has been the worst performer, with a total return of -8.1 per cent (to 18 June), compared to -4.5 per cent for the FTSE/JSE All Share Index, -1.5 per cent for the All Bond Index and 0.7 per cent for cash.
(REITS) have also delivered earnings that are, when compared to general equities, relatively more stable over time, with a higher level of visibility into their future growth trajectory.
Investors could be forgiven for thinking the current weakness is a good opportunity to buy into listed property. However, the sector continues to look somewhat expensive from a valuation perspective. It also faces headwinds for earnings from the prospect of rising interest rates and continued weak economic growth in South Africa.
Net rental income growth is underpinned by lease contracts that expire in 2.5 to 3 years on average, and also include above-inflation escalations of around eight per cent per year historically. At the same time, SA REITS typically pay out close to 100 per cent of their distributable profits to shareholders every year. As a result, listed property company distributions have been less volatile than stocks in the broader general equity universe over time. These characteristics, combined with relatively attractive valuations, have brought many investors into the sector in the last few years, as has the introduction of the internationally understood REITS structure.
In recent years, both local and foreign investors have been attracted to listed property shares for the relatively high yields and distribution growth they have been offering compared to bonds and cash. SA Real Estate Investment Trusts
In the second half of 2014, the sharp fall in the oil price caused a widespread decline in global and South African inflation expectations, which helped further increase investor demand for income-producing assets
On the positive side, distribution growth is expected to be above inflation at 8.0 per cent over the coming year. This combines with the 7.2 per cent forward distribution yield for an estimated total return of around 15.2 per cent (assuming further de-rating does not materialise). With US bond yields already on the rise and South African rates expected to move higher from increasing inflation, listed property companies could come under pressure from a number of fronts. Internationally, foreign investors may be tempted to move back to less-risky US assets as their yields move higher. Locally, it’s difficult to see how already-low vacancy levels in the retail and industrial sectors (both at around 3.5 to four per cent) can continue to fall. Meanwhile, office rentals still face headwinds from the low-growth economic environment and high vacancies (at around nine per cent). Also importantly, property companies could face higher borrowing costs, despite the industry having over 70 per cent of debt set at fixed rates – these rates will still need to be renegotiated upward over time. We expect more bouts of volatility in the months ahead as expectations for interest-rate increases adjust. Investors should, therefore, exercise caution on listed property and other interestrate-sensitive assets like bonds. However, it’s important to note that with an expected total return that is still well above inflation, and with valuations having retreated slightly from very expensive levels, listed property remains a valuable, albeit not yet cheap, component of a diversified investment portfolio.
Duncan Schwulst, portfolio manager at Prudential Investment Managers
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DaniĂŤl Kriel
CEO, Sanlam Private Wealth
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Profile
Sanlam Private Wealth was recently named ‘Top Wealth Manager in South Africa’ for the second year in a row in the 2015 Intellidex Top Private Banks and Wealth Managers survey. To what do you ascribe Sanlam Private Wealth’s win two years in a row? To receive the award for a second year running is an acknowledgement of the quality of our team, their continued hard work and our client-centric business model. The award is also testament to the success of our long-term strategy which we’ve been implementing for the past eight years. The strategy places strong emphasis on investment performance, providing the highest quality of service to our clients, growing the business, enhancing efficiencies, building the brand, and investing in Sanlam Private Wealth’s people
What distinguishes the financial needs of high net worth individuals from less wealthy clients? In the ultra-high net worth market, clients’ demands for investment and financial solutions have become more complex. These are high flyers and global players requiring multi-jurisdictional solutions. Unique offerings such as guidance on trans-generational wealth distribution and preservation, tax and fiduciary services, trustee training for the younger generation, advice on passion investments (such as art) and overall wealth management continue to be high on the priority list. There is also a huge demand for offshore portfolio diversification. Younger clients also want a competent digital offering. Even in South Africa, with slow broadband, this will be crucially important. At the very core of their concerns remains the protection and growth of their wealth, which is really the same for every category of wealth.
