NFB Sensible Finance Magazine Issue 32 by NFB

NFB

A FREE publication distributed by NFB Private Wealth Management

Eastern Cape's Community...

Issue 32 March 2016

PERSONAL FINANCE Magazine

2016 TAX RELATED BUDGET PROPOSALS

ACTIVE VS PASSIVE INVESTMENT MANAGEMENT the strategies that could potentially play a part in your portfolio

WHO IS WATCHING YOUR FINANCIAL ADVISOR? the FPI and the revised Code of Ethics private wealth management

“Based on my calculations, I can retire about 5 years after I die.” Anonymous, 2014

Are you this “guy”?

Don’t be. Talk to an NFB Private Wealth Manager today to plan your financial future. fortune favours the well advised

Contact one of NFB’s financial advisors: East London s tel no: (043) 735-2000 or e-mail: info@nfbel.co.za Port Elizabeth s tel no: (041) 582-3990 or e-mail: info@nfbpe.co.za Cape Town s tel no: (021) 202-0001 or e-mail: info@nfbct.co.za

web: www.nfbpwm.co.za NFB is an authorised Financial Services Provider

private wealth management

ED’S LETTER editor Brendan Connellan bconnellan@nvestholdings.co.za

Contributors Bryce Wild (NFB East London), Nonnie Canham (NFB East London), Grant Berndt (Abdo & Abdo), Pieter Hugo (Prudential Unit Trusts), Shaun Murphy (Klinkradt Murphy), Grant Magid & Paul Marais (NFB Gauteng), Jenny Saunders (NFB Insurance Brokers), Xolisa Funani (NFB Port Elizabeth), Zukiswa Sonjica (NFB East London), Francis Marais (Glacier by Sanlam), Debbie Jacobs (IE&T), Travis McClure (NFB East London), Liam Graham (NVest Securities)

Advertising Robyne Moore rmoore@nvestholdings.co.za

layout and design Jacky Horn TA Willow Design jaxx@at-media.co.za

Photos used in this magazine - 123rf.com

Address East London Office NFB House, 42 Beach Road Nahoon, East London, 5241 Tel: (043) 735-2000 Fax: (043) 735-2001 E-mail: info@nfbel.co.za Port Elizabeth Office Ground Floor, Building 6, Ascot Office Park, Cnr. Ascot and Conyngham Roads, Greenacres, 6045 Tel: (041) 582-3990 Fax: (041) 586-0053 Email: info@nfbpe.co.za Web: www.nfbpwm.co.za The views expressed in articles by external columnists are the views of the relevant authors and do not necessarily reflect the views of the editor or the NFB Private Wealth Management. ©2016 All Rights Reserved. No part of this publication may be reproduced in any form or medium without prior written consent from the Editor.

a sensible read

n the surface of it, the world, and South Africa in particular, appears to be on dangerous ground at the moment. On a global scale we continue to see a refugee crisis, countries in civil war, a buffoon like Donald Trump actually been taken seriously in a country as developed as the USA, the global economy is underperforming, emerging markets are seeing huge net outflows and bank stocks are plunging in the US and Europe. As for SA…Our President's State of the Nation address now rivals Sewende Laan in terms of drama, university students are protesting and protests are getting more and more violent and, largely assisted by poor governance and our President's baseless sacking of Nhlanhla Nene, we are also in a financial crisis as a country – seeing our rating being reduced to just above junk level status and our inflation levels climbing, having just breached the SARB 6% upper threshold. In addition, racial tension in South Africa is also probably at the highest it has been in many years – and that is clear when, essentially, a “nobody” like Penny Sparrow makes racist utterances on social media that result in a huge racial social media war of words. However, on the flip side, this crisis has gotten people talking about important issues. On an economic front, for the first time in many years, there is a convergence between government and business, both realizing that they need to work toward a common goal if we as a country are to survive. From a racial perspective, people are at least talking openly. It's important that we all start listening to opposing viewpoints and try to understand them. And from a political perspective, although it has taken far too long, our Constitutional Court has shown that even the President will be held accountable, Thuli Madonsela has been vindicated, our students are letting the government know that they will no longer tolerate empty promises and it seems as though the good people in the ANC are finally finding their voices and letting Zuma know that his, until now impenetrable bubble, may soon burst. Municipal elections to be held later in the year should both be interesting and telling. But if there is a lesson to be learned from everything we have witnessed, it is the importance of strong and effective communication, both in terms of conveying a point, as well as listening to and getting to understand an opposing viewpoint. A lot can be learned from that approach and a lot of the hardships we see today, could have been avoided. We hope that you enjoy this edition of NFB's magazine. Being the end of the financial year and given retirement tax reforms in progress, there is a retirement focus. So, although you may be worried about the future and where SA is headed, keep in mind that there are positives out there and we all have a part to play in getting a positive end result. Brendan Connellan - Editor and Director of NFB sensible finance Mar16

SENSIBLE CONTENTS MARCH 2016

AN EARLY START TO RETIREMENT PLANNING The importance of starting NOW! By Bryce Wild, Private Wealth Manager - NFB East London.

17 WHO IS WATCHING YOUR FINANCIAL ADVISOR? A look at the FPI's revised Code of Ethics. By Nonnie Canham, Financial Paraplanner - NFB East London.

ASSISTED SUICIDE The right of a terminally ill patient. By Grant Berndt Abdo & Abdo.

18 THE GREATEST GIFT Ensuring your affairs are in order. By Debbie Jacobs, Senior Estate Administrator - Independent Executor & Trust.

LOOKING BEYOND THE REGULATION 28 LIMITS Gaining off-shore exposure. By Pieter Hugo, Managing Director Prudential Unit Trusts.

10 ACTIVE VS. PASSIVE INVESTMENT MANAGEMENT Exploring these concepts further. By Grant Magid, Director - NFB Gauteng and Paul Marais, MD - NFB Asset Management. 12 A SUMMARY OF THE TAX RELATED BUDGET PROPOSALS Contributed by Shaun Murphy, partner at Klinkradt Murphy. 14 SPECIAL RISK INSURANCE Are you covered for violence and vandalism? By Jenny Saunders, Commercial Underwriter - NFB Insurance Brokers. 16 RETIREMENT REFORM Unpacking the changes. By Xolisa Funani, Financial Paraplanner - NFB Port Elizabeth.

sensible finance Mar16

19 OPTIONS AVAILABLE ON RETIREMENT By Zukiswa Sonjica, Financial Paraplanner NFB East London. 20 GUARDIANS VS GODPARENTS Ensuring your children are taken care of. By Nonnie Canham, Financial Paraplanner - NFB East London. 21 CURRENT MARKET CONDITIONS Is this time any different? By Francis Marais, Research & Investment Analyst - Glacier by Sanlam. 22 Q &A. You ask. We answer. Advice column answering your investment, personal finance, life and/or risk insurance questions with Travis McClure, Director/Private Wealth Manager - NFB East London. 24 THE RAND HAS PEAKED In the short-term at least. By Liam Graham, Portfolio Manager - NVest Securities.

