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How to grow the South African economy

Dr Francois Stofberg
Managing Director: Efficient Private Clients.

Theoretically, it is not difficult to grow an economy. But practically, it is a nightmare to execute. Although there are many ways to approach economic growth, I would like to focus on the collective ideas of improving the ease of doing business and facilitating sound money. Overall, these collective ideas can encompass most of what is needed to sustainably grow the South African economy. However, knowing what to do, or even how to do it, is not as important as knowing why you are doing it. We should have more capitalist collectivism and less bureaucratic collectivism.

Improving the ease of doing business
The ease of doing business is everything that is needed to start and to run a successful and sustainable business. It has nothing to do with the traditional idea of government support, and everything to do with guiding, gearing, and getting out of the way of entrepreneurs. Governments should only guide and gear industries that have a high multiplier, that is, those that generate wealth and, consequently, more jobs. Importantly, these industries must have export discipline, meaning that they must be able to compete internationally. Also, guiding and gearing should only be for a set period. The South African textile industry is, therefore, possibly the worst industry to support.

Why is it important to first create wealth and then to employ more people? And why is it important that businesses, and not governments, create jobs? Because businesses employ people in the most effective manner, not governments. Businesses create more out of nothing and employ out of excess. Add export discipline and businesses are forced to invest in technology and in their people in a way that enables them to compete internationally. Governments do not compete, they simply impose, and because they do not compete, they never learn the skill of wealth creation, and because they do not create, they employ out of lack. Then there is also the lack of pricing signals that is missing in the government sector which makes it almost impossible to effectively allocate scarce resources.

Practically, to improve the ease of doing business means to fix Eskom, fix our railways, get rid of employment equity policies, and pull the teeth of unions. But it also means protecting private property rights and allowing for free trade. How do you do this? By building momentum through doing small things right to build confidence that can lead to larger victories. It starts with keeping the streets clean, and it ends with an education system that can compete with the best in the world.

Facilitating sound money
Sound money is the two-fold working of healthy fiscal and monetary policy that creates an environment that is conducive to growth. In terms of fiscal policy, this means effectively spending on capital and spending less on current expenditure (salaries and grants). Capital spending includes, but is not limited to, infrastructure, education, and healthcare. Sound money also means not wasting money and being accountable for every cent that is spent. Furthermore, it means guiding and gearing industries that need the support to create the wealth that can later be distributed from the self-interest perspective of collectivism. In terms of monetary policy, it means creating a stable price environment without reducing consumer confidence.

Economic growth all starts with the correct ideology
Economic growth all starts with the correct ideology, or else you will lose yourself along the way, much like the government did during the Zuma era. Our current ideology must lean less towards bureaucratic collectivism and more towards capitalist collectivism. Because our ideology is incorrect, private property rights are not protected like they should be to incentivise and facilitate the wealth-creative process of entrepreneurship.

However, the idea of collectivism is important because government should channel the efforts of capitalists (entrepreneurs) towards those industries that generate the greatest sustainable returns, that is, those that have the highest multipliers in a way that benefits all stakeholders. Moving to a collective self-identity, like the Rainbow Nation that we had under Nelson Mandela, will come naturally as government wins back the confidence of its citizens.

20 Years On… And The Efficient Group Is Still Standing Strong

Efficiency can be defined as the ability to achieve an end goal with little to no waste, effort, or energy.

While efficiency is a key part of the Efficient Group’s inherent philosophy and the way that it goes about its business (the name says it all), this definition does not encapsulate the essence of the Group’s 20-year journey. Indeed, it has been an all-out effort from day one. Without endless energy, passion, and enthusiasm, there would be no Efficient Group today.

As much as a 20-year milestone is a cause for celebration for the Group, it is not the end. If you ask co-founders Dawie Roodt and Heiko Weidhase, or any of their ambitious colleagues, they will tell you that the Efficient Group is only just getting started:

“We continue to have a lot of fun and love what we are doing. There is also so much more to do. Helping people attain financial well-being is what it is all about for us, and we have a good understanding of the benefits that financial well-being brings to people, communities, and the country as a whole.”

At an inspiring celebration at Time Square’s SunBet Arena in Pretoria, the Group hosted an unforgettable evening of reflection, projection, and gratitude for all of the key stakeholders in attendance… the co-authors of the Group’s tremendous success story. After all, 20 years in business is no small feat and the Efficient Group had much to celebrate!

For a business that started from humble beginnings, and for a brand that faced many unexpected challenges, the celebratory champagne tasted that much sweeter.

