ecsponewsFinancial Services

Newsletter ▪ August 2018

Ramaphoria starts fadingPresident Cyril Ramaphosa’s election had promised to be a watershed moment for South Africa. There was euphoria and expectation that our economy would become market-oriented and that there would be a large-scale focus on job creation.

Instead, the country’s focus has shifted to the internal struggle in the ANC with an eye on the 2019 elections. As we moved into the second quarter, the so-called “Ramaphoria” began to fade as companies were unable to use the positive sentiment to create new business and consumers started to lose confidence.

This disappointment was reflected in two important business measures. The Bureau of Economic Research Consumer Confidence Index dropped four points to 22 in the second quarter from 26 in the first quarter. The SA Chamber of Commerce and Industry’s trade activity index also dropped, sitting at 37 points in June, down from 40 in May.

President Ramaphosa faces no easy task in trying to undo a decade of mismanagement and looting. The damage caused by the previous regime is astronomical, with the latest revelations being R19,6-billion in irregular spending by Eskom. It appears that every day there is another revelation and it will only be addressed properly after the election.

Service delivery protests and labour strikes are expected to increase in the second half of the year. Hermanus, for instance, has already suffered almost R40-million in damage due to protests and in some instances demonstrations have completely brought regional economies to a standstill.

As if that were not enough, political uncertainty has all but paralysed consumers and businesses that are feeling the effects of a weak rand and rising fuel prices.

There is money for growth and expansion. According to the Centre for Competition, Regulation and Economic Activities of the University of Johannesburg,

the JSE’s top 50 companies have R1.4-trillion available to spend but choose not to do so due to the ongoing economic and political uncertainty. This, despite the fact that tough times often offer the best investment opportunities.

Often organisations tend to focus too much on government and its actions instead of looking inwards and focusing on their own business’ survival and growth. This is leading to an increasing dependency on government when the focus should be on putting in the hard yards for oneself.

Obviously, perceptions and sentiment are very important but it is equally important to guard against excessive pessimism. At the end of the day, consumers determine the demand and expenditure in an economy. It is important that those in power understand this and refrain from populist and anti-business rhetoric.

Government needs to support business by creating a climate conducive to growth and doing business. While it will not be easy, it is possible to revive the economy. There are many opportunities in the country and several reasons to be positive:

Ramaphosa meets his promisesIn his State-of-the-Nation address, Ramaphposa made several commitments and an analysis shows that he has already delivered on about 70% of those promises.

Constitutional democracy is strongThe supervisory mechanisms of a constitutional democracy, such as the independence of the judicial system and media, are robust. There is public debate, like the Section 25 land reform public hearings.

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State enterprises are being spring-cleanedExecutives with Gupta-links at Eskom, SAA, SA Express, Transnet and Denel have been removed and replaced with seemingly credible businessmen who have excellent qualifications and a strong work ethic.

Pragmatism at workThe landscape is changing and we are gradually finding anew, pragmatic way of doing things as we move from afree market to a more meaningful, controlled market ofallocation.

Great opportunities in SASouth Africa has a lot to offer investors. We are one of the five fastest growing economies in Africa. SA is one of the most advanced developing countries in the world, but with the infrastructure of a typical industrial country. Our competitive financial sector, mineral wealth and scientific standards all contribute to making the country attractive.

Our history of willpowerSouth Africa has a past of “getting things done” such as the automotive industry and renewable energy sectors, which have been successfully established.

Pull up our socksAn old tale tells the story that a father once asked his son how to spell the word “money”. The boy responded by spelling m-o-n-e-y. To the son’s surprise, he received an instant reprimand from his dad, who explained that you spell money as follows: w-o-r-k. SA will do well to follow this wisdom on our journey to prosperity.

What’s up with the rand?Will the rand continue to depreciate, and should I move my money abroad as soon as possible?

The volatility and recent depreciation of the rand are causing concern for many investors. This is exacerbated by increasing signs of political instability and warnings of a shrinking economy.

