Latest News

Life Assurance I Life Cover

Is Life Assurance Still Seen As a “Grudge Purchase?”

Before the COVID-19 pandemic, the question of whether life assurance was a ‘grudge purchase’ or not was often debated. Following COVID-19, the argument is becoming more heated both for and against these products and services.

During this tragic time, living in the age of the ‘new normal’ has made many people aware that it is sometimes difficult to adjust to and recover from losses, both emotionally and financially, and that life can take unexpected turns at any time. Even after a few years of adapting to COVID-19, the reality for some South Africans remains falling seriously ill for lengthy periods, having loved ones pass away prematurely, losing jobs, or having to close businesses.

Read more

Wealth Management I Financial Services

What You Need to Know About Wealth Management

Wealth management can be a complex topic, but understanding the basics equips you to make informed decisions about your financial future. It is a comprehensive service that helps individuals and families achieve their financial goals. It encompasses a wide range of services, including financial planning, investment management, tax planning, and estate planning. Wealth managers work with their clients to develop a personalised plan that takes their individual circumstances and goals into account.

Read more

Financial Consultants I Personalised Financial Advice

The Impact a Financial Consultant can have on your Personal Finances

Financial consultants assist you to develop a financial plan that meets your individual goals, identifies and manages risk, and helps you to make informed investment decisions. These professionals can have a significant impact on your personal finances – electing to work with one can improve your financial well-being and help you achieve your financial goals, needs, and wants more easily.

In this article, our financial professionals at Efficient Wealth will explore the insights that financial consultants can bring to the table and how they can guide you out of the red and into a successful financial future.

Read more

Why diversification matters

Dr. Francois Stofberg: Senior Economist at Efficient Wealth and the Managing Director of Efficient Private Clients, with specialist input from Christiaan van Zyl.

Nobel Prize winner Harry Markowitz famously said that diversification is the only free lunch in investing. In simple terms, this means that you can quite easily keep your expected level of return constant, or even increase your expected return, without taking on additional risk. Diversification is one of the most important principles in investing: It involves spreading your money across a variety of assets or even across asset classes.

Diversifying your investment portfolio holds many benefits but perhaps the most prominent one is reducing overall portfolio risk. No single investment is risk-free, and even the most stable investments can experience losses from time to time. It is, therefore, sensible to include various assets that are uncorrelated, which, in essence, means that the prices of the assets move independently over time. If one investment loses money, the other investments may achieve gains, offsetting some of the losses and thereby lowering the overall portfolio risk. Over time, all of the portfolio investments are expected to achieve an acceptable level of return but the uncorrelated nature of the individual assets helps to reduce the short-term volatility of the portfolio and, therefore, lowers the total portfolio risk.

A practical example of differentiating between assets within a specific asset class is to combine a healthcare stock and a mining stock in a portfolio. As the economic cycle evolves, the mining stock may experience impressive returns as the prices of resources tend to increase when an economy expands, while the healthcare stock may experience relatively muted gains. But, as we reach the end of the economic cycle, resource prices may start to decline, which is generally bad news for mining stocks, while the healthcare stock becomes more attractive as spending on healthcare tends to be unaffected by the economic cycle. Another alternative is to diversify a portfolio by investing in various asset classes. Asset classes are broad categories of investments, such as stocks, bonds, real estate and cash, or alternatives such as hedge funds and private equity, among others. Each asset class has its own unique risk and return characteristics, and are generally uncorrelated with one another. By investing in different asset classes, an investor can reduce their overall portfolio risk.

Taking it a step further, investors can also diversify their exposure across various investment managers. Active investment managers tend to follow distinct strategies, constructing portfolios based on individual asset valuations, expected earnings growth, secular themes, or macro-economic expectations. As can be expected, and already confirmed by many studies, these different investment strategies generate returns that are, on average, uncorrelated with one another. This creates an opportunity for investors to diversify some portfolio risk without necessarily lowering their return expectations. Fortunately for investors, investment experts at Efficient can assist investors who do not feel comfortable constructing their own investment portfolios. A financial advisor can help you to assess your risk tolerance, develop an investment plan, and choose appropriate diversified investments for your portfolio so that you can achieve your long-term financial goals.

Main Street vs. Wall Street: The strange relationship between stock markets and economies

Dr. Francois Stofberg: Senior Economist at Efficient Wealth and the Managing Director of Efficient Private Clients, with specialist input from Renier van Zyl

American stockbroker, Peter Schiff, delivered a timeless reminder: “The stock market is not the economy, and the economy is not the stock market”. What Schiff was trying to say is that the stock market, often referred to as Wall Street, is not always an accurate reflection of what occurs on Main Street, that is, the real economy. Schiff’s statement has never rung truer than in the ever-fluctuating landscape of today’s financial world.

The United States (US) economy grew at a 4.9% annual rate in the third quarter, marking a steep acceleration from the second quarter’s 2.1% growth rate. Nearly every component of the gross domestic product contributed positively to what was the strongest growth quarter since late 2021. This growth reminded us just how strong the economy remained throughout September; even as financial conditions tightened further. The data even placed a future recession into question, given the size of the economic surge.