SENSIBLE SAVINGS

AN EARLY START TO

RETIREMENT

PLANNING The importance of starting NOW! By Bryce Wild, Private Wealth Manager NFB East London.

eople often put off starting to save for retirement and justify that decision by convincing themselves that they will start when they are financially on their feet. However, little do they know that by making this decision, they are making it increasingly difficult for themselves to reach a stage where they will be able to retire with a substantial enough lump sum (and consequently income) that can support the standard of living that they have become accustomed to. The below article touches on the importance of starting to save for retirement as early as possible and becoming part of the 6-10% of South Africans who currently enjoy financially independent retirements. I would like to illustrate the negative effect of putting off starting to save for retirement by way of an example. Please see the below assumptions that I have made for this example. = Daniel starts to save R3 000 per month towards retirement straight after he finishes university (at the age of 22) and he stops saving at the age of 30 (8 years). He lets the funds invested grow in a retirement annuity thereafter until retirement (65), without any further contributions towards his retirement savings. = Daniel's friend, Steven, puts off starting to save for retirement until the age of 30 and he then continues saving the R3 000 per month in a retirement annuity until he retires at the age of 65 (35 years). = For simplicity, there is no annual escalation in the amounts being saved by Daniel and Steven.

sensible finance Mar16

= Both Daniel and Steven retire at the age of 65. = The return on the investments for both Daniel

and Steven is assumed to be 12% per annum. If the above assumptions are taken into account, one would think that because Steven put the R3 000 per month away for longer (35 years as opposed to Daniel's 8 years), he would end up with a larger nest egg come retirement. However, because of the material effect of compound interest, Daniel ends up with a retirement lump sum of approximately R25 332 307 and Steven ends up with just R19 292 878. If you are wanting to start saving for retirement, a retirement annuity is a good investment vehicle to make use of for the following reasons: = Tax deductions of up to 27.5% of the greater of remuneration and taxable income as from 1 March 2016, capped at R350 000 per annum. = Tax free growth within the retirement annuity structure (no income tax, dividend withholding or capital gains tax). = Retirement annuities are protected against the claims of creditors. If you would like to start saving for retirement and make use of the tax advantages of investing in a retirement annuity, please contact one of our financial advisors at the NFB offices on the following numbers: East London 043-735 2000 = Port Elizabeth 041-582 3990 Cape Town 021-202 0001 = Johannesburg 011-895 8000

“Managing success into the future” Our services include: Accounting • Auditing • Taxation Planning Estate Planning • All Statutory Registration • Business Structuring Concessions • Due Diligence • Business Succession Planning

SENSIBLE RIGHT

ASSISTED SUICIDE The right of a terminally ill patient. By Grant Berndt - Abdo & Abdo.

hould another person be allowed to assist a terminally ill sufferer end his/her life? This is one of the questions raised in an application brought urgently to Court by a Mr Stransham-Ford. Mr Stransham-Ford was a 65 year old advocate with stage 4 cancer. The cancer was initially discovered in his prostrate, but had spread to his lower spine, kidneys and lymph nodes. He had previously signed a Living Will in which he stated that he did not want his life prolonged by life prolonging medical treatments and machinery. The medical reports showed the cancer to be terminal and that Mr Stransham-Ford only had a short time to live. The report did, however, indicate that through the use of morphine-like medication, less than 10% of such patients will die in pain. Mr Stransham-Ford stated that he was experiencing severe pain, was effectively bedridden and had no quality of life. He was having to be assisted to perform the usual daily activities of bathing, brushing of teeth and eating. Section 39 of our Constitution states that human dignity is to be promoted and is a foundational cornerstone of the Constitution. Section 10 of our Constitution states that everyone has inherent dignity and are to have their dignity respected and protected. The Court held that the principle of human dignity is a central value of the Constitution and a categorical imperative of it. The Court also stated that human dignity is the source of a person's right to freedom and physical integrity and that the right to life is more than the existence of life, it is the right to be treated with dignity. The rights to life and dignity are thus intertwined. The Court held that the interests of the patient are of

paramount importance. For many years the switching off of life prolonging medical equipment, the so called “passive euthanasia” has been common place. What Mr Stransham-Ford was asking for was “active euthanasia”. The Court held that there can be no distinction between the two forms of euthanasia in circumstances where it is based on so called ethical considerations. Once the doctor has a duty to recognise and ensure a terminally ill patient's dignity is protected by passive euthanasia, then the same duty remains on the doctor through active euthanasia. Our law also allows for abortion and for the right of a person to determine the treatment they will receive. The Court stated that it then followed that a person's decision of when to end their life, is their decision based on a sense of dignity and personal integrity. The Court, based on the above factors amongst others, granted Mr Stransham-Ford the right to be assisted by a medical practitioner to be euthanised, thereby ending his life. The irony, however, was that Mr Stransham-Ford died about 2 hours before the Court delivered its Judgement. Thus, terminally ill patients have the right to human dignity in terms of our constitution and now the right to apply for active euthanasia in appropriate circumstances.

sensible finance Mar16

SENSIBLE REGULATION

LOOKING BEYOND THE REGULATION 28 LIMITS Gaining off-shore exposure. By Pieter Hugo, Managing Director - Prudential Unit Trusts.

here appears to be a general view among investors and their financial advisers that the regulations governing retirement investments are making it very difficult for investors to achieve their retirement goals. However, a closer examination shows that they may not be constraining “optimal” portfolio construction or returns as much as widely believed. Regulation 28 (“Reg 28”) of the Pension Funds Act aims to reduce the risks associated with investing for retirement by imposing limits on the assets retirement portfolios can hold. Among the many restrictions, the two regarded as having the largest impact are those limiting equity exposure to a maximum of 75% of the portfolio; and limiting offshore assets to a maximum of 25% of the portfolio plus 5% in Africa. It is generally argued that by constraining exposure to higher-returning growth assets like equities and listed property, as well as all types of offshore assets, it is much more difficult for investors to achieve the returns necessary to reach their retirement goals. Of course, in theory any restrictions imposed on the wider investment universe are negative for investors, narrowing their choice and preventing an ideal asset allocation. However, in reality investors have the scope to get offshore exposure well beyond the Reg 28 limits. One source of this is through the offshore earnings of locally listed companies. We estimate that some 56% of all JSElisted company earnings come from outside South Africa. Looking at the average ASISA multi-asset high equity (Balanced) fund's exposure, it currently has 25% offshore at face value: 21% in offshore equity, 1% in offshore property and 3% in offshore fixed income assets. However, taking into account the underlying offshore exposure of locally listed equities, the average fund's estimated effective offshore exposure is nearly 50%. It is also important to consider investors' assets outside of retirement investments. Reg 28 does not apply to Living Annuity assets (post-retirement income), Tax-Free Savings products or other discretionary investments like rand-denominated

sensible finance Mar16

offshore funds or direct offshore investments. These can be used to help create an optimal overall portfolio should an investor require more offshore or growth assets. For example, every individual has an annual discretionary offshore allowance of R10 million plus R1 million travel allowance. Therefore, a family of four could take up to R44 million offshore every year – a very substantial sum. Although an investor's retirement fund typically makes up a large portion of their investable assets, taking into account these additional avenues for “going offshore” as well as the 25% + 5% retirement fund limit, there seems to be scope for most investors to be able to achieve their desired offshore exposure across their various portfolios. Meanwhile, Reg 28-compliant funds can certainly deliver strong performance. Graph 1 shows how a theoretical, aggressively positioned Reg 28-compliant portfolio can beat the ASISA General Equity Unit Trust (GENUT) category average over time. Note that this portfolio also has an effective offshore exposure of 63.5%. Investors can therefore gain adequate, albeit not ideal, exposure to growth assets under Reg 28 – they are not sacrificing as much growth as they believe. So although the existing regulations are not ideal, the above examples show they may not be constraining portfolio construction or returns as much as many believe.

