NFB FINANCIAL UPDATE Volume48 February 2010
FROM THE CEO’s DESK
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s the new decade begins, I believe it an appropriate time to reflect on a few things. Firstly, NFB turns 25 years old in April. Many things have happened in this interesting period of time, and many significant corporates have come and gone. I am terribly proud of the continued existence and growth that our business enjoys. We at NFB recognise the role that clients, institutions, the media and the staff of NFB in Johannesburg, East London and Port Elizabeth have played in our success. If one considers the dramatic changes in financial markets and the many institutions, once household brands, such as Trust Bank, Fedsure, Arthur Anderson, Saambou, Santambank to name a few, who are no longer in existence, some the victim of poor trading, others merged and absorbed, NFB can hold its head up high. We remain one of the country's premier investment advisory businesses, but enjoy a healthy respect for the need to remain relevant to the needs of a discerning client base. The next decade will, I believe, deliver some great opportunities, but equally, as many threats. The world will probably change for good and hopefully also for the good! The major developing economies will play a significant role in the prosperity of the world and the way we approach these markets will play an important role in achieving reasonable returns on investments. Interest rates are also likely to track lower inflationary trends, although this will need careful scrutiny as the systemic monetary and fiscal easing that has characterized the world over the last two years, will come back to bite. Carefully managing this will prove the mettle of central bankers, and Mr. Bernanke's skill displayed in orchestrating the “match saving” bailout, will again be tested, when it becomes necessary to tighten the screws on economies in variously fragile recoveries. Accepting that the above is true, we need to navigate our clients, ranging from those in retirement and dependant on income from investment, to the more aggressive savers, and the wealthy individuals and institutional clients, through the current markets, fraught with conflicting opinions, and a blend of fear of a recurrence of recent losses. Diversification has long been a popular adage at NFB. Some would argue that this reflects a lack of conviction. Others readily accept this strategy as
sensible and appropriate. We see no reason to deviate from this approach, whether the investment need be as aggressive as direct equities, or more moderate, where a balance between equity, property, bonds and cash is required, or even for investors set on remaining in cash. In all cases, diversification will probably not (and technically cannot) deliver the top return. However, on a risk-adjusted basis, it makes sense. As one drops down the risk / return spectrum, diversification remains important, changing, however, from the need to blend different shares from the same asset class to blending asset classes. Even in the most cautious portfolios, where cash is king, diversifying by placing funds into different banks, lowers risk. Lastly, these rules of thumb apply equally to local and offshore portfolios. Currently the rand is well placed, firstly as a “developing economy currency”, enjoying a resumption of investor interest from abroad. We are also a resourcebased economy, benefiting from a secondary effect of global fiscal easing, i.e. low cost of borrowing internationally. This will be temporary, and when it reverses, might, as typifies the South African rand, be rather dramatic. Taking advantage of this seasonal strength and using one's foreign allowance is another form of diversification. On a lighter note, one of the world's best investments last year was the Zimbabwean currency. Apparently, the 100 trillion Zimbabwe dollar note, once worth a fraction of a cent, is the largest bank note ever printed. These are now changing hands at the Victoria Falls Hotel and market where collectors are prepared to pay up to R300.00, an amazing premium for a banknote with no intrinsic value. Makes you think, doesn't it? During the coming months, we will be doing a few special things in celebrating our 25th Anniversary. I hope you will join us in celebrating this important event and thank you for your kind patronage. I also look forward, on behalf of our staff and management in the various divisions of NFB, to continuing to provide the excellent advice and service I trust you already receive from us. All the best for 2010.
Mike Estment, CEO
IN THIS ISSUE From The Ceo’s Desk What If The Carry Trade Rebounded? Retirement Annuities. Where Are Yours Invested?
financial services group
WHAT IF THE CARRY TRADE REBOUNDED? The rivalry between the dollar and the world became very clear last year creating an exciting and very rewarding environment for currency traders the world over. The question for 2010 is: is there more space to profit from the carry trade? By Marc Schroeder, Financial Advisor - NFB East London.