Emotion gets the upper handIt is easy to yield to one’s emotions and “decide to move all available funds abroad” when faced with protesters disrupting the N3 or setting fire to towns like Delareyville and Hermanus. The decision to move money offshore than comes as a kneejerk reaction, instead of taking thoughtful action based on a sound strategy.

Rand weakens againThe rand is a volatile currency that tends to overreact to both positive and negative news. A period of excessive

escalation usually follows after each major currency contraction. For investors who acted on impulse, this then leads to regret as they realise again how unpredictable the currency is.

The rand has been particularly volatile over the past three years. In 2015 the currency weakened to almost R17.00 against the dollar during “Nenegate”. It recovered to R11.50 with the election of President Cyril Ramaphosa in February this year. The currency has since weakened to below R14.00. Without Ramaphosa, forex specialists say the rand would have been back at R17.00 today.

Investment houses have, however, observed that many investors have increased their offshore exposure because

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of other risk factors in South Africa, irrespective of the rand’s performance.

This raises the question: has the level of political and economic tolerance now been exceeded?

One of the straws breaking the camel’s back was certainly weak local returns over the past three years, coupled with South Africa’s economic growth shrinking to 2.2% in the first quarter of this year. In May, trading activity, according to the BankservAfrica’s index, also decreased by 2% - the sharpest fall since 2013.

Emerging countries vulnerableThe dollar’s strength and rising interest rates in the US mean that investors are exiting emerging market currencies, because these countries will face increasing pressure to settle their dollar-based debt.

International investors are further wary of emerging markets because of the looming trade war between America and the rest of the world, which will have a significant impact on the developing world.

In addition, emerging countries are especially exposed to the effects of US tariffs against China (the rand weakened to almost R14/$ with the tariffs announcement) because it will affect Chinese economic growth, which means exports from emerging nations to China will decline.

Global funds are performing wellThere are certain international investment funds, such as global equity funds, which have produced excellent returns over the past five years.

According to Morningstar, the top three global equity funds in South Africa have delivered between 13% and 14% per year over the past five years. The FTSE/JSE General Index showed a return of 9.16% per year over the same period.

Many investors choose to be exposed to specific sectors such as technology, which leaves Naspers as the only JSE-listed option. Global equity funds offer investors opportunities to invest in a broader range of quality international technology shares, such as Facebook, Apple, Microsoft and Amazon.

Global funds provide exposure to high-growth countries such as China and India, and the opportunity to invest in more stable economic and specialist sectors such as biotechnology.

Developing countries, like South Africa, are often heavily exposed to commodities and resources. Global funds give investors exposure to developed markets and countries, which respond differently to world events, and diversify portfolios.

Rand hedgesSwitching out of rand-based investments is not the only way to hedge your money against the volatility of the South African economy. Many investors already have indirect exposure to foreign currency hedged shares like Richemont, MTN, SABMiller and Ecsponent Limited. The latter has 30% of its assets denominated in US dollars and Euros. Many companies are listed locally but earn the lion’s share of their income from abroad.

Move for the right reasonsThe uncertain political climate is not the most compelling reason to consider foreign investments. The main motivation for moving funds should be diversification, and alignment to the investor’s needs and appetite for risk.

Foreign investments are an important part of a cleverly compiled and well diversified investment portfolio. However, it is not a magical asset class that will automatically secure wealth. Many investors end up highly disappointed with their foreign returns - especially if the exchange rate turns against them!

South Africa: info@ecsponent.com • 087 8080 100 Fintech Campus, Corner of Botterklapper & Ilanga Streets, The Willows, Pretoria, GautengSwaziland: swaziland@ecsponent.com • +268 2417 1616 • 7 The Gables, Ezulwini, SwazilandBotswana: botswana@ecsponent.com • +267 391 8756 • Unit G3, Victoria House, Plot 132 Independence Avenue, Gaborone, BotswanaAll content is for information purposes and should not be regarded as investment advice.

