News & Insights

By now you have been bombarded with Budget feedback, so we need not go into the details. The most talked-about item is that VAT will increase from 14% to 15%. This had to happen and like it or not, it will kick in on 1 April 2018. As far as the rest of the announcements are concerned, not much new. Unless you have an estate worth more than R30 million or want to donate more than that, tax rates stay the same. Personal, company and trust tax rates stay the same. Only the lowest three tax brackets have been adjusted to counter inflation. Investment companies and pension funds may invest more of your money offshore, which is a good thing. You will pay more for fuel, alcohol, luxury items and tobacco. Dividend tax and capital gains tax stay the same. Unfortunately, we still need a substantial amount of state revenue to pay for our  government debt and to fund our budget deficit.

The debt issues were, however, addressed in the Budget in a bid to stave off a final ratings downgrade which would also see the rand weakening substantially. Currently the rand is strong and hopes are high. As a country, the only solution to our longer-term problems is better growth. We have to convince companies to employ more people and make more fixed investments. We have to get rid of corruption at our SOEs and stop funding those that are terminally ill. We have to cut down on a lazy and bloated government and make them lean and mean. We have to incentivize increased productivity and punish freeloaders.

Mr. Ramaphosa will have to show us that he means business, otherwise we will once again be overcome by the gloom and doom of knowing it was all bark and no bite. And then we still have the issues of land, nuclear energy, and free education. Rome was not built in a day and after the devastation of the Zuma era we need to realize that we have to start building from the foundations up again. We have to be a little bit patient.

 

The 14^th of February 2018 was a great day for South Africa when a disgraceful person resigned as the country’s president, after huge and sustained pressure from everybody. It was an even greater day when the Hawks swooped down on the Gupta stronghold, starting to cleanse the country of these gangsters and their cronies.

But the 15^th was the greatest day, when Cyril Ramaphosa was sworn in as our new president. We believe that we should give him the benefit of the doubt and that he will be an honest and committed leader. That he will truly act in the best interests of all South Africans and that – although the damage caused by his predecessor runs deep – he will make South Africa a better place for all.

When confronted by danger, the human condition – developed over thousands of years – is to either fight or run away. It is not natural for us to act calmly and with compassion under those circumstances. It is therefore not surprising to see investors exhibit these reactions when there is a sudden drop in the value of their investments. They become fearful and  vicious.

For the past nine years we have seen a gradual and serene increase in the value of our investments. We have accepted this state of bliss without apprehension, listening to the media announcing a new all-time high on the world stock markets almost daily. But then we wake up one morning and the market is acting like a flock of birds taking flight after having been triggered by one skittish one.

The JSE is down 7% year to date and the US market is down around 4,5%. This is no cause for concern yet – merely a healthy correction. Actually, situations like these where all the shares in the index are down, create fantastic opportunities to invest in quality companies dragged down by sentiment rather than fundamentals. Of course there will be shares that do not rise to the surface again after the storm is over but there will be lots of shares whose fundamental buoyancy will make them pop back up.

In our newsletter of 22 January this year we wrote that the markets were expensive and that we could see a 10% correction any time. We also mentioned that it was prudent to re-balance portfolios to ensure that you had a chair to sit on when the music stopped. The danger for investors lies not in the broader market sell-off, but rather that the individual share we might own should go down alone. This solo diver might be based on actual rotten fundamentals and a permanent loss of capital might stare us in the face.

We therefore appreciate the work our fund managers do to minimize those rotten apples and on top of that we always prefer to diversify our portfolios among different and uncorrelated asset classes. So, even if the market drops a bit more, we should see this for what it is: a short-term correction in a longer-term growth plan.

 

Every year, a World Economic Forum is held in Davos, Switzerland. This is where all the important, rich people come together for what we would call an indaba. A lot of networking and, of course, lots of talk happen there. We are not sure how much of the talk actually leads to action, but we do know that the world watches and the world listens to the rhetoric.

