NFB FINANCIAL UPDATE Issue67 April2013
FROM THE CEO’s DESK
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Mike Estment BA, CFPÂŽ CEO - NFB Financial Services Group
IN THIS ISSUE Front Page: From the CEO’s desk Center Page: Budget 2013/2014 Boring? Back Page: Rewards programs are you making the most of them?
financial services group
he recent weakness shown by our currency warrants a little attention. Much has been written about the exceptional relative strength of the rand over the last decade which, when added to the strength of local equity and property investments, has had commentators gushing about this tip of Africa's superb performance when compared to those dastardly developed, big braggarts such as the USA and Europe. They are correct, but I hasten to add, every dog has its day! I have said in recent publications of this editorial that without crystal ball gazing, my view is that the elastic band was stretching a little too far for my liking and a correction was (and still is) due. In my opinion, this is taking place and to some extent has already happened. In simple English, the world's investors have been starved of returns in cash in their home bases. Like some other faraway places, SA has offered good yields on our bonds and even cash. The trick always is the volatility of the rand. As long as it behaves, typically because of such issues as government policy, balance of payments, muted inflation, etc... , um, well-mannered and predictable labour and industrial relations, all is well. Should these, or any combination of them, go out of kilter, those fickle foreigners, having enjoyed the so called "carry trade" run away. In so doing, they do two things: firstly, they exit our bonds or shares; secondly, they sell the rand to buy something "safer". What this is, I don't know, but run they do. Depending on whether this is a localized SA event or alternatively, a global emerging market event, will determine the impact. The former might be over in a jiff, the latter might have seismic impact. What this means, is the weakening of the rand, and possibly the rapid increase of interest rates to help soften this. It would also bedevil the government's efforts to finance the deficit they need to fill as announced in the budget and in terms of the medium to long term strategic plans of the state. This is important - ask any self-respecting central bank governor. The issue is the current and sustained low cost of borrowing which enables treasuries around the world to issue debt (read bonds) and enjoy sub-inflationary interest rates. Should this reverse we start a slow spiral into trouble, where the interest bills swallows more and more of the revenue the economy and taxes generates for the government. Interestingly, SA is not over-borrowed in international markets. There has been sustained appetite for our bonds. This represents a double edged sword. It has been attractive for us to issue debt and we have taken advantage, but the danger is the reversal of this trend, just when our Treasury is getting ready to finance the government's spend. We are also witnessing the negative effects of the rand's weakness and the unprecedented and ridiculous wage settlements negotiated in the recent past; both in the mining sector and in the general economy. Our wage bill relative to productivity is shocking and this will have an impact in the form of added inflationary pressure in time to come.
So where does this leave us as investors? Notably, when analyzing the makeup of local unit trust portfolios, one notes that all of the portfolios we support are heeding these trends and are all pretty fully invested; in some cases even slightly over the limits allowed. We also think that taking advantage of the now generous annual foreign allowance we are entitled to is smart. What we do with these funds once overseas is dependent on one's appetite for risk. Importantly, if time is on your side and income or even access to funds isn't required, a quality portfolio of top global shares (preferably with higher dividends) or a well managed balanced portfolio, is bound to have a positive impact. Cash should be avoided given that interest rates are negative in real terms. Property overseas is also attractive. The probability, given the unprecedented worldwide issuance of money, is a resurgence of inflation in years ahead. This inclines us to promote, whenever possible, growth assets in portfolios. Property in a commercial sense has not returned to favour with legacies of the meltdown of 2007/8 still clear in the memories of investors and borrowers alike. It requires a cautious approach, but is certainly enjoying a lot of attention and research at NFB, given the positive cash flows and longer term capital growth these investments enjoy. Once again, we like a multi management approach where we entitle either our Asset Management team, or top managers the right to switch monies between asset classes.
Either way, the key message is trying, where possible and where monetary and risk budgets permit the luxury, to allow your wealth manager the mandate to create inflation beating returns, both locally and, importantly right now, globally. The risk of loss is ever-present when investing in growth assets. This risk is diminished by time on the block. The risk of running into troubled water is unavoidable where riskier growth assets are avoided, for fear of short-term losses being incurred. This statement does not promote wholesale commitment to risk. It does, however, strongly promote detailed engagement with your wealth manager to review your needs, understand risk, inflation, and to adapt portfolios if necessary. In conclusion, recent developments in the retirement savings space has created a very effective and flexible opportunity in the space of Estate Planning. Your NFB wealth manager is aware of these developments. I would promote this being discussed as Estate Duty and associated costs are very significant and can often be moderated.
fortune favours the well advised