How does Sanlam Private Wealth cater to these needs? Sanlam Private Wealth offers holistic, integrated wealth management services to high net and ultra high net worth private individuals and their families in South Africa, the UK, Western Europe and Australia. Our services include: wealth management, portfolio management, stockbroking and derivatives trading, retirement fund management, fiduciary and tax services, offshore investments, online trading (with Sanlam iTrade), access to credit and an art advisory service. We continue to deliver personalised, one-on-one service delivery to our clients. We’ve expanded our Johannesburg offices, and we are looking at expanding further to include additional multi-jurisdictional solutions.
What would you describe as your main challenges at work? Right now, with the increased uncertainty and volatility in global markets, it is to identify investment opportunities that offer value and that will contribute to the performance of clients’ portfolios for the long term. It remains a challenge to exceed our clients’ expectations and is a responsibility that we take very seriously.
On a personal note, what aspects of your work do you most enjoy? I most enjoy the interaction with our clients, who are all successful people, whether here in South Africa, the UK, Australia and globally. It is a real privilege to be able to build personal relationships with this calibre of people, and I find it both enriching and motivating.
How do you strike a balance between your personal life and your work schedule? I am in the fortunate position that I am passionate about my work, our company, clients and people. I thoroughly enjoy what I have, and I also have the unwavering support of family and friends. Quality time with them has always been important in my life.
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Practice management Africans, leading one to believe that about four million unemployed citizens are credit active! In any event, the best advice to debt-stressed people is to pay off debt rather than enter any savings programmes. So the result is that about five million South Africans are potential targets for recurring savings plans. This means the Financial Planning industry successfully persuades about 20 per cent of these prospects per year to implement a new savings plan, thus fully covering the market in about 60 months.
Fiddling
while Rome burns Many bemoan the fact that South Africans don’t save and too readily incur debt. Annually in savings month, newspapers and magazines carry articles and headlines reinforcing the requirement to become a nation of savers, not spenders.
I
n this morass of misery around our poor savings record, a beacon of hope shines brightly. In 2014, and almost every year for the past five years, well-motivated and correctly rewarded financial advisers introduced almost 900 000 new monthly paid retirement annuities and endowments (ASISA 2014 statistics) to the various life offices offering these products. In doing so, these new contributors are adding R522 million per month to South Africa’s savings pool. These new savings contracts are added to the already committed net value of monthly savings plans introduced in previous years. This is a remarkable achievement in mobilising the nation’s savings. Maturing endowments and RAs – the result of decades of monthly savings for millions of people – also provide the accumulated capital which underpins the nation’s investment industry. The achievement is all the more spectacular when one considers the small pool of
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prospective savers available to be approached by financial advisers. Starting at the top, we have about 54 million people in South Africa, of which 38.5 million are too young or old to work, or are unemployed. This leaves 15.5 million employed South Africans (Department of Labour March 2014) who are prospective participants in a monthly savings plan of some sort. Or are they? To add to our nation’s woes of youth and general unemployment, we must consider the euphemistically named ‘debt stressed’ population. According to the South African Human Rights Commission (SAHRC), over 11 million of the 19 million credit-active South Africans are over-indebted (more than two months in arrears with their repayments). One must assume, having implemented the National Credit Act (NCA), that the bulk of these debt-stressed people is employed. In fact, inexplicably, the credit-active South Africans outnumber the employed South
So what about the much-vaunted unit trusts and linked investment administrators (LISPs)? Well, total unit trust sales, including single premiums, represent about a month-and-a-half of endowment and RA sales at R800 million and LISPs just over two months sales. Into this juggernaut of savings success comes the tax-free savings plan at just over R2 500 per month, with a lifetime limit of R500 000. How is this going to mobilise savings? Well, back to the stats. Of the 15.5 million employed South Africans, only five million actually pay tax on their earnings. So the tax-free savings plan potentially benefits just 10 per cent of South Africans. These South Africans already benefit from the general tax rebate on interest (R23 800 per year reached with about R250 000 of invested capital) on interest and the capital gains tax exemption (R30 000 per year). So the tax-free plan actually benefits almost no one. Endowments, which gather the lion’s share of the nation’s savings with just on 600 000 new contracts sold per year are successful, despite suffering a 30 per cent internal tax rate and a 10 per cent capital gains tax rate. The average size contribution, at about R550 per month, suggests that many people saving via an endowment are probably not liable for personal income tax and certainly would not be paying a tax rate of 30 per cent or more. The nation’s average tax rate expressed as a share of total wages is about 18 per cent, so endowments are taxed at almost double this. A better way to mobilise savings would have been to reduce the internal tax rate on the endowments to 18 per cent. The distribution machinery for this product is already demonstrably there, and investors arguably are being overtaxed for saving.