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009 was a schizophrenic year: out of the ashes of economic Armageddon global markets surged and surged, surpassing all forecasts to close the year at unexpected, and arguably,
unrealistic levels; the dollar shed 15% against the major currencies supporting the S&P500 to it's best year since 2003. It is of popular economic opinion that the dollar carry trade was the major contributor to the extreme outperformance of emerging markets in 2009; soaring emerging indices and a plummeting dollar were constant themes last year. The dollar, not the usual carry trade currency, was traded in vast volumes. The
rivalry between the dollar and the world became very clear last year creating an exciting and very rewarding environment for currency traders the world over. The question for 2010 is: is there more space to profit from the carry trade? In trying to address this concern I am going to review popular economic theory attempting to predict the dollar's path and what different movements would mean for the global community, particularly commodity based emerging markets. Judging by it's excessive mood swings, one can be forgiven for mistaking the dollar for an African currency over the past year. Taking a quick review of the dollar throughout this recent global credit crisis, bad news starting oozing out from the US housing market back in 2007. What followed was the bursting of the real estate bubble in the US and subsequently the sub-prime and the global credit crisis. When it became apparent that governments across the globe were in danger of defaulting, panic spread through the global economy like news of free braai packs at a Zuma rally; asset classes world wide were under threat, there was,
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however, one perceived safe haven: the US government. Liquidity
flowed across the seas and pushed the high water mark to
exciting to speculators and traders who revel in the volatility
unprecedented and worrying levels; the short term result was violent
associated with the opening and closing of any major cycle.
dollar strength as investors were prepared to settle for a negative
The second scenario, and less popular at this stage of the
real return in exchange for a safeguard against further capital
game, is that the US recovery is real, and that the economy is ready
obliteration. The states were aflush with foreign flows at the height of
to walk itself to the bathroom without any more assistance. What
risk aversion; that round definitely being awarded to the dollar as
this means is that the US government will exit from it's exorbitant
the global currencies suffered heavy blows, our rand touching 10.6
corporate rescue scheme sooner rather than later. A turning off of
to the dollar, the euro and pound trading at respective discounts of
the tap by government should immediately put upward pressure on
1.2 and 1.4 - this was as recent as March 2009. It was the perfect
inflation; less liquidity will mean a thirstier and more competitive
opportunity for investors to diversify their offshore portfolios away
corporate environment. What the US have enjoyed in 2009 is a
from dollars. At the time, the US economy was still reeling from the
weaker currency, something the Eurozone and Japanese have
sub-prime crisis, with many financial institutions closing down, some
been extremely envious of. A result of the US carry trade has seen
being bailed out by government to the tune of hundreds of billions
the Euro and Yen, amongst other hard currencies, strengthen to
of dollars, diluting the strength of the dollar. Like a glass of Oros with
uncompetitive levels; reading the press gives one the strong
too much ice, the flavor started to tire. After some time, investors
impression that these are the economies who will be leaving rates
realized that the world was not going to explode and that a
lower for longer and who are less perturbed about inflation over the
negative real yield was not Ayoba, especially while sipping
medium to longer term. So, should the US be in fact well on the road
increasingly tepid Oros. With losses to recoup, the hunt for yield
to recovery, a likely sequence of events could easily include a
began and the stage was set for what is commonly referred to as
readjustment to the outlook on inflation, a series of interest rate
“the carry trade”.
hikes, treasury bill yield increments and a reversal of the carry trade.
The carry trade is one of the simplest strategies in forex, and if executed correctly, can also be one of the most profitable.
It took me a while to get to this point, but the crux of this article is to discuss the implications of a reversal of the carry trade. One of the greatest risks that a carry trade faces is a change to the interest
The basic mechanics of a carry trade involve borrowing in one currency that offers a low interest rate, and selling it in favor of a higher-yielding currency, in order to capture the interest rate spread.
rate environment of the lending currency's economy. In 2008, Yen carry traders got burnt as the currency strengthened by 60% in two months against its major target currency, the Australian dollar. It is estimated that the dollar carry trade is around 600 billion US dollars; the flow of which has, and will, continue to have serious implications for global currencies and indices, especially more sensitive emerging economies. Stock markets with substantial foreign interest, such as the JSE, got hammered towards the end of 2008 and early 2009 at the height of risk aversion, along with their respective currencies. This scenario could unfold again with greater force due to the
The most popular carry trade has historically been the yen, the
significantly higher levels of liquidity in the system. Quoted from the
real yield offered on Japanese treasuries being negative for many
most recent Allan Gray Stable Fund fact sheet, “We once again
years. Most recently the dollar has become the popular currency
believe it prudent for the fund to carry a fairly low exposure to the
to fund the carry trade thanks to close-to-zero interest rates and the
equity market as investors need no reminding that call deposit
popular opinion that the dollar will continue to weaken against the
returns can be very attractive in the event of a bear market.” Allan
global currencies.