Active Versus Passive Investment Management By Paul Marais and Grant Magid

he active versus passive debate has been raging for a number of years now. We thought it would be instructive to explore these concepts further so that you might understand what role these investment strategies could potentially play in your investment portfolio. Firstly, however, it makes sense to set out what is meant by the terms 'active' and 'passive' as the investment management industry has habits, amongst many others, that are relevant here: the first being the inclination towards using jargon, and the second being the predilection towards assuming that everyone else cares about, and understands, these terms. Neither habit is particularly useful when engaging with potential investors.

ACTIVE MANAGEMENT Active management is the process of selecting securities from a pre-defined universe of securities and allocating investments amongst these securities in order to achieve a pre-defined benchmark. Note the inclusion of the words “predefined”; that's an important element of the process. These universes could consist of nearly

sensible finance Mar16

anything, but generally are grouped by asset classes: all the securities that make up the Top 40 of the JSE All Share Index by market capitalization, for example. Benchmarks also vary widely and are the result of an agreement between the investor and the portfolio manager. In the Top 40 portfolio “above the benchmark” might be the broad JSE All Share Index; with the portfolio manager attempting to achieve this by selecting from only the Top 40 shares measured by market capitalization. Importantly, all benchmarks should have a measurement period. The above example would probably come with a rolling five to seven year performance measurement period. The key distinction between active and passive investment strategies is that the manner in which the portfolio manager selects securities for inclusion is up to the manager, their team and/or their investment process and is generally disclosed to investors upfront. The manner chosen spans the range from gut feel right through to very sophisticated investment processes, which have varying degrees of quantitative work. Generally speaking, the process, the team and/or the

SENSIBLE MANAGEMENT manager involved in running the portfolio are expensive resources; the cost of which is borne by the investment portfolio itself.

PASSIVE MANAGEMENT Passive management, too, is the process of selecting securities from a pre-defined universe and allocating amongst these securities in order to achieve a pre-defined benchmark, which also comes with a measurement period. The key difference, however, is that the manner in which the securities are selected is rules-based. As with active management, the choice of which set of rules to use is up to the provider of the passive product. As strategies for active managers can vary, so too can rules for passive managers. Rules might include matching the weightings of a selection of securities in a portfolio to the same weighting for the same securities in a publicly available benchmark, like the JSE All Share Index, or they might simply be to build a portfolio consisting of the ten securities with the best 1-year historical dividend yields. The resource requirement for a passively managed investment product is far lower than that for a similar active strategy and this allows passive strategies to have lower cost profiles relative to their actively managed counterparts. This doesn't, however, mean that all passive products are cheap or that all passive products that are similar have a similar fee. It's easiest to compare active and passive management in the equity space, but both investment strategies can be deployed into any asset class (equities, bonds, property or cash, locally or globally or a combination of both) or even amongst asset classes. Increasingly, there exist passive asset allocation portfolios that have a fixed rebalancing schedule which are becoming increasingly popular with investors who are looking for a simple blend of a number of asset classes for their portfolios. Further, like active managers that choose to specialize in certain market sectors (Japanese mid-capitalization equity portfolios or South African long-term bond portfolios, for example) so too is there specialization within the passive industry. For example, it is possible to obtain exposure to South African inflation-linked bonds through the RMB Inflation-X product. This raises an additional characteristic of active versus passive management. The RMB product mentioned earlier is an Exchange Traded Fund (ETF); essentially a portfolio with multiple investors (a bit like a collective investment scheme (CIS)/unit

trust) that is listed on a securities exchange (the JSE in this instance). The majority of passive products are in ETF or CIS form, but the majority of active management takes place through non-exchange traded products (unit trust funds or limited liability partnerships, for example). Though this is swiftly changing. The inward-listing of Astoria, a portfolio of equity securities amongst other items, on the Johannesburg Stock Exchange where the portfolio management is conducted by Anchor Capital, is a good example. Having worked through these key differentiators and characteristics of active versus passive management it is clear that not only is there a wealth of choice within each portfolio management strategy, but that the low-cost nature of passives shouldn't be the driving factor behind decision-making. In the same way that an active managers' investment process and ability to achieve a certain benchmark within a prescribed set of opportunities must be assessed in determining their suitability for a particular investor, so too must the rules-based approach of a passive manager be assessed on the same criteria. For example, if an active manager has an exposure to a security that subsequently falls in value and a passive manager has a similar exposure it won't matter whether the portfolio results were because of poor decision-making/the absence of a robust investment process or whether the rule being followed was poor; the investment outcome will be the same. The suitability of the portfolio for the client will be the over-riding, determining factor of whether the investment, and therefore the subsequent return, was appropriate or not. There is also the presence of research indicating that the average active manager underperforms the benchmark by the extent of their fees and whilst this is empirically true for a given set of observations it, like most things in life, doesn't apply everywhere all of the time. Passives, therefore, shouldn't be selected simply because of a dim view on active managers. There are certain market sectors and certain market conditions when being exposed to a non-rules based portfolio can protect against losses, participate in gains or do both. Should you have any queries with regards actively or passively managed portfolios, please do not hesitate to contact an NFB Private Wealth Manager at one of our NFB offices in Johannesburg, East London, Port Elizabeth, Stellenbosch or Cape Town.

sensible finance Mar16

SENSIBLE BUDGET

2016 TAX RELATED BUDGET PROPOSALS Submitted by Shaun Murphy, CA (SA), Partner Klinkradt

1. INTRODUCTION The following is a summary of the tax related budget proposals announced by the Minister of Finance, Pravin Gordhan, on 24 February 2016.

2. BUDGET HIGHLIGHTS The main tax proposals include the following: = A two year postponement of the annuitisation requirement for provident funds and tax-free transfers from pension to provident funds. = An enhanced SARS and SARB Voluntary Disclosure Programme in respect of offshore assets and income, applicable for the period 1 October 2016 to 31 March 2017. = The capital gains tax inclusion rate for individuals, special trusts and insurers' individual policyholder funds increases from 33.3% to 40%. For other taxpayers, the inclusion rate increases from 66.6% to 80%. = Measures to prevent tax avoidance through trusts â&#x20AC;&#x201C; assets transferred via loans to a trust to be included in the estate of the founder (assumed to mean donor/lender) on death and interest-free loans to be categorised as donations. = Increase in transfer duty rate from 11% to 13% in respect of property sales greater than R10 million. = The general fuel levy will increase by 30 cents per litre on 6 April 2016. = A 6% to 8.5% increase in excise duties on alcoholic beverages and tobacco products. = A tyre levy at R2.30 per kilogram is to be introduced on 1 October 2016 and a tax on sugar-sweetened beverages on 1 April 2017.