Gavin Came, BComm LLB CFP®, consultant, Sasfin Financial Advisory Services
Real estate
Benefits of acquiring
permanent residency in Europe
M
ore and more South Africans want to acquire permanent residency in Europe to secure a ‘Plan B’ for themselves and their families. Cyprus, an ex-British colony, is a full EU member, not part of Greece, and currently has the most attractive residency programme on offer. Purchasing a residential property for at least €300 000 (+ VAT) qualifies the main applicant, the spouse and all dependent children to secure permanent residency status, as well as to obtain Schengen travel visas. Cyprus is a popular choice not only because of the affordable investment entry-level, but also because of the following benefits and predominant differentiators to other EU residency programmes: 1. The residency permit automatically renews every year and is for life. You would have the legal right at any time to go and live in Cyprus, firmly securing your ‘Plan B’ and also bypassing the normal strict visa requirements.
2. Dependent children up to the age of 25* qualify, thus exposing your children to the world’s largest economy: Europe. 3. It only takes four to six weeks for the residency permits to be approved thereby safeguarding your and your family’s future in a short space of time. 4. No need to stay or live in Cyprus: except for one day every two years, so you can continue to live and work in South Africa while retaining your EU residency status. 5. No minimum annual tax levied for your residency permit to remain valid; and Cyprus’ personal and corporate tax rates are the lowest in Europe. Corporate tax is capped at 12.5 per cent; and the personal tax rates are as follows: • €0 - €19 500 nil • €19 501 - €28 000 20 per cent • €28 001 - €36 300 25 per cent • €36 301 - €60 000 30 per cent • €60 001 + 35 per cent 6. No inheritance tax. On your death you can dispose of your assets to your loved ones
without having to pay the Cypriot government any tax. This is advantageous for legacy planning. 7. The annual costs to own a property (council taxes, levies, rates, etc.) are one of the cheapest in Europe. Other attractions that Cyprus’ residency programme offers are: • Being an ex-British colony, there is no language barrier – everyone speaks English and all documentation is in English; • You can rent out your property to earn a Euro-based income, and some properties come with a rental guarantee for long-term rentals; • Low cost of living: it is cheaper to live in Cyprus than in South Africa even with a volatile exchange rate. Monthly living costs are a fraction of those in South Africa, and there is more income left at the end of your month. • Euro-accredited education: your children will have access to top universities and worldclass education facilities with a multitude of post and undergrad degrees available – giving them a distinct advantage when they enter the global job market; • Europe on your doorstep: Cyprus has two International Airports and several marinas, which means getting to and from Europe is easy and inexpensive; • First-world medical facilities: you have access to affordable healthcare with highly qualified doctors and specialists and a multitude of premier hospitals and medical centres. Investing in a property in Cyprus is simpler than one may think. Cypriot Realty, a proudly South African company, has an impressive sevenyear track record of assisting South Africans in finding their perfect home and acquiring permanent residency in Europe. An investment property in another country is the achievement of a lifetime and a legacy for generations to come. In Cyprus, the purchase of your property comes with permanent residency status – now that’s solid financial planning! www.cypriotrealty.com
Jenny Ellinas, Cypriot Realty, Founder & managing director
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NEWS
nvest Financial Holdings Limited lists on AltX The Johannesburg Stock Exchange welcomed NVest Financial Holdings Limited (‘NVest’) onto the AltX board following a successful private placement. NVest will list in the Financial Services sector of the AltX board. The listing makes it the seventh company to list on the JSE this year and the third company to list on the AltX board in 2015.
