NFB Proficio Newsletter Issue 80

NFB FINANCIAL UPDATE Issue 80 May/June 2015

FROM THE CEO’s DESK

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have a particularly soft spot for Nepal.

Having spent three weeks in that beautiful country a few years ago, enjoying the privilege of a few hours at the Base Camp of Mount Everest, whilst spending three weeks getting there and back left me in love with the place and the people, and inspired me to do more climbing. I was further privileged to be led by one of South Africa's premier climbers and adventurers in Sean Wisedale.

Listening to reports of the incredible damage and loss of life suffered in the last few weeks in this mountainous kingdom, leaves me seriously doubting the moral fibre of the world at large. The place lacks gold, oil, tactical borders and any form or exploitable resource and therefore, unlike Haiti, Japan and other countries, which have suffered natural disasters, the world seems largely to be ignoring the plight of these people in their moment of need. But I guess this is the way humans behave. It is not too

®

Mike Estment CFP professional BA / CEO - NFB Financial Services Group

financial services group

dissimilar to driving a new car. Once you own it, you suddenly become aware of the same car every time one drives by.

The same might be said of investments and our financial lives.

Behaviour is a big subject in investments and more importantly our individual and family financial plan. NFB has recently celebrated its 30th Anniversary together with several clients, professional networks and other institutions which have shared, and I believe, contributed significantly to our success and sustainability. Like a good marriage, this has been a story of give and take and understanding the longterm story. A good plan radically increases the probability of a good outcome, not only because it takes careful aim at long-term needs, but also probably, more materially, it allows the players to weather any storms encountered along the way. Poor planning makes for knee-jerk risk, where short term volatility, political events, market volatility and the like cause overreaction and inevitably, loss.

More often than not, South African investors are inclined to think short term.

This is easily rationalized given the remarkable levels of uncertainty which characterize our lives. Ranging from empowerment and its impact on our children's career prospects, Eskom and its negative impact, both on the national psyche and economy, crime and violence, an enormously volatile rand, and many more. However, take a look at markets, interest rates, listed property investments and these are all at record highs. The problem is having been doubtful over the last few years whilst these growth assets have performed, whilst we have sat on the sidelines and heard others regaling stories of successes, leaving the investor between a rock and a hard place, facing the risk of deploying cash into growth investments at the peak of a cycle!

A possible solution lies in planning.

Ensuring income is available irrespective of market conditions might make sense, allowing you to invest the balance of your portfolio into growth assets, both locally and abroad, safe in the knowledge that several years'

income can be derived from “safer” investments. Here, tax efficiency is critical, as both taxes inside the investments as well as in the hands of the investor make a big difference. The smarter the tax planning, the less demanding the return needed to provide you with suitable, inflationadjusted income.

The key point here is to logically, and with professional help, split the portfolio up, achieving a few critical outcomes.

Firstly, to provide tax efficient income should this be needed. Secondly, to balance the risk of not beating inflation with the market risk (volatility) associated with growth oriented investments, and your tolerance of this. Next would be local vs. global. So often we hear folk being negative on foreign investment “because back in 2001 we took Rands out and lost our socks”. Another oftenimportant issue is planning for inheritance and the substantial effect of taxes and Duty at death. These and other issues particular to your circumstance need to be integrated into a robust plan, capable of being changed, but only as a result of unplanned events.

So what has all this have to do with Nepal and Sean Wisedale, you might ask.

Well I wonder if the fact that his expedition, led to Everest this Spring, has just returned - unharmed physically - is pure luck, or if the planning, professionalism and calmness when under pressure has had a positive effect.

I'd hazard that the latter has a bearing.

I've witnessed his skill in climbing, managing altitude for beginners, and sending paying customers down mountains when at risk. I've also heard of his team's selfless support in parting with food, medical supplies and days of their lives at Base Camp during the recent catastrophe.

In my opinion, it pays to surround yourself with qualified and experienced professionals. I'd like to believe NFB is one in the area of investment management, long term planning and provision of valuable and sustainable service.