Gray have hedged the entire equity position of their Stable Fund in
There are two scenarios that can play out here according to
anticipation of a reversal of the carry trade and subsequent sell off
popular current debate. Firstly, and most popularly, the dollar is
of our market by international players, who have around a 30%
going to continue on it's weakening trend. This argument is based
interest in the index; 2009 witnessed a record inflow of 72 billion rand
on the belief that the recovery we started witnessing in early 2009 is
from abroad. Should the carry trade reverse, commodity intensive
not real and a mere consequence of bail out packages and
emerging markets are the likely candidates to suffer most, as
stimulus that shocked the US into motion. Pundits argue that the bail
commodity prices should fall along with margins for profit amongst
out packages won't be enough to sustain the growth required to
large cap miners; in South Africa, our large cap miners account for
revive the US economy long enough for normal and consistent
nearly half of the JSE. I'm sure no one has forgotten how quickly
earnings growth to improve. The result will see policy makers
Anglos sold off from R550 to R130 in just 6 months last year.
endorsing further bail out packages, increasing debt and staving off
In these volatile times the best advice is to follow a diversified
fiscal development for a longer period of time in the US; inflation will
approach to asset allocation and, as importantly, currency
not be a concern, interest rates will be kept lower for longer lending
allocation. For more information on how to diversify risk within your
the currency to further carry trade. Should this scenario play out, we
portfolio please contact NFB.
are likely to see emerging market currencies continue to strengthen and commodity prices continue to rally. The environment will prove
RETIREMENT ANNUITIES WHERE ARE YOURS INVESTED? Everyone would like to live the retirement they've always dreamed of, and the underlying funds that you choose in your RA will ultimately dictate how well your money will grow for you in order to realize this dream Written by Stuart Coates, Financial Advisor - NFB Port Elizabeth.
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ost working individuals have retirement savings in
attract no estate duty on the death of the investor which is also an
some form or another, very often in a retirement
added bonus.
annuity (commonly referred to as an “RA”). There are two common questions that we get asked with most
When an investor wishes to start an RA investment or is approached by a financial advisor, a large proportion of investors
investments, firstly ,”How do I go about this?”, and “Where do I go to
get lumped into so called “default funds”, invested according to
get my investment started?”. As advisors, we can easily help you to
your calculated risk profile. It is vitally important that you, with the
facilitate investments, but our job is more to ensure that you are
assistance of your advisor, choose the correct mix of funds. The
both positioned in an investment that suits your personal needs and
funds that you choose ultimately dictate how well your money will
that the underlying investment funds or equities invested into, are
grow for you until your retirement!
suitable for you. What worries me though, is that when asked, not
To illustrate this point clearly, an actuary from a big asset
many people actually know where their hard earned retirement
management company recently went through some very
money is currently being invested or where it should be invested. A
interesting retirement statistics with us, one of which being that 68%
recent survey showed that only 4.5% of respondents actually knew
of the total value of your money at retirement should have been
where their retirement money was invested!
attributed to the growth of the underlying funds! That means that you should have only contributed 32% of the total value of the
At this point, maybe I should peddle back a bit and tell you a bit
money invested! This is of course assuming a reasonable investment
more about RA's.
time period in order to have allowed your retirement investment the opportunity to grow, as well as that some risk was taken on during the life of the investment.
RA's are investment vehicles, where your monthly or yearly contributions are invested, with the intention of growing steadily, until you decide to retire (from 55 onward). The structure of the RA
Your money should work as hard for you, as you worked for it!
allows you the freedom to invest in a portfolio of funds, or even shares, of your choice which can be changed at any time as your
In conclusion, it is very important that you have control over where
risk profile changes as you near retirement. The structure allows for
your retirement money resides so that when you do eventually
zero income tax and capital gains tax (CGT) levied against your
reach your retirement, you have travelled the distance with your
name, and also provides for part of your contributions to be tax
investment and are happy with the fruits it has produced. This will
deductible. This is, of course, until you decide to retire (when a
allow you to live the retirement that you always dreamed of!
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portion of any lump sum taken may be subject to income tax) and you start to draw income from your investment through a living
If you would like to discuss your retirement investments further,
annuity structure (where-after your income is subject to income tax).
please feel free to contact me on 041 582 3990 or speak to your
RA's now, do not fall into the estate of individuals and will thus
existing NFB Financial Advisor.
A licensed Financial Services Provider - Licence nos. 25962, 16216 & 16300
Contact us: Johannesburg Office: NFB House 108 Albertyn Avenue Wierda Valley 2192, P O Box 32462 Braamfontein 2017, Tel: (011) 895-8000 Fax: (011) 784-8831 East London Office: NFB House 42 Beach Road Nahoon East London 5241, P O Box 8132 Nahoon 5210, Tel: (043) 735-2000 Fax: (043) 735-2001 Port Elizabeth Office: 110 Park Drive Central Port Elizabeth 6001, P O Box 12018 Centrahil 6001, Tel: (041) 582-3990 Fax: (041) 586-0053 E-mail: nfb@nfb.co.za
Web: www.nfb.co.za