10x Investments, Momentum Asset Management and Argon Asset Management awarded at the 2015 Batseta Imbasa awards The Batseta (the Council of Retirement Funds) is the leading independent body that looks after the interests of principal officers, trustees and fund fiduciaries in South Africa’s retirement fund industry. The organisation hosted their annual Imbasa Yegolide Awards early in June this year. Batseta also includes union federations Cosatu, Fedusa, Nactu, the Principal Officers Association and Business Unity South Africa.
Momentum Asset Management was awarded the 2015 Cash Manager of the Year title at the Imbasa Awards. Momentum’s money market portfolios are managed by Conrad Wood and Richard Klotnick, both of whom have extensive experience and tenure. Wood said that they were delighted with this award: “It bears testimony to everything we have set out to achieve with our client-centric model.”
The awards aim to honour and pay tribute to innovative service providers who demonstrate professional excellence in their service of retirement funds.
The award comes off the back of the recent Fitch Rating accolade, in which the Momentum Money Market Fund was assigned the highest money market fund rating in South Africa.
10X Investments scooped three awards at the prestigious ceremony which was Balanced Fund Manager of the Year, Employee Benefits Administrator of the Year and Technology Provider of the Year.
Argon Asset Management was named the Best Absolute Returns Manager for 2015 by the retirement fund industry on the night.
According to Steven Nathan, CEO of 10X Investments, winning the awards underlines the retirement industry’s shift towards simplified solutions that deliver better long-term investment outcomes for the retirement fund investors.
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Mothobi Seseli, chief executive officer of Argon Asset Management, thanked Batseta for recognising the company and congratulating their peers on their respective awards. “We are delighted to have received this acknowledgement of our excellent service to retirement funds, especially because the industry is so competitive.”
NVest is an integrated financial services holding company with assets under management and administration of over R13 billion. NVest companies include NFB Private Wealth Management, NVest Securities, NFB Insurance Brokers, Independent Executor & Trust and the NVest Properties. The company was established in 1985 in the Eastern Cape and now seeks to increase its reach beyond the region to raise its public profile and increase the liquidity of its shares through a listing on the AltX. Anthony Denis Godwin, CEO of NVest, said that they have an opportunity to take a business which started 30 years ago in the Eastern Cape to the South African market and grow it into a brand recognised throughout the country. “The listing provides NVest with a growth platform and offers our employees real ownership and incentive opportunities for our top performers and key staff.”
Sanlam Private Wealth named ‘Top Wealth Manager in SA’ Sanlam Private Wealth has been named the top wealth manager in South Africa in the 2015 Intellidex’s Top Private Banks and Wealth Managers survey. Daniël Kriel, CEO of Sanlam Private Wealth, said receiving the award for a second year running was an acknowledgement of the quality of the team, continued hard work and the company’s client-centric business model.
Andrea Fouché
New appointments at Mazars Professional services firm Mazars recently announced three new appointments to strengthen the team. This includes the appointment of Andrea Fouché as national learning and development manager, Jean Wessels as a partner in the firm’s Cape Town audit practice and Mike Teuchert as national head of taxation services in South Africa. Fouché joined Mazars in 2011 as part of the national learning and development team and has extensive experience in organisational psychology and management. Her new role will include the facilitation of pervasive and professional skills programmes in accordance
Rebranded from Sanlam Private Investments in June 2014, Sanlam Private Wealth offers holistic, integrated wealth management services to high net and ultra-high net worth private individuals and their families in South Africa, the UK, Western Europe and Australia.
Jean Wessels with the South African Institute of Chartered Accountants’ (SAICA) requirements and training needs analyses, among other key responsibilities.
The research undertaken by Intellidex assesses each wealth management company against a range of criteria, including service offering, growth strategy, international presence and the strength of its brand. The survey is structured to guide potential clients on the company best placed to serve their individual needs.
Mike Teuchert and the Mazars UCT Project, which focuses on final year Business Science students.
