During 2022, market sentiment was negatively impacted by events such as the war in the Ukraine, Covid, higher inflation and interest rates. Global equities fell by 15% year to date ending May 2022. SA asset classes were more resilient due to higher commodity prices. Although growth assets such as equity and property underperformed during 2022, these asset classes are required to outperform money market funds over the long term as illustrated in the table below.
Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients
Even after increasing interest rates by 0.75%, the United States (US) Federal Reserve (Fed) still believes that it is possible for the central bank to achieve a soft landing in which they can tame inflation without pushing the economy into a recession. Consumers, however, seem to disagree, and this is in line with economic data showing the worst reading of consumer confidence since the 1970s. From the comments made by the Fed Chairman, Jerome Powell, it seems that the Fed believes that a successful policy outcome would be if unemployment increases from 3.6% to 4.1% while inflation returns to 2% over the next two years. Even though investors had not seen such a rapid increase in US interest rates since 1994, they reacted positively to the news, mostly because it shows that the Fed is serious about fighting inflation. Theoretically, lower inflation is necessary in developed economies to have a healthy labour market in terms of real wage gains.
The Fed also signalled that more interest rate increases would be needed in 2022. Last week’s 0.75% increase brought the short-term borrowing costs to a target range between 1.50% and 1.75%. The median Fed policymaker expects further increases up to roughly 3.4% by the end of the year. That would suggest another 1.75% in total rate hikes, spread across the remaining four scheduled Fed meetings in 2022. In March, experts believed that it would only be necessary to increase rates to 1.9%. But since then, the Fed has increased their inflation forecast for 2022 from 4.3% to 5.2% and decreased their economic growth forecasts from 2.8% to 1.7%.
Overall, the S&P 500, a stock market index that tracks the performance of 500 large US-listed companies, has seen its second-worst year-to-date performance in its history. Only during the Great Depression of the 1930s has this index seen a larger contraction, 39.2%, compared to this year’s 21.6% contraction. Riskier asset classes, like cryptocurrencies, have seen even greater contractions. Since its high in November 2021, around $69 000, the price of Bitcoin has contracted by almost 70%. Overall, the market capitalisation of the cryptocurrency market has fallen from around $2.97 trillion, down to $900 billion. Cryptocurrencies were hit hard this week after US crypto lender, Celsius, froze withdrawals and transfers between accounts. Fears are mounting around the potential for a wider fall out in digital asset markets, which were already shaken by the demise of the TerraUSD and Luna tokens last month.
But what does all this uncertainty mean for investors? Is this the time to panic-sell and put all of your money into cash? Definitely not! Markets reward investors for their time, thus trying to time the markets can cause a lot more harm for investors. The reality is that we are all exposed to market volatility, in some way or another. The best we can do is to plan accordingly, something your financial advisor can assist you with, and to stick the course. As an example, if you are retired, a silo approach will protect your investments because you do not have to sell out of your equity positions. You can continue to draw an income and wait for markets to set new all-time highs. If you are not retired yet, market corrections like these provide a unique buying opportunity where investors can acquire assets at substantially reduced prices. Investors should, therefore, rather attempt to acquire more assets now.
Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients
The rand has remained resilient, albeit volatile, as negative global drivers continue to clash against many positive local drivers. At one point, the rand touched R15.18 last week, before poor performing global indicators caused the rand to depreciate back to levels around R15.90. But, excluding the rumours that President Ramaphosa might have to step down, the multitude of positive local factors caused the rand to close last week off at R15.36. On a side note, we still believe that long-term investors who want to get into global markets should take their money offshore at levels below R15.50.
Globally, the European Central Bank (ECB) announced that they would start to increase interest rates for the first time since 2011. Following the guidance provided by the ECB, July should see rates in the European Union (EU) increase by 0.25%, from the current rate of -0.50% to -0.25%. If inflation does not slow down sufficiently, the markets expect the ECB to follow this initial increase up with a 0.50% increase in September. How the ECB will use quantitative tightening to reduce their balance sheet and to attempt to keep the yield curve from inverting, remains to be seen. Unlike the United States (US) Federal Reserve (Fed), if the ECB makes changes, 19 countries are directly impacted and, unfortunately, these countries are on different ends of the spectrum of what is considered a healthy economy. On the one end, Germany seems able to stomach increases with a smile but, on the other end, Italy and Greece might already be fearing recessions.