3. INDIVIDUALS AND TRUSTS Relief for individuals Personal income tax To reduce the impact of inflation on lower- and middle-income earners, the primary rebate and the bottom three income brackets will be adjusted by 1.8% and 3.4% respectively. The tax-free threshold for individual taxpayers below 65 years will increase from R73 650 to R75 000. Exemption for interest and dividend income The annual exemption on interest earned by individuals younger than 65 years (R23 800) for individuals 65 years and older (R34 500) remains the same. Contributions Medical tax credits Monthly medical scheme fee tax credit will from, 1 March 2016, be increased from

sensible finance Mar16

R270 to R286 per month for the first two beneficiaries. For each additional beneficiary, the increase will be from R181 to R192. Other tax proposals affecting individuals Retirement reforms Allowable deduction for fringe benefit of employer contributions to defined pension funds: Section 11(k)(iii) of the Income Tax Act (the Act) inadvertently limited the allowable deduction for the fringe benefit of employer contributions to retirement funds to the actual value of the employer contribution. However, the fringe benefit value for defined benefit pension funds is determined by a formula per the Seventh Schedule to the Act and may exceed the actual employer contribution. In this case, the available deduction would not be aligned with the employer contribution's fringe benefit value and any excess amount would become taxable. This was not the original intention and with effect from 1 March 2016, an amendment will be made to allow a deduction up to the full value of the employer contribution fringe benefit, if valued according to paragraph 12D of the Seventh Schedule to the Act. Passive income deduction: It is proposed that section 11(k) of the Act be amended to allow for retirement contributions to be deducted against passive income, subject to the available limits. Rollover of excess contributions prior to 1 March 2016: It is proposed that section 11(k) of the Act be amended to allow for the rollover of excess contributions to retirement annuity funds and pension funds accumulated up to 29 February 2016. Sugar tax Obesity stemming from overconsumption of sugar is a global concern and South Africa is no exception. Following global trends, government proposes to introduce a tax on sugar-sweetened beverages, with effect from 1 April 2017 to help reduce excessive sugar intake.

Measures to prevent tax avoidance through trusts It has been noted that some taxpayers use trusts to avoid paying estate duty and donations tax. For example, if the founder of a trust sells his or her assets to the trust, and grants the trust an interestfree loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers' ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder (we assume this to mean the lender/donor) at death, and to categorise interestfree loans to trusts as donations. Further measures to limit the use of discretionary trusts for incomesplitting and other tax benefits will also be considered.

4. COMPANIES Corporate tax rates No change is proposed to corporate tax rates.

Deductions Pension, provident and retirement annuity fund contributions Amounts contributed to pension, provident and retirement annuity funds during a tax year are deductible by members of those funds. Amounts contributed by employers and taxed as fringe benefits are treated as contributions by the individual employee. The deduction is limited to 27.5% of the greater of remuneration for PAYE purposes or taxable income (both excluding retirement fund lump sums and severance benefits). Furthermore, the deduction is limited to a maximum of R350 000. Any contributions exceeding the limitations are carried forward to the next tax year. CORPORATE TAX RATES Companies and close corporations unchanged

5. SMALL BUSINESS CORPORATIONS

TAX GUIDE (including tables) Financial years ending on any date between 1 April 2016 and 31 March 2017

Individuals and trusts Income tax rates for natural persons and special trusts

Taxable income

Rate of tax

Year of assessment ending 28 February 2017

R0 – R75 000

0% of taxable income

Taxable income

Taxable rates

R75 001 – R365 000

7% of taxable income above R75 000

R0 – 188 000

18% of each R1

R365 001 – R550 000 R20 300 + 21% of taxable income above R365 000

R188 001 – 293 600

R33 840 + 26% of the amount above R188 000

R550 001 & above

R293 601 – 406 400

R61 296 + 31% of the amount above R293 600

R406 401 – 550 100

R96 264 + 36% of the amount above R406 400

R550 101– 701 300

R149 619 + 39% of the amount above R550 100

R701 301 and above

R206 964 + 41% of the amount above R701 300

Natural persons Tax thresholds2015/16

2016/17

R59 150 + 28% of the amount above R550 000

6. MICRO BUSINESSES Financial years ending on any date between 1 March 2016 and 28 February 2017 Taxable income

Rate of tax

R0 – R335 000

0% of taxable turnover

Below 65 years of age

R73 650

R75 000

R335 001 – R500 000

1% of taxable turnover above R335 000

Aged 65 and below 75

R114 800

R116 150

R500 001 – R750 000

1 650 + 2% of taxable turnover above R500 000

Aged 75 and over

R128 500

R129 850

R750 001 and above

6 650 + 3% of taxable turnover above R750 000

Tax rebates

2015/16

2016/17

Primary – all natural persons

R13 257

R13 500

Secondary – persons aged 65 and below 75

R7 407

Secondary – persons aged 75 above

R2 466

Trusts The tax rate on trusts (other than special trusts which are taxed at rates applicable to individuals) will remain at 41%. Foreign Dividends Most foreign dividends received by individuals from foreign companies (shareholding of less than 10% in the foreign company) are taxable at a maximum effective rate of 15%. No deductions are allowed for expenditure to produce foreign dividends. Exemptions

7. EFFECTIVE CAPITAL GAINS TAX (CGT) RATES Capital gains on the disposal of assets are included in taxable income. Maximum effective rate of tax Individuals and special trust Companies Other trusts

16.4% 22.4% 32.8%

8. OTHER TAXES, DUTIES AND LEVIES Estate duty No changes to estate duty regime currently Donations tax No changes to donations tax regime.

Interest Interest from a South African source earned by any natural person under 65 years of age, up to R23 800 per annum, and persons 65 and older, up to R34 500 per annum, is exempt from taxation.

sensible finance Mar16

SPECIAL RISKS Are you covered for violence and vandalism? By Jenny Saunders, Commercial Underwriter - NFB Insurance Brokers.

owards the end of October 2015, thousands of university students of all races from campuses across the country, decided to stage a mass protest against the proposed university fee increase of 11.5% for 2016. This was the biggest protest against the inaccessibility of quality education for all since the 1976 Soweto Uprising. Although the students won their demand, with President Zuma announcing a 0% increase in fees, the students protest demands have continued sporadically around the country with students calling for transformation of higher education institutions. Unfortunately, violence and vandalism accompanied the protests on a large scale. It is estimated that damage to property as a result of the #FeesMustFall protests amounted to R22 million. State-owned SASRIA (South African Special Risks Insurance Association) is the only insurer in South Africa that provides cover for special risks related to riots, strikes, civil commotion, public disorder and terrorism. Cover is optional and can only be obtained through insurance brokers and insurers of underlying cover in respect of property. SASRIA does not conduct business directly with the public. The risk of damage to property not covered by insurance, both personal and commercial, can be disastrous. People can lose their assets, and businesses may have to shut down should they suffer a big loss that is not covered. Like with most disastrous events, many people have the mentality that “this will never happen to me”. Unfortunately, this is not always the case. Many people are unsure of exactly what cover “special risks” insurance provides. They don't realise how extensive the losses can be and the serious consequences to their businesses. Most claims received by SASRIA are due to service delivery protests and salary related strikes. Some statistics on claims received by SASRIA in this regard: = Claims valued at R28.5 million due to xenophobic attacks – early 2015; = Claims valued at R2 million for vehicles damaged during a student protest – early 2015; = Claims valued at R14 million for a mining strike – 2014/2015;

sensible finance Mar16

photograph by Marius Sullivan Photography

INSURANCE

= Service delivery claims amounted to R113.1

million, increased by R27 million from the previous year; = One claim for damage to university property in the #FeesmustFall protests amounted to R10 million. SASRIA MD, Cedric Mosondo, reports that in spite of the increase of special risks insurance events and claims, SASRIA remains profitable and able to meet its commitments to its clients. South Africa has a high rate of civil disobedience with strikes and protests occurring regularly, particularly service delivery protests. People often believe that SASRIA cover is not required for their personal belongings, homes and cars. This is, however, not the case as your vehicle could be damage should you happen to drive through an area where there is unrest or your vehicle may be parked at work or in the city centre and it can be damaged whilst protestors are on the rampage. Likewise, protestors passing through residential areas could damage your home. SASRIA cover is relatively inexpensive and we urge all members of the public to ensure that they have this cover in place on their insurance policies as all indications are that the current levels of unrest and protests are not going to abate in 2016. Should you have any concerns regarding this cover please contact one of our qualified staff members at NFB Insurance Brokers and they will gladly assist you. Our contact telephone number is: 043 – 735 2460. **All SASRIA statistics as per SASRIA's 2015 report – Thokozile Ntshiqa and Cedric Masondo – FA News 21/01/2016.

insurance brokers (border)(pty)ltd.