Some of the Group’s most impressive accomplishments over the past two decades include:

  • Started with R12 million under management, which grew into a business that has more than R390 billion of assets under management, advice, administration, and consulting.
  • Started with 15 clients, which grew into being involved in the financial well-being of more than 100 000 clients.
  • Listed on the Johannesburg Stock Exchange to raise capital from the public to build the business.
  • Delisted from the Johannesburg Stock Exchange to raise capital from private equity to further build the business.
  • Built a well-known industry brand and are now focussed on building a well-known retail brand.
  • Created significant value for all of our stakeholders: Our clients, our employees, our shareholders, and the communities that the Group conducts its business in.

In recent years, the Efficient Group has continued to grow for the better. In fact, the business has grown significantly over the past three years, more than doubling in value over this period.

The decision to delist has given the Group much-needed space and freedom, and has positioned it to invest in the business, both by acquiring value-adding businesses and by investing in its existing operations. By having the freedom to think ‘long term’, the business is actively working on becoming the preferred financial services provider company for South Africans from all walks of life.

Diane Radley, Chairperson of the Efficient Group, knows better than anyone that the long-term success of the Group is being written today, every day, by leaders like Chief Executive Officer Heiko Weidhase:

“What stands out for me is Heiko’s deep love for this business. Not many companies have this type of leadership. As we celebrate the 20th birthday of the Efficient Group, we all thank Heiko for his vision, dedication, and support that he has given each one of us so generously over the last 20 years.”

While addressing key stakeholders at the Group’s celebratory event, Diane added:

“We know our people are our main asset. We do not have big machines that produce things. Our advisor workforce is the lifeblood of this organisation and the work they do in ensuring our clients are looked after and protected is central to our existence. I, personally, am a devout believer in the value of advice, and the fact that we give truly independent advice is an asset that many tied-agent networks can never claim. We should never underestimate the power of independent advice. It builds trust with your clients – the best products from the best product providers to meet the needs of our clients in the best way possible. And now at Efficient, following recent acquisitions that we have made in the risk, medical and administration space, we provide an end-to-end offering where clients can get all of their financial needs met in one place.”

With the feeling that this 20-year milestone is only the first chapter of this brand’s story, Diane shared her personal wishes for the Group’s ever-promising future:

“I would like to build a business at the Efficient Group that is representative of all of our current and future clients, transforming the industry and securing our clients’ financial futures.

I would like the Efficient Group to be the brand that everyone admires, respects, and trusts.

I would like us to have fun in doing this, utilising technology to do all the drudge work and to assist us in offering the best independent advice.

I would like us to spend more time with our clients and less time on administration.

I would like us to be a brand that is admired and respected for offering great service and investment outcomes, and delivering on our promises.

I would like us to be a one-stop shop where clients trust us with their holistic financial well-being, from retirement savings to investments and medical to risk, helping them sleep well at night and worry less about the security of their families and futures.

With information at our fingertips and continuity of information bespoke to each client, I know that we will enable every Efficient advisor to be exactly that… efficient.”

Efficient in all that it does, the Group’s name says it all. And its newly adopted positioning tells us why this brand is one to take note of. After all, a name is measured not by what it says, but by what it does… year after year, and decade after decade.

Global uncertainty and some good news for South Africans

Dr Francois Stofberg
Managing Director: Efficient Private Clients.

The global economy is heading towards an evermore uncertain place. Late in 2021, markets anticipated that central banks around the world would start to increase interest rates, and they subsequently did. Now, almost 18 months later, economies are giving mixed signals. Inflation is coming down in key regions, like North America and Europe, but not enough. Some economies, like India, are showing signs of life but others, like China, are really struggling. Yet in others, like the United States (US), one set of statistics shows a vibrant economy while others are more concerning. We do, however, see a lot of value in local equity and bond markets, and pockets of value in global equity markets, especially those companies that can play into emerging market growth without getting stuck in them.

China’s central bank left its lending benchmark rates unchanged last week even as signs of a faltering economic recovery called for more stimulus. Lowering interest rates to support the economy might, however, not be a favoured stimulus tool because it can widen inflation differentials with the US even more, leading to more short-term capital outflows. China’s economy grew at a frail pace of 0.8%, quarter-on-quarter, during the second quarter of 2023, missing analyst expectations by quite a margin. In China, local consumer and investor sentiment is very low, which is restraining demand and leading towards a worrying deflationary environment. Although lower inflation in China is welcome news for their trading partners, like South Africa (SA). The massive real estate sector has struggled to recover, while exports have plunged owing to decreasing global demand. Investors are, therefore, hoping for more supportive measures to ensure Beijing’s growth target of 5% for the year remains on track. A healthy, fast-growing China will also be welcome news for the rest of the world.