Thank you all for your individual contribution to our Group's success.

fortune favours the well advised

THE RAND AND OFFSHORE DIVERSIFICATION Besides the topics of load shedding and xenophobia, one of the popular debates that keeps coming up around the braai is, 'where is the Rand heading' and 'how much offshore exposure is appropriate'?

age credit: 123RF Stock Photo

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esides the topics of load shedding and xenophobia, one of the popular debates that keeps coming up around the braai is, 'where is the Rand heading' and 'how much offshore exposure is appropriate'? It seems that everyone has a differing viewpoint, but below I have outlined the fundamentals that point to a weakening Rand and the continued need to increase offshore exposure.

As a result of the 2008 financial crisis, the US were left in a situation where they had to buy back bonds over three rounds of Quantitative Easing, in an attempt to lower interest rates and pump liquidity back into their economy. South Africa and many other emerging markets followed suit by lowering interest rates, in order to stimulate economic growth and remain competitive, as they competed for foreign direct investment flows. Many of these countries have been using these flows ever since, to service twin deficits (current account and trade deficits). Here we sit, approximately six years later, with quantitative easing a distant memory and the US economy beginning to 'crawl' again. However, for emerging markets, the threat of the US starting to raise interest rates again is slowly becoming a reality.

The April US non-farm payroll data came out this week and they were marginally less impressive than

they were expected to be. The market was expecting 230 000 jobs to have been created in the US in April, but the actual figure ended up at 223 000 jobs. Although this is still impressive and has translated into the US unemployment rate decreasing to 5.4%, it was, however, a signal to the global economy that interest rates are going to take slightly longer than expected to start rising, with most predicting that this rate normalisation by the US Federal Reserve will only begin in September or even later in the year.

Many of the emerging markets in the global economy have benefited from the abnormally low interest rates in the US and other developed nations, with investors having a larger than usual bias of investing in emerging market bonds, as opposed to developed market bonds, in a global search for yield. As a result, foreign ownership in many emerging bond markets has recently reached record highs. This was the case in South Africa, but Inward Foreign Direct Investment (FDI) came to R62 billion last year, which was lower than the R80.1 billion in 2013. This was mainly attributable to geopolitical risks, which have not gone under the radar of major Ratings agencies.

With interest rates set to rise and the real return that one can get from a developed market set to

become relatively more attractive in the US and With this in mind, it is important to have a look at even Europe, as opposed to emerging markets one's investment strategy each year and to consider (especially on a risk adjusted basis), investors have whether the amount of offshore exposure in your largely already begun their move away from portfolio is still appropriate. The slogan of 'yesterday's investing in emerging markets. winners are often tomorrowslosers' comes to mind and financial advisors should be educating their On the topic of developing versus developed clients about the increasing importance of offshore market investments, African growth has historically diversification in their portfolios. been driven by resources, which have been negatively affected by lower commodity prices, As from the recent Budget Speech, a taxpayer strikes and negative sentiment in Syria, Iraq and can now invest up to R10 million in his/her name Nigeria. The perceptions of foreign investors has also outside of South Africa per calendar year (this been hampered by negative publicity resulting from amount used to be R4 million), but will have to issues such as lower than expected economic obtain a tax clearance certificate. In addition to this, growth, xenophobia, Eskom power cuts and the up to R1 million can be transferred abroad without ratings downgrades by Standard & Poors mentioned the requirement of having to obtain a tax clearance above. The consensus is that most certificate. This forms part of the single companies and investors plan to return discretionary allowance facility. to their pre-financial crisis levels of However, if one is going to be The slogan Foreign Direct Investment by next doing some overseas travel, the year. The US has taken top spot funds needed for this should be of 'yesterday's in the FDI Confidence Index, kept aside and not invested as winners are often followed by China and the a part of the single tomorrows losers' comes UK, and South Africa has discretionary allowance (i.e. to mind and financial actually dropped out of the If R200 000 is going to be advisors should be top 25. needed to purchase educating their clients offshore currency as part of This means that South about the increasing one's travels, only R800 000 Africa is no longer going to be importance of offshore should be invested). able to rely on the solution of diversification in foreign direct investment to With the US economy almost service its current account and back on its feet and waiting for their portfolios. trade deficits, as the Foreign Direct the opportune time to pounce and Investment that has been assisting in start the interest rate normalisation this regard has not been based on process, the convenient foreign flows that fundamentals, but on economic interference by have been making their way into South Africa's bond Federal and Central Banks. market are under threat. As a result, the Twin deficit that South Africa has been trying to juggle will come The Rand has already depreciated by into focus and the Rand is looking to be on a slippery approximately 16.33% against the US Dollar over the slope, as the scepticism of the Ratings Agencies past 12 months and the fundamentals suggest that it seems to be adding fuel to the fire. If all of these may be under further pressure in the next few years, factors are considered as a whole, it is prudent to as a result of the drying up of the foreign flows have a material amount of offshore exposure in discussed above. Investors often forget to take this one's portfolio. currency effect into account when working out how their investments have performed. An investment For advice on how much of your funds should be that has been invested directly offshore in US Dollars taken abroad, please speak to an NFB Private over the past 12 months and has only yielded a Wealth Manager at any one of the NFB offices in return of 4% in Dollars has actually returned just over Johannesburg, East London, Port Elizabeth, 20% in Rands. This kind of a return would take some Stellenbosch or Cape Town. beating in the local investment space!

