NFB FINANCIAL UPDATE Issue 79 March/April 2015
FROM THE CEO’s DESK
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rom the inside, things look a little testy in good old SA. Whilst we remain a remarkable place to be, the tailwinds of a booming China, with a global resource super cycle supporting our markets and economy, are all but over for the medium term. These have to an extent been lessened by a recovering US and a “we-can'tquite–make-up-our-minds” Eurozone which is showing signs of mild recovery, aided by the finite Euro QE announced recently. The headwinds come in various guises. These include a twin deficit, a need to borrow, a risk of further downgrades by an ever present bunch of ratings agencies (the same ones who missed the Global Meltdown), ridiculous labour law and a government intent on self-destruction, led by a shortage of power (electricity), a desperate need to hang on to power (political), a shortage of integrity, a need to govern foreign ownership of property (we call this Fixed investment, as compared to the riskier, rather flighty portfolio investment which comes and goes just as fast), and interference and mischief when
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Mike Estment CFP professional BA / CEO - NFB Financial Services Group
financial services group
embarrassed by all manner of good (read the DA's rather successful Western Cape, Power Generation from outside Eskom). Notwithstanding these rather gloomy realities, we have a new MacGyver. He is called Nhlanhla Nene. Well educated, brave and surrounded by competent folk at National Treasury and the SARB, Nene has managed to still (albeit temporarily) the ratings ferrets, proposing a budget which doesn't target any particular part of the economy and seems to be sticking to his guns and the law as well as policy. All is not lost! We have shown, against all odds and repeatedly over the last number of decades, that we are an amazing bunch. Politically, economically, even a few times on the sports fields, we have surprised the naysayers and delivered results way above our fighting weight and we will again. In this forecast, time is of the essence, and by saying time, I mean lots of it. So, MacGyver, in his maiden Budget Speech has thrown us an unexpected opportunity/lifeline. Each of us can take up to R11 million offshore annually (well there goes my bonus!). This has to be carefully considered. On average, South Africans, particularly those who are fifty and older are under-exposed to real offshore investments. Most of us, advised by an NFB advisor, have exposure “automatically” through two onshore investment themes. By simply investing in leading equities (mostly constituents of the ALSI40), one gains exposure to companies which are globally active, with costs in rands and hard currency, but earnings mainly derived in hard currency. The other way we gain exposure is through the use of Collective Investments (previously called Unit Trusts) and Endowments, where the fund manager is allowed to take up to 25% of the funds under management offshore. These investments gain exposure to genuine offshore shares, cash, bonds and a small component of property. However, unlike personal foreign allowances, these investments are broadly referred to as “asset swaps”. This now dated term still means that should the Government change their minds, they could be forcibly repatriated, giving the investor the benefit of exposure, but no certainty of this always being the case. We therefore, whilst taking up these reasonably substantial offshore positions taken by
portfolio managers, still prefer the “real thing”, being the taking up of personal foreign allowances. I personally also like to agree with my clients that these investments are strategic in nature. What I mean by this is that they need to perform in their overseas currency, rather than being a tactical bet against the short or even medium term ramblings of the Rand versus the US Dollar or Pound. Given the volatility of the Rand and its recent weakness, perhaps an appropriate approach would be to opt for a regular and ongoing take-up of this opportunity rather than a big bang approach. I clearly remember the fear and haste a few years ago when the currency collapsed to levels we are almost back to. Those same naysayers were taking every possible cent to Aussie and were packing for Perth. A while later, when the Rand had recovered to R6/US$, they weren't too sure where to next. I would encourage you to discuss this opportunity with your wealth manager at NFB. Don't look a gift horse… Finally we have been offered, and want all clients to accept, the TFSA. This Tax Free Savings Account is rather bothersome in the short term given its limits and lifetime cap. However, multiply the annual limit by the total number of folk in your family, let this go on for ten or twenty years and you will have a really attractive, top-performing piece of the portfolio. It will be tax-free inside the portfolio, tax-free on withdrawal and is definitely something we would recommend. My recommendation would be to invest as aggressively as possible, given the long term intended nature of the product. Whilst you have ready access at any time to the money, it should remain invested, growing aggressively (with the corresponding volatility) until you, or your spouse or heirs need it. It will form part of your estate one day, but hopefully you will get to enjoy some of it and spend it wisely! The offering is brand new and I have suggested to my colleagues and clients that we let the dust settle and then decide which proposition to back. They promise to offer favourably low costs and there is sure to be competition between suppliers. We look forward to helping clients and their families optimize this opportunity.
fortune favours the well advised
Keep Calm and Carry On If you reacted to what the headlines are telling you on a daily basis, then no doubt your money would be under your mattress, or worse – packed in a bag along with your passport, ready to leave the country.