It was reported in Business Day last week that our finance minister, Malusi Gigaba, made a comment regarding our debt problem to the effect that the country would feel some pain this year. Perhaps the pain he was referring to could include a hike in the VAT rate, which would not be a good strategy politically but with the surge in confidence after the election of Cyril Ramaphosa, the time might be right to help plug our budget deficit.

The other interesting piece of news was that the MD of the International Monetary Fund, Christine Lagarde, told Cyril Ramaphosa during a meeting on Thursday that SA needed to rebuild business confidence and clean out the rot. We believe Mr Ramaphosa will be doing exactly that, but because our economy is in such a poor state it might take longer than many people think.

In the interim we are enjoying a very strong rand below R12/$ and shares are doing well. We might even see interest rates drop if Moody’s will keep us at investment grade after the February budget speech. So, enjoy this positive energy but remember that markets are forward-looking and what you see in the price now, already reflects all the positive news of the future.

Image Source: World Economic Forum

At time of writing the equity markets are having a strong start to the year. The JSE All Share is up 2,5%, the S&P 500 is up 4,8% and the Hang Seng is up 7%. In fact, only Australia is negative.

 

In South Africa we are also enjoying a strong rand at around R12,21/$ and the political sentiment is hopeful with Ramaphosa taking charge. Good news is that the long-suspended crime intelligence head Richard Mdluli was fired and that the Asset Forfeiture Unit (AFU) of the NPA is going after the Gupta family and has served a summons to preserve their assets worth in the region of R1,6 billion.

 

On the wealth management side it is important to remember that in these volatile times and with most markets in record territory, a correction of 10% or more can come at any time and one should ensure that one’s cash reserves are sufficient to cover costs for 3 to 4 years. The best way of doing this is by re-balancing your portfolio. Look at the funds that have done very well and take some profits from them; and identify those funds that have perhaps been perennial underperformers. Every fund manager has a unique investment philosophy which causes the fund to outperform others for a year or two and then underperform for the next year or two. This is why it is prudent to have more than one fund manager in your portfolio.

 

Last but not least, we saw the Reserve Bank leave rates unchanged on Thursday.

 

Our expectations beginning of 2017

In a newsletter to clients at the beginning of 2017 we predicted that the JSE All Share index could trade up 25% (actual increase was 18%) and that the rand could be at R12  to the US$ (actually R12,48) at year end. We did, however, believe these figures were unlikely given the dire situation of the SA economy and the pressure on the rand due to US$ strength, rising US interest rates and SA credit downgrades.We also anticipated a better year for investors worldwide and for political reform in SA. We expected companies that had been hit hard by the Brexit vote to bounce back somewhat over the 2017/2018 period. So far we haven’t seen this happen, so we have to hope for the bounce in 2018.

Actual developments in 2017

We had a painful but necessary political year during which the Zuma/Gupta/State Capture cancer was exposed and sanity prevailed when Ramaphosa was elected new leader of the ANC. We watched the stellar performance of a handful of Top40 companies like Naspers (+64%), Richemont (+30%) and Anglos (+27%). A real shocker hit us when Steinhoff admitted to dubious accounting practices and the share price tumbled 90% in a matter of days. On the flip side, Bitcoin shot the lights out and gained something like a thousand percent, shining the spotlight firmly on crypto currencies. We saw oil hitting $60 a barrel again and gold passing the $1300 mark. It is interesting to note that although the rand strengthened around 10% against the US$, it lost ground against the euro and the pound. Inflation was 4,6% for the year.

 

And now to 2018

Looking at 2018 we have to admit that we expect it to be a smoother ride than 2017 had been. Our crystal ball predicts the JSE All Share index to be at 71 000 points at the end of the year; that is another 19% increase. We do, however, understand that this will require the majority of the shares that underperformed in 2017 to get things right and our hopes are on companies like Barclays, Firstrand, Investec, Life Health Care, Old Mutual and many more. Looking at the rand we expect the new positive political potential to support the current strength but if we get another credit downgrade in February, we might see it drop towards R14/$. In the longer term the rand will lose ground against our Developed World trading partners and our portfolios should have a good chunk of dollar exposure to stabilize the ship.