In other disheartening global news, the Organization for Economic Co-operation and Development (OECD), an intergovernmental agency positioned to stimulate economic progress and world trade, sharply reduced their global growth forecasts for 2022, and almost doubled their inflation forecast. The OECD now believes that the global economy will only grow by 3.0% during 2022, down from their 4.5% forecast in December 2021. Inflation, they believe, will, on average, increase around 9% among their member states this year. The World Bank reduced their global growth forecast to 2.9%, even though China continues to support their economy’s growth. More good news from China was their regulatory approval of dozens of new video games. Markets are hopeful that it might signal the end of the long-running and painful crackdown on the sector, which has even set rules about how many hours children are allowed to play video games in China. The good news from China was, however, quickly snuffed out by record-high inflation in the US. Many were hoping that US inflation peaked at 8.5% in March and were surprised when government authorities announced that inflation accelerated beyond expectations to 8.6% in May. We should, therefore, see the Fed increase interest rates by 0.5% during their June and July meetings, while markets remain under a tremendous amount of pressure. If these increases can cool the economy off enough, we might see the Fed relent, a bit. If not, the Fed will continue to increase interest rates by 0.5%.
In South Africa (SA), however, and unlike the trend that we have seen over the last couple of years, good news economic stories have been rolling in: The gross domestic product (GDP) came in higher than experts expected. During the first quarter of 2022, the South African economy grew by 1.9%, measured against the previous quarter, which only grew by 1.2%. By implication, the size of the economy, now roughly R4.62 billion in real terms, is finally higher than it was pre-pandemic. In our view, the South African economy should grow by about 1.6% in 2022, as lower local and global demand take their toll. Quite surprising was the 3.6% increase in gross fixed capital formation (GFCF), which has been lagging for many years and is crucial for long-term sustainable wealth creation. Higher GFCF numbers mean that there are more long-term investments being made in SA, which points towards a positive shift in economic sentiment. More good news is that, during the first quarter of 2022, the surplus on the current account of the balance of payments widened to 2.2% of the GDP, R143 billion, from R132 billion in the fourth quarter of 2021. The current account measures SA’s transactions with the rest of the world, and a surplus means that more money flowed into the country than out of it. More money flowing into SA supports our financial account and increases the demand for rands, which helps to keep the rand strong.
Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients
It has been almost three decades since the African National Congress (ANC) came into power. Our job, as economists, is to interpret the economic results of their actions, or, in this case, the lack thereof. To do this, we try to determine how the decisions of the ruling party, in aggregate, impact on the economy and, by implication, on the livelihoods of South Africans.
But first, let us look at some context: During the ANC’s time in power there have been two main policy directions. We started with many liberal, free-market policies that favoured economic development over social development; although we did not spend nearly enough on capital and labour policies never favoured economic development. These policies were most prominent between 1994 and 2008. During this time, the budget deficit, measured as a percentage of the gross domestic product (GDP), was reduced from about 4% to 0.7%. Consequently, South Africa’s (SA’s) debt, measured as a percentage of the GDP, reached an almost all-time low of around 26%. By the way, it was also during this time when Eskom ranked among the best-run utilities in the world! And then, a dramatic shift occurred in 2009 when President Zuma was appointed, until 2018 when President Ramaphosa took over the reins. Something had been brewing underneath the surface of liberal, free-market policies that favoured social development over economic development.
Redistributive policies were less concerned with increasing production, that is income, in the economy than they were with redistributing hard-earned income. It started with labour policies when the ANC came into power. Redistributive labour policies include those that made it near impossible to hire and fire, broad-based black economic empowerment, cadre deployment, and minimum wages, among others. But the nature of redistribution over creation was then extended throughout the entire economy. Most notably, we saw how the number of grants paid to individuals grew from a few million to almost 17 million. Now, we have almost 20 million people living off grants but only 15 million people working. The civil servant wage bill also grew exponentially. The result was that the annual budget deficit grew from 0.7% to 6%, and debt to GDP ballooned to highs around 52% (as at 2018), a complete collapse of prudent fiscal policy. All of this might have been palatable if there was still sufficient capital expenditure and if spending was effective. But government’s dissaving (a variable that we create by adding the budget deficit to government’s spending on capital), that is, the amount of capital they destroy each year, reached a new all-time low of roughly -1% of the GDP. So, instead of investing in capital to grow the economy in the long-term, they were net-destroyers of capital; no wonder capital-intensive institutions like Eskom, Transnet, Denel, and South African Airways failed miserably.