One might assume that this economic surge would be mirrored in the stock market but that is where the disparity emerges. Big Tech, which had played a significant role in propelling the market’s positive performance since the beginning of the year, collectively suffered a decline of more than a tenth of its value since 31 July. This decline was more pronounced than that of the other sectors comprising the S&P 500, which was down by approximately 10% from its summer peak. A contributing factor was the recent uptick in bond yields, as higher long-dated bond yields curtailed the present value of future profits.

However, the stock market is not just influenced by immediate circumstances: It is known for its forward-looking nature, often gazing at least 6 to 12 months into the future. Meta’s recent earnings guidance served as a testament to this. While the company’s sales and earnings exceeded estimates, it also voiced concerns about a potential slowdown in advertising spending. This expectation was not unexpected, given that brands might start trimming marketing budgets owing to the pressure on consumers because of inflation and higher interest rates.

Consumer spending will exert immense influence over the health of the stock market going forward. Until now, earnings reports from companies have been praising the financial might of the American consumer. The looming spectres of high inflation and rising interest rates are, however, already showing up in consumer data. A sizeable portion of spend is not discretionary anymore; rather it is a necessity for many households, driven by the need to keep up rather than to indulge in luxury. This predicament is glaringly evident in the personal savings rate, which plummeted in the third quarter to 3.8%, down from 5.2% in the second quarter, and a far cry from the pandemic-induced peak of 32%.

An increase in economic headwinds in the US should see a period of slower growth and reduced inflation in the coming quarters. Consequently, the US Federal Reserve (Fed) may find itself contemplating a pause, or even a cut, in interest rates in 2024. Investors are already pricing in a more than 98% chance that the Fed will keep the federal funds rate steady at the next meeting.

In the aftermath of recent market corrections and the forward-looking nature of the stock market, a wealth of high-quality global companies are now undervalued, patiently waiting for astute, long-term investors to recognise their potential. This serves as a testament to the enduring truth that, while the stock market and the economy are intertwined, their trajectories can diverge significantly, creating opportunities for investors.

Financial crises and emerging markets

Shortly after the turn of the century, following the Asian financial crisis in 1997-1998 and the dot-com bubble burst in 2000-2002, investor sentiment swung increasingly in favour of emerging markets. China was the main driving force, growing at an average rate of about 10% annually between 1990 and 2000, and almost reaching an 11% annual growth rate between 2001 and 2007-2008. But other emerging economies, like India, also played an important role. Overall, between 2000 and 2007-2008, emerging countries were supported by strong economic activity, globalisation and trade liberalisation, commodity booms, financial market reforms, low interest rates, and a demographic dividend, which caused investors to pour capital into their markets. In 2008, with the start of the global financial crisis, everything changed, and the rich world experienced almost 12 years of unprecedented growth, returns, and positive sentiment.

After the mentioned crises, investors were scared and pulled their liquid assets from the risky havens of emerging markets, which not only weighed on emerging market currencies but also on their capital markets. At the same time, the rich (developed) countries started the largest monetary stimulus that the world had ever seen, something emerging countries were not able to do. Not only that, but most of the rich world governments stepped in with fiscal stimulus too, which was also not something emerging markets could do. The result was that investor sentiment swung increasingly in favour of the developed world, and their capital markets and currencies enjoyed unparalleled inflows and returns. Of all the developed countries no one was favoured more than the United States. Not only did they own the global reserve currency but they also had the most sought-after listed companies (technology companies that had free cash flow and needed almost no physical assets), and their risk- and inflation-adjusted bond returns were often the highest in the world.

In 2020, ripe for another global recession which could have shifted sentiment back to emerging countries, COVID-19 intervened. Once again, it was the rich world with almost unlimited supplies of monetary and fiscal support that came out on top. Put differently, rich countries have been keeping their markets alive for longer. But also artificially inflated for almost 15 years. All the while governments in many emerging countries, who cannot print unlimited amounts of money and artificially inflate their markets, have been fighting to enforce structural reforms. Companies in these poor countries have been persistently producing profits without seeing it reflected in their valuations. Investors were simply unwilling to invest in emerging markets whilst enjoying artificially inflated returns in the developed markets that were perceived to be less risky. In this context, it is easier to understand why we have not seen the rand appreciate or the Johannesburg Stock Exchange take flight as it did decades before the 2007-2008 global financial crisis.

But even before the global financial crisis, this swing in sentiment between the emerging world and the rich world has occurred many times over and will continue to do so in the future. It is, however, worthwhile to consider that the length of the cycles might have changed. For this reason, we still maintain that as the rich world is weaned from its stimulants, the rich world will slow down and returns will normalise. In the end, and it can be another five to ten years, sentiment will be forced towards the riskier havens of emerging markets. This, in turn, will result in a substantial appreciation of emerging market currencies and unprecedented returns on their capital markets; the annual double-digit returns we last had before the 2007-2008 global financial crisis.

Balance and restraint: Let the game flow

Why adding hedge funds to your portfolio makes sense

Eben Louw: Naviga Solutions, Portfolio Manager.