Wessels, a founding member of the Renewable Energy Sector team in Cape Town, has been instrumental in developing strategies for the various service offerings within this sector. She holds a professional membership with the South African Institute of Chartered Accountants (SAICA) and is a registered SAICA Assessor.
Teuchert has extensive experience in tax consulting work with an emphasis on direct income tax to the corporate market, as well as valuing companies and their businesses for capital gains tax purposes. He was the partner in charge of the tax department in Mazars’ Cape Town office. He takes over the national portfolio from Mike Dingley, who is taking up a more focused business development role.
Wessels also serves as a member on the employment equity committee of Mazars, and heads up the university projects portfolio which includes the UWC Tutorial Assistance
Teuchert is a qualified registered chartered accountant and brings more than 20 years’ commercial experience to the role, having previously worked at SARS.
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Products
Infrastructure investments finance large projects like roads, bridges, dams, sanitation works, power generation, housing and ports. Clean energy includes any form of power generation that is environmentally friendly, such as wind, solar, hydro and biomass.
Prescient launches new clean energy and infrastructure fund Prescient Investment Management has launched a new fund that invests in clean energy and other infrastructure assets, which will be open to qualified investors. The fund is a joint venture between Prescient Investment Management and Evolution Africa – a brokerage and advisory firm specialising in corporate and project finance within the energy sector. Eldria Fraser, chief investment officer at Prescient Investment Management, said the intention was to start with a debt fund before also adding an equity fund. “The fund will offer diversified access to projects
New education, info and product platform on stock market investing Stockshop.co.za is an education, information and product platform offering
across technologies, geographies, project companies and type of debt assets. Our intention is to include some listed bonds to provide a degree of liquidity.” Ryan van Breda, a fixed income portfolio manager at Prescient Investment Management, added that, in terms of infrastructure investment opportunities in Africa, Prescient anticipates a useful and growing pipeline of projects. In terms of evaluating these, the fund will use the extensive credit evaluation and debt pricing skills of Prescient in addition to Evolution’s deep technical expertise.
“The ongoing efforts of the Department of Energy to develop clean energy resources within South Africa provide a pipeline of debt-financed projects, which will be one of the initial targets of our fund,” said Brett Jordaan, director of Evolution Africa. “Prescient offers deep investment management experience and Evolution Africa adds extensive energy infrastructure technical knowledge. The combination should provide institutional investors with a unique investment opportunity.” Investments in these projects can be in the form of loans to the project company, which they have to repay with a certain level of interest, or via equity funders who buy shares in the project company and earn a return from dividends paid. “These projects add to the infrastructure of the country, creating jobs and economic activity that help to address socioeconomic inequality in addition to being environmentally friendly,” said Fraser.
content and product access for beginners as well as for more sophisticated investors. However, it offers opportunities to product and service providers as well.
but didn’t know how to begin or who to turn to for advice. Stock Shop was born to help grow retail participation in the South African stock market.
Founder and CEO Annabel Dallamore, who previously ran the equity options market at the Johannesburg Stock Exchange, received many queries about the stock market from people who wanted to invest their money,
Stockshop.co.za curates all the relevant education tools (news, research, events, webinars, podcasts etc) as well as products and services (online share trading platforms, personal brokers, unit trusts, ETFs, ETNs, asset managers, wealth managers) and trading tools (trading software, calculators, analysis tools etc.) in one easy-to-use platform. The Stock Shop facilitates the interaction between retail investors and the product and service providers. This South African start-up generates revenue via lead generation for product and service providers as well as taking a portion of monthly trading fees.