But there was another important contributing factor: The remarkable deterioration in the quality of leadership in government, on all levels. Amid unaccountable politicians (not only in the ranks of the ANC), corruption also ballooned and important performance measures were never reached. A lack of accountability was also seen in the large number of executive orders that we had, very little of which were ever effectively implemented. One of the results of the deterioration in effective, accountable leadership is that spending, especially spending on productivity-enhancing items, was grossly ineffective. This is one of the main reasons our public healthcare and education systems are among the worst in the world. For this reason, trying to argue that more distribution would benefit SA is an absolute fallacy.
How you interpret the facts may differ, but there is one variable that does not lie, a variable that transcends opinion. The unemployment rate is probably one of the best variables to show, in aggregate, how the decisions and actions of the ruling party impacted the economy and, by implication, the livelihoods of South Africans. And with almost three decades of data, the picture is very clear. The ruling party has failed miserably, and their economic legacy is in shambles. When the ANC came into power, unemployment was 20% and has since increased to around 35%. If the ruling party was simply able to keep unemployment at 20%, there would have been 6.5 million more jobs today. That means that South Africans would have had R515 billion more income today; roughly R8 550 more for each South African. Put differently, the economy would have been at least 11% bigger. So, how do you get there? By returning to policies that favour economic development, especially labour policies. By spending more on capital. By making it easier to do business in SA. By spending more effectively on education and healthcare. And how do you do all that? Through accountable, effective leadership.
Dawie Roodt
Chief economist and director: Efficient Group
Elevated levels of inflation and higher interest rates recently spooked the financial markets while the world watched with bated breath as Russia invaded Ukraine. These are two of the many factors that are currently affecting the global economy and markets.
Investors who want to successfully navigate the global investment waters need experts on their side. My recent travels to Moscow and Sochi confirmed this: investors need the leaders in global investing to help them make sense of current world events. Our first-hand experience and knowledge of the world stage distinguish us in this regard.
Here are some of my impressions and thoughts from Russia:
There is no sign of a war anywhere! There were no soldiers, tanks, or any other signs of the military. Some preparations were made on the Red Square for the World War II Victory Day celebrations of 9 May, but not much else.
The economy seems to be pumping, at least in Moscow and Sochi.
Everybody I spoke to told me business is good; all the supermarkets are fully stocked with a variety of goodies that we can only dream of. As is the case in the rest of the world, people are complaining about rising prices. The ruble (RUB) came back strongly after taking a dive just after the invasion of Ukraine in late February, when interest rates were raised sharply. Subsequently, though, interest rates were cut again, and the RUB is now trading at levels stronger than before the invasion.
The effects of the sanctions against Russia will take some time to filter through to the economy – I estimate that the Russian economy can contract by nearly 10% this year, but it’s far from being in freefall. I spoke to many Russians who are very confident that they will be able to weather any economic sanctions by the West because there are ways and means to get around them. Russia’s immense commodity wealth can also be used as a weapon to defend its economy.
“Do ordinary Russians support the war?” is a question I have been asked many times.
I don’t think this is the right question. Before I explain, remember that there are many moving parts to this conflict, as is the case with any disagreement. I think the questions we should be asking are:
The average Russian adores their military forces and will support them wherever they are. The only reason why this war is dragging out so long is that “the Russian troops are disciplined and are showing restraint. If they wanted to, they could have taken over Ukraine long ago. Nothing can stand in the way of the Russian army.” So say most Russians…
But does the average Russian support the invasion of Ukraine? That depends. I would say most Russians support the idea that Donbas and Krim (and perhaps other areas) should be a future part of Russia. For the rest of Ukraine, I got the idea that most Russians simply do not care.
Concerning support for Putin, there are fanatical supporters as well as a few vocal haters. The supporters (and a few haters) reckon that Russia is a vast country full of diversity and that a “strong” leader is a must. Others see Putin as a mad dictator.
That said, where do I think all of this will end?
I think the Russian invasion was wrong and a strategic mistake. Putin wanted to prevent the further expansion of NATO to the east ─ and this will now be accelerated. Putin wanted to incorporate (parts of) Ukraine into Russia. Instead, he contributed to a new Ukrainian nationalism. Putin also hugely underestimated the reaction of the West (sanctions) and hopelessly overestimated the capacity of his forces.