SENSIBLE LAWS The contribution changes are as follows, effective 1 March 2016:

RETIREMENT

REFORM

Employee – Provident Fund

Before 1 March 2016

As of 1 March 2016

No tax deductions are allowed for employee contributions to provident funds.

Employer contributions to provident funds will be added to employee's gross income as a fringe benefit and deemed to be paid by the employee. Employees will be able to deduct up to 27.5% of the greater of remuneration or taxable income, subject to a maximum tax deduction of R350 000 per annum. Contributions that are over the set limit may be carried over to the following year, but will also be subject to the set limits.

Unpacking the changes. By Xolisa Funani, Financial Paraplanner - NFB Port Elizabeth.

uring the month of January President Jacob Zuma effectively signed two controversial tax laws into force as of 1 March 2016. These laws are the 2015 Tax Laws Amendment Act and the Tax Administration Laws Amendment Act. The Congress of South Africa Trade Unions (COSATU) has been up in arms, branding this move as an abuse of power by the state. The Cosatu spokesperson, Sizwe Pamla, was quoted as follows: “the state has appropriated too much power to itself and … does not believe that it is beholden to the people anymore”.

What changes will come into effect? The purpose of the changes is to harmonise the tax treatment and annuitisation requirements in the retirement fund space. In summary, these changes set out in the Acts are as follows: = The change of tax treatment to retirement fund

contributions = Aligning of annuitisation requirements between

retirement funds = The inclusion of public sector funds to the

aligning of annuitisation rule i.e. Telkom Retirement Fund, municipal funds and Government Employee Pension Fund (GEPF – which already provides for the rule if a member is in service for more than ten (10) years) = To close the loophole of avoiding estate duty through excessive contributions to retirement funds = To allow non-residents the ability to withdraw from a retirement annuity fund when they leave South Africa. The main changes we will look at are the contributions towards retirement funds from the employee and employer perspective and the annuitisation of the retirement fund benefits (this includes, pension and provident funds).

sensible finance Mar16

Employer

Employers are allowed a tax deduction of up to 20% of employees' income to pension and provident funds.

The tax deduction for contributions made to retirement annuities, pension and provident funds will be treated the same. Thus, the employer may deduct unlimited contributions to their employees' funds. The contributions will, however, be deemed to have been made by the employee and treated as a fringe benefit.

The alignment of annuitisation requirements between retirement funds was introduced in order to make all benefits at retirement stage the same. Thus, the applicable rule to benefits would be a maximum of one-third (1/3rd) as a lump sum payment and the remaining two-thirds (2/3rds) as a compulsory annuity – subject to the prevailing retirement tax table. In addition, the minimum annuitisation threshold for retirement and pension funds has been increased from R75 000 to R247 500. Note that the resignation (withdrawal) benefits have not been affected by any of the changes – which mean you will still be able to receive your full pension/provident fund interest as a lump sum upon resignation or retrenchment, where you will be taxed according to the applicable tax tables, these benefits can be transferred to a preservation fund without attracting tax implications. Since the promulgation of the two bills the annuitisation proviso for provident fund benefits has been postponed for a further two years to 1 March 2018. The contribution changes will continue as planned. Should you have any queries about the changes, do not hesitate to contact your NFB financial advisor on one of the following numbers: East London 043-735 2000 = Port Elizabeth 041-582 3990 Cape Town 021-202 0001 = Johannesburg 011-895 8000

SENSIBLE ETHICS

WHO IS WATCHING YOUR FINANCIAL ADVISOR? A look the FPI's revised Code of Ethics. By Nonnie Canham, Financial Paraplanner - NFB East London.

ou are fortunate enough to have a financial advisor who you can trust to keep an eye on your financial interests. Have you wondered, however, about who is watching your financial advisor...? The Financial Planning Institute of Southern Africa (FPI) is watching. And they are watching that your advisor behaves in accordance with prescribed guidelines and standards against which all their members are measured. This 'standard' is the FPI Code of Ethics and Professional Standards. The FPI announced recently that a revised Code of Ethics has come into effect on Monday, 1 February 2016. The revised Code is touted as world class and seeks to encourage your financial advisor to act in your best interests. By improving the quality and accessibility of professional financial planning for all and ensuring the maintenance of the highest ethical standards by its members, the FPI's aim is to ensure that you, as the client, receive service of the highest excellence from a financial advisor possessing the required level of knowledge and expertise. The purpose of the Code is to not only promote ethical behaviour, but also to prevent unethical behaviour by financial advisors who are members of FPI.

How does this benefit you as the client? With every interaction, your financial advisor will have to assess himself or herself using the 8 principles contained in the revised FPI Code of Ethics. The guidelines are as follows: Clients first: Did I act in the best interest of the client? Placing the client's interests first requires your advisor to act honestly at all times and not place personal interest or advantage, in any form, before your interests. Integrity: Am I prepared to read about my actions in tomorrow's newspaper? This requires adherence to practices of honesty, fairness, consistency and candour in all professional

matters. Objectivity: Am I convinced that I did not allow any emotions to cloud my judgement? Objectivity requires your financial advisor to identify and manage conflicts of interest and exercise sound professional judgment in managing them with intellectual honesty and impartiality. Fairness: Have I done what any reasonable person would have done under the same circumstances, or if I had the power of hindsight at some point in the future, would I have given the same advice? Fairness requires your advisor to provide you with what you are due, owed, or could legitimately expect with each transaction / interaction. Competence: Do I have the collective and sufficiently updated knowledge and skills to render the best advice and service? Competence also includes the wisdom to recognise one's own limitations, and your advisor must consult with other professionals when in doubt and refer you to other professionals where he or she does not have sufficient knowledge to attend to a particular need eg. a complicated tax issue Confidentiality: Am I sure that I have made all efforts to protect confidential information? Diligence: Have I applied all my skill and motivation to act in the best interest of the client in a timely manner? The fulfilling of agreed upon commitments must be timely and thorough. Professionalism: Have I inspired in my clients, trust in myself as a professional and in the profession as a whole through dignity and respect?

A financial advisor who conducts himself in accordance with this standard can only be an asset to his clients. Any conduct that is grossly in contradiction with the above principles can be reported and investigated. You can therefore rest easy, knowing that the FPI is watching. Should you wish to contact one of NFB's financial advisors, our contact telephone numbers are as follows: East London 043-735 2000 Port Elizabeth 041-582 3990 Cape Town 021-202 0001 Johannesburg 011-895 8000

sensible finance Mar16

SENSIBLE PREPARATION

THE GREATEST GIFT Ensuring your affairs are in order. By Debbie Jacobs, Senior Estate Administrator - Independent Executor & Trust.

he greatest gift that you can give your family, is to have your affairs in order. Even though death is a natural part of life, it doesn't happen according to our well planned schedules. It somehow always seems to occur unexpectedly and always too soon. Most people are repelled by the subject of death, and because of this many people don't put proper plans into place for themselves or for their family members. This is worse if the deceased didn't put sufficient time into planning their estate, e.g. getting financial advice and drawing up a valid will.