 

Future superstars

We do, however, see the future superstars for investment as those industry disrupters such as Google, Amazon, Netflix, Apple, Baidu, XPO logistics, JD.com, Blockchain, Tesla, Nvidia and many more. As we have mentioned before, these companies and technologies do not reside in South Africa and you have to buy them on the international platforms. Although some of these companies are already expensive, they are so powerful and cash flush that they can continue producing earnings growth by being early investors in things like AI (Artificial Intelligence), self-driving cars and online consumer gratification. The growth possibilities in these industries are mind-blowing and barring any management fraud like we have seen at Enron, Worldcom and Steinhoff, the future is bright. The only drawback is that, because the growth in these sectors is exponential, not all the start-ups will make it.

 

Reminder

We live in exciting times and we have to keep up with developments. We are sure there will be surprises in 2018, both positive and negative, but as long as we do not place all our eggs in one basket we will prosper over time.

This will be the last note for 2017 and I think we all need a bit of relaxation after an extremely exciting year. Not everything went well in 2017 but some things deserve recognition for making us feel better, namely:

• The JSE All Share Index is up 13,2% after a very lacklustre first half of the year. With inflation at 4,6% we should appreciate this solid return.
• The courts in our country are breaking down all the walls Zuma tried to build to protect him and his corrupt Gupta friends. Thuli Madonsela has been vindicated.
• Free media in our country ensured that the cancer of state capture was exposed and is being dealt with.
• Zimbabwe got rid of Robert Mugabe.
• Sexual misconduct by high profile people has been brought to light.
• Highly incompetent people in government, the judiciary and SOEs have been exposed.

 

Then there were the things that got us down:

• The severe drought in the Western Cape.
• Our inability to grow the economy and create jobs in the process.
• The destruction of our confidence in business by people like Markus Jooste of Steinhoff.
• The incessant political noise in the build-up to the ANC’s elective conference.

 

On the sidelines we also witnessed the rise in popularity of the enigma that is Bitcoin and we saw one of SA’s favourite companies – Naspers – go up 80% in value. At JWR we shared all the good and the bad during 2017 with our clients and we are looking forward to the challenges 2018 will bring.

 

Enjoy the festive season. Celebrate with your family, friends and loved ones and always keep things simple.

By now you should know all the disturbing facts about the collapse of Steinhoff, one of the biggest companies in South Africa and a major international players. Clients of JWR will not suffer material draw downs in their portfolios due to the fact that these are diversified across various asset classes and investment funds.

The real tragedy is, however, that we have once again been deceived by the management of a publicly listed company which we have trusted to do the right thing for their shareholders. We have already lost faith in our political leaders and now we are losing faith in our business leaders as well.

We can, however, learn a valuable lesson from this disaster and that is that one should never have too much money invested in any one specific asset. We have seen some shares go up a 1000% and usually we become complaisant about them, thinking that nothing can go wrong. We have also watched other financial assets like Bitcoin defy logic and tempt us to take part in the rise. But at JWR we continue to believe that diversification is the best way to prevent any unforeseen event from destroying one’s financial security. This diversification should not be limited to investment in shares only, but also to income-generating assets like the ability to work. It is of paramount importance to start saving a percentage of your income as early as possible to ensure the accumulation of a retirement fund which can supplement or replace your salary one day. It is equally important to take out disability insurance to protect your income stream.

Even a trusted investment like property can be highly risky. We have watched people invest in new property developments only to see their money disappear due to fraud (Sharemax), or to unexpected financial issues such as rising interest rates or even political turmoil. The answer seems to lie in achieving a good balance. Invest in some shares, in your education, in some property, in some cash, in some gold, and even in some Bitcoin if you want. But, before you do, have a well thought-out plan to manage your various investments and to make sure that you re-balance your portfolio from time to time.