The most likely outcome of this conflict is a low-level civil war that will go on for a very long time. Sanctions against Russia will remain in place, certain commodity prices will stay elevated, inflation may become stagflation, global growth will suffer, and financial markets will be affected.
Under these circumstances, a good asset manager will do a regular analysis but will also keep a wary eye on global geopolitical developments. Is there a possibility that China will use the Ukrainian diversion as an opportunity to cease Taiwan?
No one has definite answers to all the questions, but we must stay alert and well-informed. We definitely live in interesting times.
Speak to the Efficient Global Investing* team today. Our credentials and results are clear and categorical.
info@globalinvesting.co.za
www.globalinvesting.co.za
*Efficient Global Investing is an Efficient Wealth initiative. Efficient Wealth is an authorised financial services provider, FSP 655.
Riaan Prinsloo
Global investment specialist at Efficient Wealth
Most South African investors know that they need to include global exposure in their portfolios, and that they should increase their exposure if they already have it. There are, however, many considerations, such as different asset classes and available investment options. As interest rates start to rise, perhaps investors should hold onto some dollars? Or perhaps they should consider buying double-A or even triple-A-rated bonds. Their yields are extremely low, but maybe they are safer? On the other hand, the stock market has seen some extreme volatility, but does that mean it is now too dangerous to invest in?
Partly due to the volatility of our local currency, South African investors can actually increase their risk if they only hold onto hard currencies, like dollars and euros, or low-yielding global bonds.
As global investment specialists, we believe in allocating an appropriate portion of a client’s overall portfolio to global equities. One apparent reason for this is that investors can access geographies and sectors that are sparsely represented in our local market. Also, if the core aim of investing is to preserve and grow wealth over the long term, it makes sense to invest in a portfolio of leading companies, most of which are listed outside our borders.
It is also important for investors to consider long-term inflation, which can be beaten by investing in companies that successfully preserve their ability to make money and pass on cost increases to the end consumer. These are companies like Apple, Coca-Cola and Nike, that have pricing power through their leading brands. Other options are big tech companies that ingrain themselves into the daily lives of consumers to such an extent that they even achieve verb status. If you do not believe us, just google it.
However, a company’s ability to make money is not the only thing that matters to investors. Beating inflation requires sustainable long-term growth. For this reason, at Efficient Global Investing* we also want exposure to businesses that benefit from structural themes in the global economy. In this regard, we consider companies that provide infrastructure as we urbanise, healthcare as we grow older, and finer things for us to enjoy as global wealth rises.
While it is impossible to time the markets, the current market volatility provides a unique opportunity for long-term investors. The market uncertainty allows businesses to create more value for their shareholders by acquiring rivals at much more attractive prices. It also allows them to restructure underperforming assets and buy back their own shares at more attractive valuations. Long-term investors can then acquire these businesses while they trade at these more attractive valuations and gear themselves for exceptional growth.
As the leaders in global investing, we can help investors take advantage of volatility and buy leading businesses at inviting prices. Do not miss out; contact us today!
info@globalinvesting.co.za
www.globalinvesting.co.za
*Efficient Global Investing is an Efficient Wealth initiative. Efficient Wealth is an authorised financial services provider, FSP 655.
Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients
How do you create wealth? It’s not a new question and still it remains complex, even for people in the financial industry. As global investment specialists, we assist entrepreneurs in making better asset allocation decisions about their estates. Our job is to grow wealth and to protect it.
Creating wealth is another matter altogether. Our clients are the experts when it comes to creating wealth. They do this by combining seemingly unrelated elements in a way that produces value to enough people to cover the cost and effort of doing so. But research into some of the world’s most successful companies showed us that there is another way to create wealth ─ a way that most South African entrepreneurs are not applying.
According to the Institute on Taxation and Economic Policy, the global and gigantic company Amazon had a total pre-tax income of $78,6 billion between 2018 and 2021 in the USA. Although the corporate tax rate in the USA was around 21%, Amazon’s effective tax rate was only 5.1%. To a certain extent, tax credits helped them, but Amazon largely reduced its tax burden by using global structures to shift its profits to countries with more favourable tax regimes.