South Africans received some welcome news last week. On Wednesday, the unleaded petrol price (95) fell by 17 cents a litre, while 93 was lowered by 24 cents a litre. Over the past month, global oil prices fell slightly, mostly owing to fears about a global economic slowdown but also because large oil-producing countries decided not to cut production at their last meeting. The average rand-dollar exchange rate for the past month was R18.68/$, slightly lower than the R18.98 we had during the previous month. Oil prices seem to be settling in a range between $75 and $85, whilst the rand, at levels below R18.00/$, is showing signs of strength. What this means is that we might even have more petrol price cuts in the upcoming months.

Lower petrol prices are not the end of the good news. With a 3-2 majority vote, the South African Reserve Bank (SARB) kept interest rates unchanged on Thursday. The repo rate thus remains at 8.25%, with the prime rate at 11.75%. Our hardliner governor was, however, quick to add that this does not mean that interest rates have peaked. Fortunately for weary South African consumers, inflation seems to have peaked albeit on quarterly and annual rates. Since the 7.8% high that we saw in July 2022, consumer prices have been on a steady decline, falling from 6.8% in April 2023, to 6.3% in May, before reaching 5.4% in June, nicely within the SARB’s target range of 3% to 6%. Unfortunately, the US Federal Reserve will, most likely, hike interest rates by 0.25% this week, and maybe once more this year. Considering this, the SARB will, most likely, feel obligated to increase rates too, even though there is little evidence to support their conviction that higher interest rates in SA can attract short-term capital towards SA in this environment. If conditions were different, their plan might have worked but not in the current uncertain global environment.

Private healthcare cover – Partner with the professionals

When it comes to the private healthcare cover, the financial sector can be confusing, and you may need guidance through this complex maze. At Efficient Wealth, we understand that your wealth cannot be separated from your health; your physical well-being plays an integral part in your financial welfare. While you might be financially secure and physically fit, prevention is still better than cure.

Unfortunately, we also know that healthcare is not always placed as a priority in many people’s financial portfolios. However, neglecting to address decent medical aid, hospital plans, or dreaded disease cover for you and your family could lead to financial ruin if you are forced to pay from your cash reserves.

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Cash Deposit Management and Different Types of Cash-Management Services

Regardless of your investment horizon, investment goals, and risk profile, it is always advisable to have a liquid cash deposit management strategy. It is a wise choice to budget for a space in your investment portfolio for liquidity and physical cash that is available at short notice, or within a specifically acceptable time frame to adjust to your ever-changing needs and circumstances.

With effective cash deposit management, you can earn interest against cash that is otherwise lying dormant in a standard savings account. The returns on this cash will vary significantly over different time frames and depending on where the money is invested. Our skilled professionals at Efficient Wealth place emphasis on this to ensure that the liquid funds invested on your behalf achieve optimal returns.

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Why estate planning is so important

The crux of Estate planning is protecting your family and loved ones. Sadly, it seems like many people devote more time to planning a vacation, which is most likely a sign of the level of discomfort they feel around the subject.

Deciding who will inherit your assets after you are gone is usually a difficult topic to broach, but it is one of the most important life decisions you can make. Without estate planning, you cannot select who receives your belongings and assets that you have spent your whole life accumulating.

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Information overload is limiting investment returns

Dr. Francois Stofberg

Managing Director: Efficient Private Clients, With Specialist Input From Christiaan Van Wyk

 

Since the arrival of the internet, talks about the “information age” and its many benefits have taken place continuously. Benefits such as cheap, or even free, access to large volumes of information. But the discussion rarely progresses to the potential negative impacts that might arise from too much information. We believe that the benefits of access to information are real, clear, and well-documented, however, as with anything in life, too much of a good thing is generally bad. Not only has the volume and accessibility of information increased but also its frequency, so much so that real-time data has almost become the norm. This creates a unique problem when the goal is to achieve a long-term target. People, in general, have grown accustomed to speed and efficiency, and get frustrated at the mere thought of having to wait, especially if the immediate environment seems uncertain. This picture is the polar opposite of investing.

 

Investing, especially in equity markets, requires a long-term mindset, with very little attention being given to the noise surrounding you in the short term. Warren Buffett said it perfectly: “If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes”. This is generally the approach that most investment managers take when selecting assets to include in their portfolios, and it increases the probability of achieving optimal performance over the long term. Unfortunately, investors are not always as patient, and often impair their investment performance by making short-term decisions based on emotion, or as we will elaborate further, information overload. The average retail investor receives performance reports at least quarterly, with investment fact sheets piling into their inboxes monthly. Then we are not even talking about the myriad of competing investment managers force-feeding their marketing material via e-mails, social media, phone calls, and even airport terminals. No wonder the average investor feels overwhelmed by the investment question and second-guesses their decisions at every corner!