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The world
SOUTH KOREA, SOUTH AFRICA, GREECE, UNITED STATES, BRAZIL, AUSTRALIA
South Korea’s $14bn stimulus package to boost its troubled economy South Korea’s Finance Minister, Choi KyungHwan, has announced a $14 billion stimulus package to boost its troubled economy, which has taken strain as a result of the deadly Middle East respiratory syndrome (MERS) outbreak. The MERS outbreak has impacted on consumer spending and business sentiment. The country has also slashed its economic outlook for the year and seen a central bank interest rate cut to a record low this month. The minister said that this extra stimulus was essential as recovery in Asia’s fourth largest economy hinged on the effectiveness of efforts to quickly contain MERS. South Africa sees growth in gross domestic expenditure The South African Revenue Bank (SARS) recently released its quarterly bulletin, reflecting a growth in gross domestic expenditure accelerated to a seasonally adjusted and annualised 3.4 per cent in the first quarter of 2015 from only 0.3 per cent recorded in the last quarter of 2014. This is driven by higher growth in household consumption expenditure, up by 2.8 per cent from the previous quarter, as well as growth in gross fixed capital formation, which increased by 1.8 per cent. In contrast, consumption expenditure by the general government declined by 1.9 per cent following a 1.0 per cent growth and
the financial account surplus widened to 3.4 per cent of GDP from 2.4 per cent. Greece remains in the Eurozone after third bailout
and does not provide a coherent vision of the path ahead, and “does not provide a clear picture of the Federal Open Market Committee's majority view,” according to a recent research staff paper.
After a whole night of haggling at an emergency summit in mid-July, Eurozone leaders clinched a deal with Greece to negotiate a third bailout to keep the nearbankrupt country in the Eurozone. However, the bailout comes with demands for serious reforms and could ultimately bring down Greek Prime Minister Alexis Tsipras’ leftist government. Tsipras finally accepted a compromise on German-led demands for the sequestration of Greek state assets to be sold off to pay debt. If the summit had failed, Greece would have been facing an economic crisis, with its banks on the brink of collapse and the prospect of having to print a parallel currency and in time exit the European monetary union. Some of the sweeping measures included spending cuts, tax hikes and pension reforms.
Brazil
International Monetary Fund to review dot system for interest rate hikes
The IMF has projected a weaker financial outlook for Australia, saying that its outperformance is fading. Australia has enjoyed two decades of economic outperformance and the outlook for Australian growth is now lower than what Australians have become accustomed to over the past two decades. The IMF said, “This weaker outlook can be avoided. Australia has strong institutions, a flexible economy, and is well placed to seize opportunities created by Asia’s rapid growth and rising middle class, helped by the recent free trade agreements.”
International Monetary Fund (IMF) head Christine Lagarde has told the United States Federal Reserve (the Fed) to wait to raise interest rates. The IMF is now looking into suggestions that the US central bank remake its communications policy by finding an alternative to the ‘dot’ system. The dot plot of interest rate projections issued by Fed officials every three months is not straightforward
Brazil’s economy is expected to decline around 1.35 per cent, while inflation is at nearly nine per cent. This is above the central bank’s tolerance band of 2.5 to 6.5 per cent. This is according to a recent poll which also reflected that Brazilian President Dilma Rousseff’s approval rating dropped to a record low. There is rising fear amongst Brazilians that they may lose their jobs as a result of the poor economic conditions, with 73 per cent reflecting that they believe the unemployment rate will rise in the coming months. Australia’s outperformance is fading
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They said
A collection of insights from industry leaders over the last month
Finance Minister Nhlanhla Nene speaking at the annual African Development Bank meeting in Abidjan, Côte d’Ivoire. “We will perform, during winter, about 5 500 megawatts of planned maintenance. This is three times more maintenance we have done in the previous winters. So typically, in winter, Eskom would limit the maintenance we do because of the pressure on the system.” Acting Eskom CEO Brian Molefe said during a public utilities quarterly system update. “With increased regulation, transparency, and substantial growing debt capital markets in Africa, there is a continuously rising interest in credit ratings as a means to better understand the credit risks associated with emerging and frontier markets, as well as their future prospects, in order to make informed decisions.” Marc Joffe, CEO of Global Credit Ratings Co. (GCR), speaking about the importance of credit rating agencies in Africa
“I am still convinced – where there’s a will, there’s a way. If the political leaders in Greece demonstrate this will, then a deal with the three institutions is still possible. They implemented painful structural reforms and thus created the basis for new growth, new competitiveness and new jobs, although the path wasn’t easy and these countries are still grappling with the consequences of the necessary adjustments.” German Chancellor Angela Merkel speaking ahead of EU talks which took place in June. “We do expect some improvement over the next two quarters, helped mainly by last year’s low base, steady household spending and some uptick in manufacturing production as global growth improves and the rand weakens later this year. However, considerable downside risks remain with load-shedding, possible setbacks in China, persistently low international commodity prices and renewed waves of disruptive industrial action being the biggest concerns.” Nicky Weimar, economist at Nedbank, was one of the keynote speakers at the fourth Annual 2015 Nedgroup Investments Treasurers’ Conference.