age credit: 123RF Stock Photo
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f you reacted to what the headlines are telling you on a daily basis, then no doubt your money would be under your mattress, or worse – packed in a bag along with your passport, ready to leave the country. Today they are all about a sharp drop in exports, gold at a 3 month low, the R24.2 billion trade deficit reported in January (the highest we have had yet), and the Rand at a 13-year low against the US Dollar. In the last month we faced bad press surrounding the State of the Nation Address and continued load shedding as the Eskom crisis sees no end. Even when the news is good, it is usually with an underlying warning of “we can't keep this up”. And every time bad news breaks, investors become nervous and start thinking of withdrawing their money, expecting the worst. Yet the All Share Index had already climbed nearly 8% by the end of February, the growth outlook is positive compared to what we faced a year ago, and when we start comparing ourselves to the rest of the world, the grass isn't necessarily greener elsewhere. In terms of Global Competitiveness, South Africa is currently ranked 56 out of 144 countries. This is down from previous years, but still probably better than the headlines would have you believe. The areas in which we rank near the bottom are labour market efficiency and health and primary school education, which aren't new developments. We are well aware
of these obstacles and therefore they don't affect our markets too much in the short term. In the Long Term, however, they are a drag on potential growth and we have already seen the massive effect of strikes in particular on GDP figures for 2014.
Stage of development Transition 1–2
1 Factor driven
Transition 2 –3
2
3
Efficiency driven
Innovation driven
Institutions 7
Innovation
6 5
Business sophistication
4
Infrastructure Macroeconomic environment
3 2
Market size
Health and primary education
1
Higher education and training
Technological readiness Financial market development
Goods market ef ciency Labor market ef ciency
South Africa
Sub-Saharan Africa
Source: Global Competitiveness Report 2014 - 2015
That being said, we still fare better than many of our counterparts in terms of efficiency - financial market development, market size, business sophistication and innovation. We rank first out of the 144 countries assessed in terms of regulation and securities exchanges and strength of auditing and reporting standards; and in the top five in terms of protection of minority shareholders' interests, efficacy of corporate boards and financing through the local equity market. This explains some of the reasons why, even though headlines may be to the largest extent “doom and gloom”, and despite high volatility, our markets are still producing good, long term returns. So where does this leave you as the investor? The truth is that with all the conflicting information we hear on a daily basis, it is easy to become panicked. At the same time as some investors are calling to ask whether they should withdraw their funds, others are calling to ask whether they should move their money into more aggressive strategies. And all are reacting to something they have heard or an article of news that is a very small piece of the bigger picture.
“Capitec: the next Abil?” – 24 August 2014 “Capitec expects 22% rise in earnings, share price jumps” - 04 September 2014 “Platinum may be Best Bet among Precious Metals, and a Hedge against Gold, whatever happens” – 03 October 2013 “South African miners return to work after longest platinum strike” – 25 June 2014 If you had listened to those headlines, what was left of your money would no doubt be under your mattress. And yet through all of this, the All Share Index still had growth in excess of inflation for 2014.
When it comes to investing, this is where your focus should be:
Gather information so that you can make an informed decision. This is where an experienced financial advisor will guide you and assist in comparing different options and making sure you are comfortable with the plan being set in place; Pick a strategy that is suitable for you in terms of the risk involved and the time horizon, and STICK TO IT; Don't chase short term returns - remember that you are investing for the LONG TERM; Don't speculate based on what you hear in the news – that will only make you nervous and tempt you into withdrawing at the wrong time or changing your investment strategy too often. Taking action as a result of nervousness is going to have a worse effect on your investment than “waiting for the storm to pass” and the recent behaviour in our stock markets is testament to this.
It is interesting to note some of the headlines of the past year: “SA Tourism Stats Hits Record High” – 15 April 2014 “SA Tourism Feels Effect of Ebola” – 19 August 2014 “Election Result 'Credit Positive' for South Africa: Moody's” – 14 May 2014 “Moody's downgrades SA credit rating” – 06 November 2014 “Abil swings to headline loss of 240.7 cents per share”- 19 May 2014 “South African Stocks Retreat from Record High. Abil Soars” – 07 July 2014
In essence, despite what you hear in the news daily, have a plan and stick to it. Be informed, but don't let it dictate your investment decisions. A year of more volatility awaits and if you are patient and keep your focus on the end goal rather than on all the “noise” in between, you will come out on top. "Do you know what investing for the long run, but listening to market news everyday is like? It's like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill." - Alan Abelson Should you require assistance in refocusing your financial plan, please don't hesitate to contact an NFB financial advisor at any one of the NFB offices in Johannesburg, East London, Port Elizabeth, Stellenbosch or Cape Town.