Over the last 15 years amidst market volatility, the average local balanced fund has achieved the commonly used CPI+5% benchmark only 42% of the time over a three-year investment horizon. Consequently, investors have increasingly turned their attention to alternative investments and return sources, especially in the wake of recent bond market volatility and the uncertain outlook for equities. Hedge funds are an attractive entry point to alternative assets given their increased regulation, liquidity, and transparency. Other alternatives, however, often have little information on underlying instruments, lock-up periods, and high minimum investments. Adding hedge fund exposure to portfolios offers investors a lower correlation with traditional portfolios, diversification benefits, and a means of minimising volatility.

While the average drawdown (peak to trough move) of the FTSE/JSE All Share Index was more than -11% during the past five years, the typical local long-short equity hedge fund limited this drawdown to -4.8%. Fixed-income and market-neutral strategies limited this drawdown even further (to approximately -0.9% and -0.6% respectively). While limiting the downside, these strategies can still participate significantly in market rallies. Over the past 10 years, the typical local long-short equity hedge fund has outperformed traditional local equity funds 71% of the time over a three-year investment horizon.

Hedge funds, like traditional unit trusts, can invest in a wide variety of assets but also make use of additional tools such as leverage, derivatives, and short positions, which gives them the potential to profit from market downturns. Hedge funds can follow different strategies and risk levels that deliver significantly varying performances. Among the most common long-short equity funds available locally, the one-year difference between the best and worst performer can average up to 30%. Therefore, as with any investment, thorough research and due diligence remain crucial.

What to do when things get a lot worse in South Africa

How short-sightedness hurts your investments in the long term

Dr. Francois Stofberg: Senior Economist at Efficient Wealth and the Managing Director of Efficient Private Clients, with specialist input from Renier van Zyl.

Taking a hiatus from checking your investment portfolio for a month can be akin to stepping back from the canvas of daily market fluctuations. It is a deliberate act of patience, allowing the market’s ebb and flow to paint its own picture before returning to assess the masterpiece.

In the intricate tapestry of financial markets, September often paints a canvas of uncertainty and volatility. Historically, September has proven to be the worst month for equity market returns. In fact, it has been the worst-performing month, on average, going back nearly a century. It is a period when investors are reminded of the unpredictable nature of the financial landscape. Market participants refer to this phenomenon as the “September Effect”. It is a calendar-based market anomaly in the sense that it occurs without any real causal link or event, challenging the efficient markets hypothesis.

Challenging the established order is crucial, especially when the downturn is more pronounced than usual, as is the case this year. There are several reasons for this: The looming threat of a United States (US) government shutdown is causing market uncertainty. This potential shutdown is owing to a sharp ideological division between House Republicans that could lead to a halt in federal agency funding by 30 September. The shutdown will continue to loom unless Congress agrees on all 12 appropriation bills in time for the new fiscal year beginning on 01 October.

In August, Fitch Ratings downgraded the US owing to precarious debt ceiling disputes between the Democrats and the Republicans. This downgrade highlights the fragility of US fiscal policymaking compared with its AAA-rated counterparts. Another government shutdown would only exacerbate this vulnerability.

Additionally, the US is already walking a financial tightrope with the nation’s debt now exceeding $31.1 trillion. It is a complex interplay of economic necessity, political debates, and global repercussions, all influencing the US’ fiscal future. In the last week alone, the US managed to add a staggering $100 billion of additional debt (this is more than a quarter of South Africa’s annual gross domestic product (GDP)). Persistently high interest rates will lead to the US refinancing its debt at increasingly costly levels, potentially surpassing $1 trillion in annual borrowing costs before the end of 2023. Without a debt limit, there is little incentive for fiscal restraint. If the situation continues to deteriorate, it could result in another downgrade of the country’s debt rating.

Then there is the consumer: The US economy will stay utterly dependent on the consumer to steer it to a place of relative safety; investors are, therefore, constantly monitoring the health of the US consumer. Intriguingly, the latest downward revision of second-quarter GDP consumption figures paints a challenging picture. As a result of the revision, quarter-on-quarter GDP growth plummeted from an annualised rate of 1.7% to 0.8%, the lowest rate since the onset of the COVID-19 pandemic. Personal consumption, constituting more than 68% of nominal US GDP, faces mounting pressures owing to tightened lending conditions, student loan repayments, and dwindling savings. Even Bloomberg reports that most Americans, excluding the wealthiest 20%, now have less cash on hand than when the pandemic began. Expiring support programmes are also adding to the strain.

In this environment, patient, methodical financial planning becomes evermore important. Planning of this kind helps investors steer away from being short-sighted and running after deceptive returns. Usually, these short-sighted investment decisions are fuelled by emotions rather than by logic, and this does not play out well in the long term. Independent, holistic financial advice allows investors to step back from the canvas of short-term market fluctuations (read emotions) and make the most of long-term opportunities by buying the right companies at the right prices. In the current environment, the right company is resilient, with a strong balance sheet and products that are in high demand. With patient, methodical financial planning, uncertainty and volatility eventually fade away, and all that remains is peace of mind.