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“With respect to international spillovers, this is something that we have been long attentive to. Obviously, we have to put in place a policy that is appropriate to evolving conditions in the US economy, but we can’t promise that there will not be volatility when we make a decision to raise rates. What we can do is to do our very best to communicate clearly about our policy and our expectations to avoid any type of needless misunderstanding of our policy that could create volatility in the market and potential spillovers as well to emerging markets, and I have been trying to do that now for some time.” Federal Reserve chair, Janet Yellen, speaking at a press conference in Washington following the conclusion of the US central bank’s two-day policy meeting. “If the growth is such that the vast majority are poor and unemployed, we need to shift focus. We need to identify opportunities where we can take part on the next level of the value chain, like manufacturing. It is not an overnight, easy solution to find but structural reforms are also part of government. We need to start focusing on the labour-absorptive sectors.”
“The first violation was when South Africa allowed him in in the first place and did not arrest him… The second violation was that he was welcomed at the African Union gathering in Sandton, and the third was that he was allowed to exit the country in defiance of a court order.” Professor Bonita Meyersfeld from the Centre for Applied Legal Studies at Wits University comments on South Africa’s treatment of Sudan’s President Omar al-Bashir after the African Union Summit held at the Sandton Convention Centre in June. She added that it was, however, a different story at a regional level: “South Africa is under pressure … by its African colleagues. So regionally, there will be a quiet affirmative nod to the commitment shown [by South Africa] to pan-Africanism.” “There is no greater pillar of stability than a strong, free and educated woman, and there is no more inspiring role model than a man who respects and cherishes women and champions their leadership. We need policies for longterm security that are designed by women, focused on women, executed by women not at the expense of men, or instead of men, but alongside and with men.” Angelina Jolie, actress and UN Ambassador, speaking at the African Union Summit in Sandton during June, on sexual violence towards women.
You said
A selection of some of the best tweets as mentioned by you over the last four weeks.
@keithmclachlan: ‘Knowledge’ is knowing that stocks outperform other asset classes in the long term. ‘Wisdom’ is actually holding them for that long. Keith McLachlan – Small and mid cap fund manager. Writer. Painter. Talker. Philosopher. Warrior poet.
@MebFaber: Over 8 000 mutual fund managers have < $100k in their own funds, but they expect you to invest with them? Don’t. Meb Faber.
@behaviorgap: The 3 most important words for investors right now: remember, remember, remember. Carl Richards – Helping people make smart, simple decisions with money. Creator of The Sketch Guy Column at
The New York Times. I use email for conversations.
@ConsueloMack: Asness’ economic law: There is no investment product so good that a high enough fee cannot make it bad. Consuelo Mack – Consuelo Mack WealthTrack on PBS is the only TV program devoted to long-term diversified investing.
keep the lights on. Max Gebhardt – MD of FTI Consulting South Africa. Trying to learn more each day. Mad about mountain biking. Love flyfishing and spending time with my girls.
@KyleSMoore: Financial planning is solving a puzzle not selling a product. Kyle Moore – Traded in my golf clubs for a HP 10bII+ calculator.
@ganeshadhruth: ‘No matter how much data we have about the past, we have no data about the future. Investing is a matter of faith’ – Carl Richards #investing” Ganesh R – A Certified Personal Finance Advisor. Striving to create a positive impact on the lives of my clients by guiding them to meaningful financial decisions.