Practical tips before death Create a file for:= ALL debt/accounts: clothing, chemist accounts, bond and credit card details, vehicle finance, personal loans, etc. = Stop orders: short term insurance, DSTV, medical aid, cell phone = Income: salary/pension, annuities, income from investments = Documents: vehicle registration papers, Title Deeds, childrens' birth certificates, marriage certificate, Ante-Nuptial Contract, Divorce Orders, Maintenance Agreements, Adoption papers = Investments: policy contracts and/or any investment details = A list of people your family can contact at your bank, doctor's office, insurance company, and investment firm = Names of your banks and account numbers = A copy of your latest Income Tax return. = Do you pay all the bills? What if something happens to you and your spouse has no idea of

your internet passwords and/or banking pin and requires funds urgently? = Funeral wishes/requests: a difficult time can be made more stressful for family members having to make funeral decisions with no guidance which music would you like, did you want flowers, where to scatter ashes, etc. - can be harrowing decisions at an already painful time. Yet making a few decisions about your own funeral now can be a real help to your relatives after your death, and it needn't be drawn out.

Things to keep in mind: = Bank accounts will be frozen when one dies. If it

is close to the end of the month, things like debit orders will bounce. If it is for household or car insurance, contact the companies directly to make arrangements. This is not the time you want to be without cover. = When cancelling something like a phone contract, make sure customer services as well as the accounts departments know about this and that they have signed a document stating they have received notification from you. = Your debts don't die with you – it is often said that "when you die, your debts die with you". But it's a little more complicated than that. When you die, anything you owe has to be paid first, before any assets can go to your beneficiaries. Lastly, don't forget about your “virtual life” - shut down services you wouldn't want accessible after you have passed away. For example, Facebook can memorialize your page if you want, but if you don't want that digital record sticking around, you might make a request to your heirs to delete it outright.

At Independent Executor & Trust we are committed to personalized service and individual attention. With combined experience of 65 years, we specialize in the Drafting of Wills, Administration of Estates & Testamentary Trusts. 49 Beach Road, Nahoon, East London, 5241 | PO Box 8081, Nahoon, 5210 Telephone: (043) 735 4633 Fax: 086 693 3356 / (043) 735 3942 | e-mail: info@iet.co.za

Port Elizabeth clients can call 041-582 3990 and you will be re-directed accordingly

SENSIBLE PLANNING

OPTIONS AVAILABLE ON RETIREMENT By Zukiswa Sonjica, Financial Paraplanner - NFB East London.

etirement is a life event requiring reflection and forward planning on the retirees' behalf. Apart from the psychological adjustment and emotional effects of this stage in life, there is the financial aspect that can lead to further stress during this time. Statistics tell of many retirees faced with the reality of having overestimated the large sounding retirement lump sum they have to provide for their lifetime maintenance, with no further sources of income. Retirement may be the first time some individuals seek financial planning advice. Little can be done at this stage, however, to change the amount that has been accumulated over the working years. The only thing left for the financial planner is to give the best solution to suit the client's needs, and to taper unrealistic expectations of the years to come. Currently, individuals retiring with provident funds and provident preservation funds can take up to 100% of their full benefit in cash and use it as they wish. Needless to say, retiring from these structures requires restraint, planning and continued discipline to ensure the funds are managed responsibly and used solely to provide the needed income throughout retirement. Current legislation regulating pension funds, pension preservation and retirement annuity funds limits the amount that can be taken in cash at retirement to only one third of the full value. The balance is dedicated to an annuity product that will ensure an income is paid out the individual during their retirement years. The annuity product options available are discussed below. The Living Annuity Product is an investment based structure that gives the annuitant control over the

amount of income that can be drawn, limited to a range of 2.50% to 17.5% per annum. The financial planner can be useful in this product structure by managing the underlying investments guided by the client's risk profile, and monitoring income withdrawal rate. The capital invested will last until the funds in the living annuity investment are depleted. If the client dies before the investment funds are depleted, the investment is paid out to nominated beneficiaries who either receive the remaining capital as a lump sum or continue receiving the income. Only income can be paid to the annuitant, no capital amount can be withdrawn. The investment amount can, however, be used to purchase a traditional life annuity at any stage. The Traditional Life Annuity Product is an insurance product that takes on the risk of providing income for the rest of the annuitant's life. The insurer determines the amount of income the annuitant receives from the start of the agreement. The insurer quotes the income rate after taking various factors into account, such as the sum of the retirement benefit, the age of the annuitant, gender, life expectancy and prevailing interest rates. There are various types of life annuities structured to fit annuitants' needs and circumstances. The income rate quoted by insurers differs according to the annuitant's needs. The annuity can be structured to continue paying out to the annuitant's spouse who may be in need of the income after the death of the first annuitant. The annuity income can be structured to increase at a predetermined rate annually to give protection against rising prices, or at a rate determined by underlying investment returns. The choices on offer differ across the life companies. As no-one can be certain of their date of death and for how long they will require income after retirement, choosing between the two products is not an easy decision to make unadvised. Please contact one of our advisors at the NFB offices on the following numbers should you like further information on your retirement planning: East London 043-735 2000 Port Elizabeth 041-582 3990 Cape Town 021-202 0001 Johannesburg 011-895 8000

sensible finance Mar16

SENSIBLE GUARDIAN

MAKING SURE YOUR CHILDREN

ARE TAKEN CARE OF If tomorrow never arrives...? Who will take care of your children? By Nonnie Canham.

e don’t like to consider our mortality. We take it for granted that we will be around to not only watch our children grow up and go to university, but that we will see them get married and have children of their own too (in that order). But what if tomorrow never arrives...? Who will look after our children?

GODPARENTS vs GUARDIANS GODPARENTS - A godparent, in Christianity, is someone who sponsors a child's baptism. Nowadays, the secular view of a godparent tends to be an individual chosen by the parents to take an interest in the child's upbringing and personal development, and to take care of the child should anything happen to the parents. A godparent is, however, essentially a spiritual role, not a legal one. LEGAL GUARDIANS - A legal guardian, on the other hand, is the person who will make all the important decisions regarding your child’s welfare should you die or become incapacitated – decisions about where your child will live, schooling and general care until the age of 18. The legal guardian, as named in your will, must be formally appointed by the Master of the High Court. Your children’s godparents have no legal role when it comes to the children’s protection and well-being after your death, whereas their guardians have a legal role with long-term responsibilities with regards to their protection and well-being. When choosing a potential legal guardian for your child, consider someone who: = Has a cultural background and family values similar to yours = Your child knows and is comfortable with = Lives in the same neighbourhood, ensuring continuity of schooling = Keeps regular contact with you and your

sensible finance Mar16

children = Is relatively stable financially and can be trusted

to handle your children’s financial affairs honestly. It is recommended that you stipulate who you would like to appoint as your child’s legal guardian in your will. You can also include a short motivation for your choice, in a separate annexure to your will. If one parent dies, the other biological parent will become the legal guardian, irrespective of any divorce agreement that may exist. If both parents die, the Master will consider your recommendation of legal guardian. If no guardian has been recommended, the Master will consider the closest living relatives for the role. The Master may, when deciding who to appoint, take into account any godparents who have been named, since these people are likely to be family members or close friends trusted by the parents. Whereas godparents are usually selected for life, your choice of legal guardian should be reviewed on a regular basis. “People’s personal circumstances change and the candidate you selected at the birth of your child may no longer be an appropriate choice 10 years later.” The guardian should be asked beforehand if they feel up to the task, and informed in detail of the financial arrangements that have been made (such as education policies and testamentary trusts). This gives both parties the opportunity to raise and resolve concerns, ensuring peace of mind that your chosen legal guardian will look after your child in the way you intended. The guardian will be legally obligated to take care of your child only until the age of 18. Should you need to ensure that your Will is in order, or require assistance in setting up a Testamentary Trust, speak to one of our qualified financial advisors at one of our NFB offices in Johannesburg, East London, Port Elizabeth, Stellenbosch or Cape Town. It will definitely be time well spent to secure your children’s legacy.