They can either hurt you financially or pave the way to a carefree lifestyle and comfortable retirement. The decisions that hurt are most often caused by preconceived ideas and limited knowledge, or by our tendency to repeat the mistakes from the past.

There are no fool proof road signs on the path to financial prosperity. However, with the right guidance, you can avoid obvious pitfalls by performing a risk profile analysis, followed by thorough financial planning.

A full risk profile looks at the following three aspects:1. Risk appetite - the degree of risk required to achieve

the financial objectives, given the available financial resources;

2. Risk capacity: the amount of financial risk that the investor can afford to take, and

3. Risk tolerance: the level of financial risk that the investor feels emotionally comfortable with.

Armed with this information, and by avoiding the mistakes below, you will be able to create a winning investment strategy to stay on course financially.

Some of the most important life-changing choices and mistakes are:

Medical — I’m healthy enoughYour health (and wellness) is your wealth. According to Statistics SA, only 16.9% of households were members of a medical aid in the last year. About 45 million people in South Africa do not have medical cover. While the new proposed national healthcare system will aim to provide quality medical care for everyone, the infrastructure to do this is a far cry from being adequate.

The safest strategy is to take care of yourself and to have medical cover and insurance against dreaded diseases. If medical aid cover is too expensive, you should at least consider a hospital plan with gap cover to protect you against major events like accidents or serious diseases.

Life insurance — nothing will happen to meYour death will compromise your entire family’s financial wellbeing if you have not made provision for them. This applies to both men and women.

Over the last three years, deaths among women due to cardiovascular disease have increased by 50% and one in four women will develop a heart problem before the age of sixty, according to the Heart and Stroke Foundation of SA. Make sure you have adequate life insurance so that your family, especially your children, are financially independent after your death. Pay specific

attention to their educational needs, so that your dreams for their future do not die with you.

Savings — I’m ignorant about investments Savings generate the capital needed for investments. By delaying your decisions to save and invest, you are putting your standard of living at risk. This risk is elevated if you are faced with significant life events, like being retrenched or involved in a serious accident. When investing, time, not money, is your greatest ally. Over a period of 30 years, your own money contributes about 30% to the average return, while 70% comes from compounded growth - as long as you stay invested for the period.

Diversify - my money is safe in the bankDiversification entails much more than randomly investing your money with different investment companies. It is a management technique to spread investments across diverse companies, asset classes and currencies, which will each respond differently to market developments. Diversification reduces your overall risk because, when the market is underperforming, only part of your portfolio will be affected, and some investments may actually benefit from changing market conditions.

Debt — I live for the presentThe Reserve Bank expects another five interest rate hikes in the next few years. Debt will therefore become more expensive, which could land you in a vicious cycle of using debt to rob Peter and pay Paul. Inflation is also on the increase, having risen from 3.8% in March to 4.6% in June. During the same period food inflation was at 3.1%. The petrol price is at a record level (R16.02 inland) and may rise by a further 19 cents per litre this month. As prices are rising across the board, increasing your debt exposure can become a one-way road to financial ruin.

Retirement — no need to worry about that today The average life expectancy in SA is 64.2 years according to the Statistician General. However, with good health and medical care, you are likely to live much longer than that. Do you have enough money for the increasing cost of living and medical expenses?

Risky decisions and bad advice — I’m getting rich soon!Avoid errors of judgment or choosing excessively risky investments as best you can. Lending money to friends and family comes with glaring warning signs and are best avoided. Find a registered financial adviser to formulate your investment plans and beware of falling prey to get-rich-quickly schemes around the braai fire.

Although you may land in the odd financial pothole and undoubtedly face crossroads in your life, wise decisions will continue to pay dividends for years to come.

Proceed with care –decisions that determines your wealthFinancial decisions, ranging from your children’s education to retirement planning, will determine the wellbeing of you and your family.

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