@Maxgeb: Rather glad I’m in Greece at the moment. They might not have much of an economy but at least they can
@MarketChartist: ‘Good traders manage the downside, they don’t worry about the upside.’ – Mark Minervini’
MarketChartist – The Market Chartist delivers concise, cutting edge and award winning technical analysis to end users' desktops.
@GerhardVisagie1: Widespread disregard for risk creates great risk. Gerhard Visagie – Investment Director at Acorn Private Equity. Value investor. Passionate about Africa. Follower of Jesus Christ. On a mission to change the world.
@rationalhill: You know Greece is in trouble when holiday makers are being warned to take cash ‘cause banks & ATMs may close. Stuart Theobald – Entrepreneur, journalist, financial analyst, philosopher, marathon runner.
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And now for something completely different
Persian beauties
Sickle leaf carpet $34 million
fly away on a magic carpet ride
With most forms of alternative investments, the last thing an investor would do would be to spend millions on a priceless item only to walk all over it. However, some investments are designed for that very purpose.
P
ersian carpets have been used over the millennia by wealthy kings, sheikhs, business moguls and even Hollywood celebrities. The art of the finely woven Persian carpet dates back 2 500 years, based on the discovery of the 500BC Pazyryk carpet that was created during the Achaemenid period in Persia (modern-day Iran). As with any alternative investment, particularly collectables, there are three important factors that all investors need to take into account: liquidity, risk and value. The current economic downturn has resulted in the cost of Persian carpets being reduced – leading to it being a high-value asset at a relatively low cost. At the same time, investors need to be cautious of not buying imitations. Countries such as China, Pakistan and Turkey have capitalised on the demand by copying the Persian designs at a fraction of the cost of the original designs. However, both the quality
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and workmanship of the carpets are poor in comparison to an original. Apart from the design and origin of a rug, investors also need to understand other forms of measurement that are used to help determine the quality of a Persian carpet – such as knots per square inch (KPSI). A high KPSI count is generally considered a sign of a quality carpet. The value of a carpet is also dependent on its price and rarity. The art of creating these masterpieces is, however, dying out. After generations of handcrafting the elegant carpets, many are leaving the trade for more profitable careers in the job market. With a reduced number of artisans, the value of quality Persian carpets only increases in value as they become harder to find. This has also been compounded by the political issues within Iran itself, whereby the government has put serious pressure on the remaining artisans to rather mass produce their products.
The most expensive Persian rug ever sold, a beautiful Persian Kerman, sold for nearly $34 million at a Sotheby’s auction in New York City in June 2013. More than tripling the previous record price paid for a rug, the amazing piece that sold at Sotheby’s is a fantastic work of art. Shattering pre-auction estimates and all records for the highest prices ever fetched for rugs, the sale of this magnificent Kerman marks something of a watershed moment, as antique rugs become an ever more desirable commodity and establish a firm footing in the highest rungs of the art world. The sickle-leaf design is the rarest of vase-technique carpet patterns and this is the only known example featuring a red background.
Kirman ‘vase’ carpet $9.6 million Originally estimated at R302 600 to R461 400, the remarkable Kirman ‘vase’ carpet was put up at an auction at Christies London in 2010. The mid-17th century carpet shattered early estimates by selling for an incredible $9.6 million – placing it as the second most expensive Persian carpet ever to be sold. The piece is the earliest known example of the popular Persian carpet design called the herati pattern.
Ornate Silk Isfahan $4.4 million Once owned by the tobacco heiress Doris Duke, this Persian beauty has seen many owners since it was first created in Central Persia in the early days of the 17th century. Unlike many carpets from this era, the silk Isfahan was almost fully intact and only had a few areas where it needed repairs over the years. The carpet holds its value in its beautiful style and design, vibrant colours and an incredibly high KPSI. The value is also held by the fact that the rug is made entirely of silk, which is rare. One of the most striking aspects of its features is the minor border which is made up of an unusual vinery design composed of stylised scrolled buds in a repeating pattern. This is thought to have been derived from vinery borders found in classical Persian rugs of the 16th century.
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