It is also important to realise that although the JSE All Share Index has been one of the best performing stock markets in the world over the past few years, it is currently sitting on a Price-Earnings ratio of approximately 18. The historical PE ratio on the JSE All-Share Index is approximately 14. This indicates Article written by: that our local bourse is overpriced, even though this ratio is skewed by a concentrated few companies Bryce Wild with large market caps, it is clear that there is more B.Com (Hons), PGDFP value in offshore equities than local equities at the Private Wealth Manager, NFB East London moment from a valuation perspective.

INCOME PROTECTION

INSURANCE COVER

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n the jigsaw puzzle of comprehensive financial planning is the need for income protection. This is particularly true for those who are self employed or professional people and also applicable for those employed, but who do not enjoy the benefits of an employment benefit scheme. For these groups of people income protection is an important consideration in their overall financial plan.

What is income protection?

As the name suggests it is insurance that replaces the income lost through your inability to work due to injury or sickness. It is comprised of two parts: sickness and permanent incapacity cover, the latter being of critical importance due to its long term nature.

One needs only to think of the surgeon who has spent over ten years qualifying, first to become a doctor, then specializing in her chosen field. Then through no fault of her own she is involved in a motor accident - all too common on South African roads.

The accident results in the loss of the use of her hands and she is unable to practice surgery. This is a tragedy to society, the surgeon and her family.

Therefore, when considering income protection it is recognized that one of our greatest financial assets is our ability to earn an income. Consequently, this ability should be insured against either through an employee benefit scheme or through an income protection policy, crafted to best suit your particular needs. By “crafted” we mean deciding on the amount – for instance, should this be your gross income plus business expenses? There are choices to be made from a variety of products in the market place as there are certain providers who specialize in certain market segments such as the professional market; and then there are also decisions to be made regarding the most suitable waiting period with respect to a sickness benefit.

deductible, and the benefit was taxable.

The Minister of Finance has now pronounced that, effective 1st March 2015, all premiums, both to sickness and permanent incapacity cover, are no longer tax deductible, but that all the benefits claimed are received tax free.

Consequently - Are you over-insured with regards to permanent incapacity cover?

In the past because a permanent incapacity claim was taxable the client was often advised to take cover equal to their gross income and in certain circumstances also to cover for their business expenses.

These clients who have covered their full gross income will now find themselves at least 30% over insured and therefore paying an unnecessarily high premium for this cover. In the event of a claim the insurance company is unable to pay you more than your after tax income, even if you had additional cover in place. This follows the principle that one is unable to gain a claim benefit for an amount greater than the value of the asset - in this case one's income.

While income protection is not relevant to all clients it does beg the question even to those who are employed. Do you know the benefits you are paying for through your employee benefit or income protection plan? Are these sufficient to protect a vital financial asset, that is - your ability to earn an income?

Should you require any further information on income protection, please do not hesitate to contact an NFB financial advisor at any one of the NFB offices in Johannesburg, East London, Port Elizabeth, Stellenbosch or Cape Town.

Change in Tax Legislation Those clients who have income protection policies already in place are advised to speak to their respective Wealth Managers about the consequences of the change in tax legislation, announced by the Minister of Finance, in the recent National Budget.

In the past, there was this confusing aspect that premiums for sickness protection were taxable, but the benefit was received tax free. But for permanent incapacity protection the premium was tax

Article written by: Paul Jennings CFP

® professional SF Fin (Australia) B.Com (Hons), PDFP Private Wealth Manager, NFB Gauteng

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