In South Africa, entrepreneurs use clever accounting techniques and black economic empowerment structures, they lend money to their enterprises or trusts, they load expenses, and they shift profits between companies ─ all to reduce their tax burden. The aim is of course to create wealth for their stakeholders, which is the primary mandate of a business. The consequence of creating value is that entrepreneurs end up creating the scarcest resource in the country, namely jobs. But local entrepreneurs have yet to make use of global structures in the way that entrepreneurs around the world are doing. Successful SA entrepreneurs can only avoid taxes for so long before their marginal tax rate approaches the top of SARS’s tables.
Nevertheless, the lessons from the likes of Amazon have stuck with us. What if South African entrepreneurs could also shift their tax burden to countries with a more tax-friendly environment? It seems that we were not the only ones who thought this would be a clever idea ─ even the South African Reserve Bank changed the policy on looping in 2021 to allow South Africans to own assets in South Africa from abroad. Now, despite all the difficulties that plague wealth creation in our country, entrepreneurs with the correct global structuring advice can continue to flourish and create the jobs we so desperately need.
Speak to the Efficient Global Investing* team today. Our credentials and results are clear and categorical.
info@globalinvesting.co.za
www.globalinvesting.co.za
*Efficient Global Investing is an Efficient Wealth initiative. Efficient Wealth, is an authorised financial services provider, FSP 655
Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients
Until the early 2010s, South African investors had a strong bias towards investing in local markets. Offshore markets were generally perceived to be too far away and too inaccessible to consider. Data about performance and alternative investments was also not readily available until about a decade ago. In recent years, the tables seemed to have turned. Now, local investors want as much offshore exposure as possible. Some would-be financial experts even suggest taking all investable money offshore. These advisors and other service providers play on investors’ recency bias and simply sell the story that clients want to hear, instead of educating them about long-term investment strategies and asset allocation decisions.
Our research, along with that of many other reputable asset managers, shows that inappropriately high global exposure can hurt an investor, especially if the entry price to gain that exposure was too high. Over the last five to ten years, equity markets in developed countries, aided by low interest rates and quantitative easing, outperformed emerging markets. Emerging economies ─ like South Africa’s, that lacked structural reforms ─ severely underperformed compared to developed economies, and their markets followed suit.
Most investors do not have an investment strategy for 20+ years ─ they only remember the last five to ten years. This is often detrimental to the success of their investment decisions. Investors often buy into the trend of global investing at the peak of a cycle, when monetary authorities have already started to increase interest rates and are reducing their liquidity and balance sheets.
For this reason, the South African Reserve Bank’s decision to allow more global exposure in balanced funds could not have come at a worse time. It would have been much better if they changed the policy five or even ten years ago, when South African investors could have enjoyed the once-in-a-lifetime above-trend growth that the equity markets in developed markets produced.
It seems that investors are not getting the quality, holistic financial advice they need to make informed global investment decisions. For the everyday investor saving towards retirement, it’s important to understand that you can have too much global exposure. This applies particularly if you are already retired and are drawing an income from your investments. Global asset classes do not always outperform and are often quite volatile, especially if you consider global bonds and cash. And excessive volatility does not produce greater returns. In fact, it reduces a portfolio’s long-term performance. Being overexposed to global markets at the wrong time can therefore hurt your investment portfolio.
Another common fallacy among investors is that the rand will always depreciate. Although this is true in the long term, it is not always the case in the short and medium term. The rand has depreciated over the last decade or two but has been getting stronger over the last five years. If you were invested in the wrong global asset class over the last five years, your portfolio would have been losing money in rand terms, which is exacerbated by fees and the effect of inflation. Once again, this is an unfortunate scenario if you are retired and drawing an income in rands.
Before making the strategic decision to allocate more of your investment portfolio to global assets, consider your long-term objectives. Speak to a financial advisor who can provide global investment advice that comes from subject area specialisation and expertise.
Speak to the Efficient Global Investing* team today. Our credentials and results are clear and categorical.
info@globalinvesting.co.za
www.globalinvesting.co.za
*Efficient Global Investing is an Efficient Wealth initiative. Efficient Wealth, is an authorised financial services provider, FSP 655
To plan for and prepare for your future financial security, you need to start as early as possible as it takes time to build wealth. However, without professional financial advisory help, it can be challenging to choose from the many options available. Making use of personal, professional investment management services enables you to avoid costly pitfalls, ensure optimal tax structuring, mitigate risks, and position your investing for maximum return. Read more