Article written by: Mikayla Collins CFP® professional B.Com (Hons), PGDFP, CFA Level 1 Private Wealth Manager, NFB Finance Brokers Western Cape
Tax Free Savings Account (TFSA) Is it really for better or for worse
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very February tax payers around the country watch with bated breath as to how government expects to raise funds to ensure that our economy can withstand robust challenges from both global and local economics. Year on year we see amendments to income tax rates & rebates, capital gains tax (CGT) rates, exemptions and the customary “sin tax levies” among others. This year was no exception! From 1st March 2015, income tax brackets were stretched to max out at 41%. Tax thresholds increased, tax rebates increased at all levels and every bottle of whiskey and wine or packet of cigarettes will cost you more. However, there was some good news for investors! National Treasury announced their new Tax Free Saving Account (TFSA). The introduction of the TFSA's can be seen as the ideal opportunity to persuade South Africans to save more. This would ensure that families would have greater retirement savings available for when it is needed and could even reduce household debt in certain instances.
The basic mechanics of TFSA's are as follows:
< Who Can invest
¢ All South African taxpayers who are natural persons
¢ TFSA's can also be held in a minor's name What amount can you invest ¢ Annual contributions are limited to R30,000 per year or R2,500 per month. ¢ Lifetime contributions are limited to R500,000, however, your overall capital value may exceed R500,000 due to the investment return and capital growth over the investment period. < Constraints ¢ There is no roll-over of contributions to the following year. This means if you invest R28,000 in 2015 you may NOT invest R32,000 in 2016. ¢ Should you have over contributed to TFSA's, SARS will gladly levy a 40% penalty on this over contribution. < Taxation Benefits ¢ No income tax: this represents a saving of up to 41% on interest or rental income ¢ No capital gains tax: this represents a saving of up to 13.65% on capital gains ¢ No dividends tax: this represents a saving of 15% on dividend income ¢ No tax on withdrawal of funds < Withdrawals ¢ Investors can withdraw funds from the savings account at any time. ¢ Investors must, though, heed caution when withdrawing funds as legislation does not allow for replacement of the withdrawn funds i.e. the lifetime contribution is not a net R500,000, but a gross contribution limitation. ¢ No third party payments are allowed i.e. funds must be paid into a bank account in the name of the owner of the TSFA, even in the case of minors. < Investment Providers ¢ National Treasury have been very specific as to the types of institutions that may issue TFSA's, namely: ¨ Banks ¨ Long Term Insurers ¨ Collective Investments ¨ Government
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tax efficient products suitable to their needs, the TFSA represents a further opportunity to structure their portfolio efficiently. Furthermore, for these investors, investments into a TFSA can be made on behalf of family members. If we consider a family of 4 people, this R30,000 limitation equates to R120,000 per year, which becomes a material contribution to a tax free investment. To illustrate the power of a TFSA, refer to the simulation below which compares identical contributions to a TFSA and an endowment, based on the following assumptions: < You contribute for 16 years which is just short of the time before which you will reach your lifetime contribution limit < You keep the funds invested for a further 10 years after you stop contributing < You do not withdraw any funds < The funds are invested taking on moderate risk Product Type TFSA Endowment Annual Payment R120,000 R120,000 Number of Years you Contribute for 16 16 Assumed Annual Investment Growth 14.43% 12.73% Investment Value (End of Contribution Period) R6,355,492 R5,469,218 Number of Years Funds Remain Invested 10 10 Investment Value 10 Years Later R24,465,167 R18,126,767 By contributing R120,000 per year (in total R1,920,000), you will have created an asset worth R6.4 million in the TFSA and R5.5 million in an endowment at the end of 16 years. After a further 10 years of the funds remaining invested, the TFSA is worth R24.5 million and the endowment is worth R18.2 million. This equates to almost 13 times and 10 times your total contribution in the TSFA and endowment respectively. Notably, an endowment already enjoys tax efficiency and thus the enhancement in the TFSA would be even more dramatic when compared to a unit trust investment, where growth is taxed at the investor's marginal tax rate. In conclusion, you may be thinking: what is the fuss all about? In the UK, the equivalent ISA (Individual Savings Account) industry represents a GBP450bn industry. The largest platform provider in the UK has more than double the assets in ISA's than the largest platform in SA has in total Assets Under Management. We believe this creates an opportunity for South African investors to create significant additional investment savings. Should you require further information on this new savings opportunity, please don't hesitate to contact an NFB financial advisor at any one of the NFB offices in Johannesburg, East London, Port Elizabeth, Stellenbosch or Cape Town. Article written by:
Grant Magid CFP® professional B.Com, PDFP
So why are TFSA's so attractive?
Executive Director
For the high net worth individual, who already has a wider array of
NFB Financial Services Group
Nina Joannou B.Com (Hons) Investment Management; BSc Financial Mathematics, Special Projects NFB Financial Services Group
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