SENSIBLE STRATEGY

CURRENT MARKET CONDITIONS IS THIS TIME ANY DIFFERENT? By Francis Marais, Research & Investment Analyst - Glacier by Sanlam.

ne of the biggest drivers of current market volatility is the divergence between monetary policy in the US and Europe. The US has for quite some time indicated that it would raise interest rates, while in Europe and also Japan, central banks have been cutting rates or even continuing with quantitative easing. This has led to an appreciation of the US dollar. On a relative basis, investors would get a better yield on a US bond than they would in Europe or Japan. The selling of assets and moving them to the US has in turn had an effect on the currencies involved.

Monetary policy in China Monetary policy in China and the devaluing of the yuan has also played a role in the volatility. The Chinese stock market crash and the resultant capital flows had a knock-on effect on global markets. This followed the announcement that the state would step back from setting foreign exchange rates. The slowing down of China's economy has also contributed to the fall in energy and metal prices globally.

Geopolitical causes Some of the geopolitical events currently affecting global markets include: = The rise in terrorist activity perpetrated by groups such as ISIS = The continuing war in Syria = The increasing number of refugees entering Europe, which is placing pressure on European governments for a solution = The fall in oil prices which increased volatility = Increased tensions in the Middle East = El Nino, floods and droughts have led to lower crop yields and higher food prices = The threat of a new virus, possibly even a drugresistant one, is a concern. The Ebola virus has caused loss of life and one month into 2016

= =

we've seen the World Health Organisation declare the Zika virus a public health emergency A referendum this year will determine whether Britain exits the EU ('Brexit') The US presidential election this year â&#x20AC;&#x201C; with the race essentially between Donald Trump and Hillary Clinton Locally, SA is holding municipal elections this year â&#x20AC;&#x201C; an indicator for the next general election Nhlanhla Nene's removal as Finance Minister in December last year led to a substantial weakening of the rand, increased volatility on the JSE, and loss of confidence in the ruling party. This in turn led to an increase in the risk and inflation premiums on SA assets, with foreigners demanding higher expected returns when investing here.

From an emerging market perspective, local equities remain expensive and are currently trading at a premium relative to other emerging markets, on a price-to-earnings and price-to-book basis. However, from a bottom-up perspective some value managers are starting to find more value in the local market, especially when comparing shares relative to some of their peers. Should emerging markets be sold off further, this could have a negative impact on the domestic market and lead to further volatility. Despite the increase in volatility that we're seeing now, our view remains that investors who've consulted an adviser and have a strategic and diversified long-term plan in place should not panic. Most of the events described above are random and investors can never be prepared for these. Volatility also presents opportunities for those who are prepared to remain invested for the long term.

sensible finance Mar16

SENSIBLE QUESTIONS

“Sensible Finance - Questions and Answers” is an advice column that will allow our readers the opportunity to write to a professional and experienced financial advisor for advice regarding investments, personal finance, life and/or risk cover. Travis McClure will be answering any questions that you may have.

A lot of investors are concerned about the possible ratings downgrades and junk status and what this means for the country, the economy, the markets and the Rand. They want to know, what will happen if we get downgraded ? Rather than try and explain this myself I have used a recent article written by Kokkie Kooyman of Denker Capital that answers a lot of these questions. The main points of which are highlighted below. Will our sovereign debt get downgraded? IIt is not a “dead cert” that our sovereign debt (and along with it our bank debt) will get downgraded to “junk” or non-investment grade status. Ratings agencies rate the capacity and willingness of a country/company to repay its debt, and a key factor they look at is debt levels versus future cash flow. A poor or deteriorating growth outlook effects future capacity to repay and is a negative. SA's 50% debt to GDP ratio level is much lower than that of developed market countries, but SA's high interest rates make a high (and increasing) debt level dangerous. And the rand's fall in 2015 could push inflation to 7%, necessitating continued high interest rates. The fact that SA also has considerable off-balance sheet debt (Eskom, SAA, etc.) adds to the risk. On the news of finance minister Nene's dismissal, markets immediately re-evaluated SA's ability and willingness to meet future obligations and pushed the interest rate of our sovereign debt higher. This, and a shrinking GDP (recession), could keep the debt/GDP level on its upward trajectory.

Gaph 1: SA debt to GDP ratio over the past 10 years (Source: Bloomberg, February 2016; Denker Capital)

sensible finance Mar16

Travis McClure

Why is it that “developed” countries get away with such high debt levels? 1. Their interest rates are structurally lower and needless to say, at lower interest rates one can afford more debt. This is one of the reasons why keeping inflation low is a key objective of central banks (and the SARB). 2. Perceived low political risk and policy predictability. Hence the key factors that will determine whether South Africa's sovereign debt will be downgraded are: = Our prevailing debt levels, = inflation rate, = growth rate, and = trust in the abilities of our political leadership, the Reserve Bank and Treasury. What will the effects of a possible downgrade be on the rand and the JSE? It seems there are many who believe that South Africa will follow the Brazilian route, believing the rand and the JSE will fall significantly following a downgrade. This view is flawed. Markets react negatively or positively to unexpected events. The extent of such a reaction is driven by: = Valuation levels at the time of the event, = the extent to which it was expected (corollary to the valuation levels), and = the extent and impact of the surprise. For example, finance minister Nene's dismissal was totally unexpected and valuation levels were high. Hence the significant impact on the rand, bond markets and JSE when it happened. A downgrade is seldom a surprise. If we do get downgraded it will be based on what is already known: the weak state of the economy, high debt levels and a lack of confidence in government's decision making and policies.