It is time to smile for a while. Let us look at some recent good news:

• The world’s stock markets are at record highs.
• Zimbabwe got rid of Mugabe.
• SA will soon be rid of Zuma.
• The SABC and SAA have both been “uncaptured” with a similarly positive process happening at Eskom and other state-owned enterprises.
• The cancer at Eskom – involving the ex-Eskom chairman Zola Tsotsi; minister Lynne Brown; the president; andSAA chairwoman Dudu Myeni – is being exposed by the Public Enterprises Committee.
• General Khehla John Sitole has with immediate effect been appointed as the country’s top cop. Unlike his disgraced recent predecessors, Sitole is a career policeman who started as a student constable in 1986 and rose through the ranks.
• The Reserve Bank kept interest rates unchanged on Thursday.

Because this blog is going to print on Monday, we cannot yet comment on the outcome of the rating agencies’ decision regarding our credit rating which is expected on Friday 24 November after the close of the market. So by the time you are reading this, we are still investment grade – or junk – on our local debt.

Note: Credit ratings agency S&P Global has downgraded South Africa’s credit rating to full junk status, while its counterpart Moody’s has placed the country on review for downgrade.

During a recent presentation by PSG Asset Management we were once again reminded of the forward-looking nature of financial markets. What we mean by that, is the suggestion that the current value of a share, a bond, or even a currency, already reflects the impact of potential future events. This will mean that:

• The meteoric rise in the Naspers share price reflects the expectation that the Chinese-listed company Tencent in which Naspers has a 34% stake will continue to grow its earnings at eye-watering percentages.
• The dismal performance of Steinhoff International reflects the multiple allegations against their reporting practices.
• The increase in the yields on the SA government bonds reflects the possible downgrade of our credit rating to junk on local debt.
• The recent collapse of the SA rand against the US$ and other currencies also reflects the credit rating downgrade; as well as the capturing of the Treasury by Zuma.

The question we must ask ourselves, is: if the above-mentioned examples are indeed correct, what will happen if the expected outcome materializes or if the opposite happens? So: if Tencent’s earnings falter, will Naspers go down? If the allegations against Steinhoff are false, will the share price go up? And if our credit rating is downgraded, will our bond yields come down and will the rand strengthen because of the removal of the uncertainty?

The answers may be found in history. We see that uncertainty tends to make investors overreact and that, when the uncertainties are removed by their realization or non-realization, the pendulum swings the other way. That is why many investors who base their investment decisions on the day-to-day reporting in financial media get it wrong. The future uncertainty is already discounted in the price they pay today. That may still mean, however, that the future uncertainty may yet be understated and that the actual future outcome may be worse or better than expected.

When investment decisions are made, therefore, it is important to understand the longer-term value of an asset and not get fixated on the shorter-term fluctuations in its price. It may also be necessary to hold on to the asset for longer than you initially anticipated to allow for the shorter-term uncertainties to get washed out of the system eventually.

Many of you may be wondering what has been happening to Gold over the last couple of years. The SA Bullion Gold Report recently quoted these interesting statistics for periods up to 30 September 2017:

 

Gold performance	1 year	3 years	5 years	10 years	Year to date
In US$	-2.9%	+3.0%	-6.2%	+5.6%	+11.5%
In SA Rand	-4.8%	+8.1%	+3.4%	+13.0%	+9.3%

(annualized for periods longer than a year)

 

If we compare these returns with the JSE All Share index it is evident that Gold has struggled relative to SA Equities in rand terms over the last 5 years, where the All Share is up 13% per annum, and especially year to date where the All Share index is up over 20%.

We therefore continue to hold the opinion that Gold as a stand-alone asset class does not fit into our portfolio structures but we do recognize that there are times when Gold can perform very well, especially when there is a lot of fear and uncertainty in the world.