 

Investment managers are also being forced to adapt to the “information age”, not only in terms of the changing investment landscape but also from a client management perspective. Owing to the frequency with which investors can access investment information, and the vast amounts of alternatives being marketed to them, investment managers are being pressured to make shorter-term investment decisions, limiting their long-term return potential. An example of this problem is the performance differential between retail investments and alternative investments, such as private equity funds. One of the key differences is the investment period. A typical lockup period (the time in which investors cannot withdraw funds) for a private equity fund is at least five to seven years, with infrequent investment information throughout the period. This creates an environment wherein the investment manager can make long-term investment decisions without the pressure of clients withdrawing funds in the short term, which increases the probability of achieving favourable long-term investment performance.

 

As with most real-world problems, the solutions are, unfortunately, not simple. One approach that can address some of these issues is the bucket approach to financial planning. This approach involves creating different buckets or pockets of investments, each addressing a different investment need with its own investment horizon. This affords the client the much-needed comfort that their unique needs are being addressed, it simplifies how they look at their total investment portfolio, and it increases their chances of sticking to a long-term financial plan. For long-term financial success, we recommend trusting your investment manager, maintaining a long-term mindset, and avoiding getting distracted by short-term noise.

Do not miss the shift towards emerging markets

Dr Francois Stofberg
Managing Director: Efficient Private Clients.

The strong June jobs report in the United States (US) is likely to leave the Federal Reserve (Fed) on course to raise interest rates to a 22-year high during their next meeting to cool off the economy and to combat inflation. Employers in the US added 209 000 jobs in June, causing the unemployment rate to fall from 3.7% in May to 3.6% in June. This is ever closer to the 53-year low of 3.4%. June’s increase was the smallest since December 2020 and is one of the indicators pointing towards a slowdown in the world’s largest economy. However, a tight labour market means average hourly earnings for private-sector workers rose 4.4% since 2022, maintaining the pace set over the last few months. Because hours worked also increased, the overall income in the US also rose in June. Persistently-higher incomes mean spending should remain elevated and add upward pressure to inflation. As the outlook for above-target inflation and a stronger-than-expected labour market persists, more restrictive monetary policy will be needed for a longer period. Consequently, many emerging markets and their currencies took a bit of a beating.

In South Africa (SA), the local equity market contracted 2.4% when the news broke, and the rand depreciated more than 2% to levels above R19.10 against the US dollar. Tighter monetary policy in the US will likely translate into more interest rate hikes in SA too. The South African Reserve Bank (SARB) has unequivocally shown that their primary concern is inflation and that they care very little for consumers or the broader economy. Although, with today’s data, we doubt that the SARB will need to raise interest rates by more than an additional 0.5% in 2023.

As the US Fed is likely to continue to increase interest rates, fears about a global economic slowdown have heightened. This, in turn, brought about some price alleviation in the energy market where oil prices fell despite this year’s supply cuts from the Organisation of the Petroleum Exporting Countries and Russia (OPEC+). Overall, production efficiencies and larger production outputs from countries outside of OPEC+, especially the US, together with weaker-than-expected demand in China, meant that oil prices have fallen more than 13% over the last year, despite OPEC+ cutting output by more than 6%.

Our base case also includes an eventual slowdown in the US but we do not believe that this will translate into a deep global economic crash. Rich-world countries, like the US, have been driven, to a large extent, by extremely loose monetary policy and generous fiscal policy, which have now dried up. This contrasts with emerging economies and their capital markets that have been under severe strain for multiple years, scraping by, fighting for every cent, and forced into structural change. We believe that global investors have not yet effectively priced in the expected slowdown in the US or the hard work that has gone into many emerging markets. When these realities sink in, and investor sentiment shifts to chase the real-world lucrative yields of emerging markets, an upward correction is much more likely in emerging markets. Unfortunately, like all good things, shifts like these do not materialise overnight. We will probably have to wait another 12 to 18 months, at least.

The active versus passive debate

Dr Francois Stofberg
Managing Director: Efficient Private Clients, With Specialist Input From Christiaan Van Wyk

The active versus passive investment strategies debate has been raging for many years, with both sides trying to make the case for their own strategy at the expense of the other. Without pre-empting our own beliefs on this matter, we will start with the words of John C Maxwell: “A great idea is simply the combination of many good ideas”.