SENSIBLE QUESTIONS True, the mandates of most investors in sovereign and bank debt force them to sell their holdings (normally over a 12 month period) which in the short-term has a negative impact and makes future refinancing more difficult. But the markets generally anticipate this before it happens. Brazil is a good example. Similarities between SA and Brazil in 2015: Brazil experienced a significant recession during 2015 and there are quite a few similarities with the current South African situation, including drought, a shrinking economy, a squeezed consumer and excessive government spending.

in the economy that will be the main driver of price changes. Table 1 below highlights three interesting points: = The JSE All Share index doesn't reflect what is

happening inside the country. Despite the events in December (measured in rands), the JSE has outperformed US markets. = The original effect of the dismissal of finance minister Nene has almost been reversed. Markets look ahead and currently seem to believe that Pravin Gordhan will deliver. Bear in mind, however, that the rand had depreciated by more than 25% during the previous 12 months. = The Brazilian real declined by more than 40% prior to the S&P downgrade on the back of the recession and political crisis. % moves measured As at 17 Feb 16

Description

from this date to 17 Feb 2016 30 Nov 15

JSE All Share

-3.5%

-0.4%

0.0%

1,924.02

-7.5%

-2.4%

-6.6%

Brent Crude

34.76

-18.8%

-32.2%

-37.7%

ZAR/USD

15.29

5.5%

15.3%

32.1%

13,501.00

-2.5%

-4.1%

0.0%

USD/Norwegian Krone

8.59

-1.3%

3.3%

15.2%

USD/Turkish Lira

2.96

1.5%

1.7%

26.6%

USD/Brazilian Real

4.01

2.9%

10.3%

51.4%

S&P 500

Graph 2: 5-year credit default swaps

USD/Indonesian Rupiah

(Source: FactSet)

The graph shows that Brazil's 5-year credit default swaps (CDS) re-priced by 200 basis points (bps) in the period leading up to their downgrade, and only a further 100 bps after the actual S&P downgrade. Most of the bad news was priced in prior to the downgrade. Similarly, our swap rates have already increased by 150 bps. The new budget and risk of further deterioration in our economic prospects (drought, labour unrest, etc.) will be critical to whether our debt re-prices further. A ratings downgrade, should it happen, will simply affirm what we will already know. The point we are trying to make is this: it is not the rating agencies that will cause the JSE and rand value to fall – it is the budget, its subsequent implementation and further unexpected weakness

31 Aug 15 31 Dec 14

49,786.83

(-)= stronger against USD

Table 1: The rand and the JSE (Source: FactSet, Bloomberg, Denker Capital Research)

Table 2 below compares the factors that go into the pot to determine sovereign debt ratings. Each country has a different history and different dynamics which make a simple comparison dangerous. But it does highlight a few interesting similarities. Of the four countries, the South African government has been the strongest believer in a central led “government is best at creating jobs” paradigm. This is a red flag in the eyes of rating continued on page 25...

Country South Africa

population (mill)

GDP (bill)

GDP/ Capita (USD)

Government Debt/GDP

Inflation Rate

5 year CD swap rates

GDP Growth 2016F

S&P Credit Rating

Budget Deficit %

Current Account Deficit %

Currency move since Jan’14

$350

6,483

45.4%

6.2%

3.4%

0.7%

BBB-

-4.1%

-5.4%

45.1%

Brazil

206.1

$2,350

8,177

59.2%

16.1%

4.6%

-3.5%

-10.3%

-3.3%

67.5%

Turkey

75.9

$798

10,515

36.6%

9.6%

3.0%

2.9%

BB+

-1.5%

4.5%

37.3%

Indonesia

254.5

$888

3,492

56.2%

4.1%

2.4%

5.1%

BB+

-2.5%

-2.1%

10.2%

Table 2 : South Africa and it emerging market peers Note: Due to the debt levels of parastatals not being included the debt/GDP ratio can be misleading

sensible finance Mar16

SENSIBLE RAND

THE ZAR HAS PEAKED IN THE SHORT TERM AT LEAST By Liam Graham, Portfolio Manager, NVest Securities

s we are all well aware the Rand has depreciated significantly against most currencies over the last 12mths, having lost 37% against the US$ since the beginning of 2015, reaching a precipice after â&#x20AC;&#x153;Nene-gateâ&#x20AC;? and warnings from the ratings agencies of an impending credit downgrade if we lose focus on our Fiscal prudence.

lead to a stronger ZAR. 1) Pravin Gordhan is in an extremely strong position after December debacle. Knowing the eyes of the rating agencies are firmly on him, I believe it likely that he delivers a very prudent budget speech come February. Despite weak GDP growth this will go a long way to placating the ratings agencies. NO DOWNGRADE THIS TIME 2) Another factor broadly responsible for the ZAR's sell off has been the Fed's reversal of its zero interest rate policy. Yield seeking capital has poured out of EM currencies and returned to US as investors position themselves for the Fed rate cycle and a compression in EM/US yield spreads.

The markets adjusted quickly to price in these risks. Currently the market is pricing in a South African downgrade to junk status at the next round of Credit agency meetings. The Government 10 year bond and credit default swap (CDS) spreads are trading in line with other sub-investment grade counties.

Barely one rate hike into their tightening cycle and we are already seeing signs on a stumble. The FOMC has signaled they may hike 4 times in 2016 (100bps), given global events and talk of continued easing from other central banks, markets are currently pricing in the potential for no more hikes this year from the Fed. While in South Africa the markets are currently pricing in 120bps in interest rate hikes for 2016

Yield spreads are widening again which should entice yield seeking investors to reverse capital flows and buy back into South African bonds thereby strengthening the Rand.

So what can we expect over the next 6 months that may change the direction of the Rand Currencies are never easy to predict given the inherent emotional component, but I believe several things are in South Africa's favour that will

BARRING ANY GLOBAL RECESSION, I BELIEVE WE HAVE PROBABLY SEEN THE PEAK IN USD/ZAR RATE FOR THE NEXT 6-12MTHS.

The Eastern Cape's first home-grown

STOCK BROKERAGE NVest Securities (Pty) Ltd NFB House, 42 Beach Road, Nahoon East London 5241 PO Box 8041, Nahoon 5210 Tel: (043) 735-1270, Fax: (043) 735-1337 Email: info@nvestel.co.za

www.nvestsecurities.co.za Port Elizabeth clients can call 041-582 3990 and you will be re-directed accordingly

NVest Securities is an Authorised Financial Services Provider

SENSIBLE QUESTIONS

QUESTIONS & ANSWERS ...continued from page 23

agencies. Brazil's recession is worsening, whilst Indonesia's sovereign debt has the most positive outlook in terms of an upgrade to investment grade.

Dividend yields are attractive, but the consumer and the earnings of consumer-facing companies will face severe headwinds in 2016 due to low growth, high levels of inflation and higher interest rates.

Summary: The rand is oversold and undervalued, but without significant policy change South Africa is at risk of losing its attraction as a destination for capital. Having said that, South Africa has truly world-class management teams. SA corporates are generally ungeared and our banking sector is well capitalised and should come through a possible recession fairly well.

The recent rand and bank index strength indicates that markets have started anticipating a 2016 budget which will point to a turnaround in government policy. In one budget Pravin Gordhan has to undo a lot of poor policy making hence subsequent support by cabinet is extremely important. Conversely, a failure by cabinet to visibly endorse a good budget could see a significant fall in the rand and consumer dependent shares.

At some stage commodity prices will turn and slow US growth would mean no further US interest rate hikes and a weaker US dollar.

Reference : Kokkie Kooyman â&#x20AC;&#x201C; Denker Capital

sensible finance Mar16

For 30 years, NFB have successfully guided our clients. Now let us navigate your financial future too. private wealth management

Contact one of NFBâ&#x20AC;&#x2122;s financial advisors: East London s tel no: (043) 735-2000 or e-mail: info@nfbel.co.za Port Elizabeth s tel no: (041) 582-3990 or e-mail: info@nfbpe.co.za Cape Town s tel no: (021) 202-0001 or e-mail: info@nfbct.co.za

web: www.nfbpwm.co.za NFB is an authorised Financial Services Provider