Before one can start the conversation about active versus passive investment strategies, one must first look at the key characteristics of both. A passively-managed investment strategy is one where the investment manager pools large sums of investor money to buy assets in accordance with the constituents and weightings of a chosen index. The manager will, therefore, make no active decisions regarding which benchmark assets to include in or exclude from the portfolio, nor will the manager change the benchmark weighting assigned to the given asset. In contrast, an active investment manager will decide which benchmark assets to include in the portfolio and will, typically, deviate from the benchmark weightings. An active manager will further, typically, hold fewer assets than the benchmark, making the portfolio more concentrated than the comparable passive portfolio. In doing so, it affords the active manager the opportunity to outperform the benchmark.

Both active and passive investments have strengths and weaknesses. For example, passive strategies are usually cheaper than actively-managed portfolios but are limited to the benchmark they track, whereas active managers have the flexibility to invest in the specific assets that are expected to deliver index-beating returns. Tax is another topic of debate: Passive investors argue that the buy-and-hold strategy gives them the upper hand via pre-tax compounding returns, whereas active managers can manage taxes for the investor – offsetting taxes on gains in a year where the investor has realised other losses.

The decision of whether to use active or passive investment strategies usually comes down to investor preference. But could a “great” investment solution not simply be a combination of two “good” investment strategies? We believe that there is a place for both active and passive investments, and instead of choosing a single strategy, one can combine these two strategies to create a solution that will benefit the individual client. As an example, the investment manager can allocate a portion of a client’s portfolio to a passive investment, which will give the client beta/index returns, then use the remainder of the portfolio to make active decisions and only allocate capital to high-conviction ideas. The result is a cost-effective portfolio that can achieve alpha/excess returns over time; this strategy is commonly referred to as a “core-satellite approach” to portfolio construction.

The core-satellite example is but one of many ways that investment managers can utilise both active and passive investment strategies to build and to optimise investment solutions. In closing, we believe that it is, therefore, fruitless to debate which investment strategy is superior: In the end, it all comes down to the needs of the client and the skill of the investment manager to utilise all of the tools at their disposal.
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The Fed halts and the rand strengthens

Dr Francois Stofberg
Managing Director: Efficient Private Clients.

At their latest Monetary Policy Committee meeting, the United States (US) Federal Reserve (Fed) decided to leave interest rates unchanged at 5% to 5.25%, following 10 consecutive hikes over a 15-month period. But the Fed remains unwavering in its commitment to bringing inflation down to its 2% target. Jerome Powell, the Chairman of the Fed, therefore, made the comment that more hikes may be needed later this year. According to dot-plot projections, two more hikes may still be on the table in 2023. Investors anticipate a 61.5% chance that the Fed will hike rates during their July meeting.

The Fed deemed it appropriate to moderate the pace of increases, albeit only slightly, and we agree with this. Powell explained that the brief halt in the increasing cycle will allow the Fed to assess more data, which they are hoping will assist them in making better decisions going forward. But a halt also allows the economy a little more time to adapt to the tightening environment. Now that rates are at, or very close to, what most believe are restrictive levels, the Fed’s job becomes increasingly difficult. If they do not do enough, inflation might spiral out of control again. But if they do too much, as they tend to do, then the US may experience that hard landing that many thought possible not too long ago.

The US economy and capital markets find themselves in a peculiar place. Up until now, they have been able to shrug off the monetary policy tightening cycle. Corporations keep on expanding and printing favourable earnings reports, unemployment keeps decreasing, and even the housing market seems to be bottoming out. This is because interest rates only impact the real economy at least a year or so after they are increased. Markets try to anticipate what could happen but they mostly get it wrong, as we believe they are currently doing in the US. Wall Street is betting that US markets will continue to outperform but Main Street is starting to think otherwise, as signs of a slowdown and cracks are starting to appear. The annual pace of US inflation eased last month to its lowest level in more than two years. Prices increased 4% in May compared with a year earlier, a significant step down from 4.9% in April, and a remarkable slowdown from the peak of 9.1% last June.

Overall, we believe that the US consumer, who has been insulated from pain, will experience a lot more of it in the short term (12 to 18 months). In the US, earnings will correct, markets will adjust, and more people will be laid off, which will assist in moving sentiment away from developed markets towards emerging markets. It is, however, worthwhile to note that this does not mean that all developed markets will underperform; we still see and invest in pockets of opportunity. But this is good news for South Africa’s capital markets. The rand has already responded positively, strengthening to R18.19 levels, down from the R19.88 high that we were at only two weeks ago. Soon, short-term capital will look elsewhere for yield and the emerging markets will be all too ready to receive it.