What’s going on with world growth?

 

Despite years of unprecedented stimulus from authorities all over the world, the global economy is sluggish. Global growth expectations are continually adjusted downwards and are still well below long-term averages. This year the World Bank adjusted its global growth forecast for 2016 downwards to 2,4% from 2,9% in January.

So, what’s happening with economic growth and why is this happening?

We have identified a few factors that are hampering economic growth.

The world has become more protectionist.

The political landscape is moving towards the right and there is a rise in nationalism. Brexit is a good example. Politicians who promise “We can do it alone”, and “Let’s look after ourselves,” or “We’ll be better off on our own,” are seen as saviours and appeal to voters.Taken further and we’re faced with isolation and trade protection. The G20 countries have instigated more protectionism. The number of trade restrictive measures in G20 countries have tripled since 2008. World trade has not recovered since 2008. In fact, world trade volumes now average at a fraction of pre-2008 levels.

World Trade Volumes
World Trade Volumes

Lack of fixed investment. 

Despite low interest rates around the world, investment in infrastructure remains low. Fixed investment has declined and is not even enough to maintain infrastructure. In South Africa, private sector fixed investment as a percentage of domestic product is declining at around 5% p.a.

developedmarkets2b

Ageing population. 

Global life expectancy is rising fast. This means that a larger percentage of older people depend on the productivity of younger people. It is difficult to grow an economy with a declining labour force – Japan is a very good example. In addition, young people study for longer before entering the job market meaning that older people form an increasingly big part of the working population. And old people do not spend as much money as the younger generation!

Ageing Population
Ageing Population

China is rebalancing. 

China has fundamentally changed their economic policy. Up until 2008, China spurred economic growth by expanding their infrastructure. They built cities and transport systems. However, the policy became unsustainable as they created too much spare capacity. The Chinese authorities are now encouraging consumers to spend more. The graph below shows that this policy is working. However, the policy change results in a lower demand for commodities – which impacts global trade volumes. Emerging markets that were dependent on commodities, like South Africa have suffered.

China is rebalancing
China is rebalancing

china2

The world has lost confidence. 

Confidence globally remains significantly lower to the 2008 financial crisis. Lower confidence can partly be ascribed to a loss of faith in global leadership. 86% of respondents in a World Economic Forum survey said leadership is in crisis. This includes religious, political and media leadership. In addition, there is growing unease about the unequal distribution of wealth. The richest 80 people have the same wealth as the bottom 3.5 billion, and according to Forbes, the richest 10 people are worth more than countries like Sweden and South Africa. Furthermore, the world is corrupt. According to Transparency International’s annual corruption survey, 2 out of 3 countries score below 50 out of 100 on the corruption index. A score below 50 means that there is serious corruption in that country.

Economic Sentiment
Economic Sentiment

The uncertainty of technology.

Nobel Prize–winning economist Robert Shiller told Yahoo Finance in an interview that technology is to blame for faltering economic growth. “People are worried about technology,” said Shiller. “It’s all of these amazing devices that are out there helping us—they’re great—but the benefits of them seem to go substantially toward a minority of wealthy people.” As a result, Shiller says advances in technology have led to “rising inequality.” A report published by the World Economic Forum in January warned that by 2020, more than five million jobs in the world’s wealthiest nations could be lost due to disruptive labour market changes. A 2013 study by researchers at Oxford University speculated up to 47% of all jobs in the US are at risk of “computerization.” The pace of change in technology and the unpredictability of which jobs will provide security weighs on the outlook of many. This uncertainty is not conducive to consumer confidence.

So where does that leave us?

South Africa has a very open economy, meaning that we are reliant on exports and imports, so it’s unrealistic to think that we will grow above world growth.

The gap between South African economic growth and world growth has opened up though. The economy is faltering. Economic policy is a big contributor to this tendency. Not only is there a lack of direction, but policy has been unfriendly to business and has not spurred economic growth.

sowheredoesthatleaveus

What are we to do?

Monetary authorities continue to provide unprecedented stimulus to financial markets. Interest rates remain historically extremely low (in some cases even negative). Most governments can also still increase spending or reduce taxes to encourage economic growth.

The increased dissatisfaction with unemployment and the uneven distribution of wealth will put pressure on governments to deploy further measures.

These interventions will continue to provide support for financial assets in the short to medium term.

In addition, equity markets are not expensive. Pockets in the South African equity market now provide attractive dividend yields.

However, global bond yields seem very low and any sign of their return to normality is uncertain. This is a concern.

We continue to increase diversification in a world that feels unsafe and unsure. Our clients’ portfolios must withstand the increased volatility and global shifts. Forecasting how these shifts will affect asset values remains impossible.

As always we believe that a disciplined asset allocation strategy and a focus on valuations will help us to meet our clients’ needs.

Sources:

  • Presentation by Kevin Lings, Chief Economist, Stanlib
  • Interview with Robert Shiller: Robert Shiller identifies the surprising source of the world’s problems today
  • World Economic Forum: Is technological change creating a new global economy

 

Unpacking the taxation of trusts

The taxation of trusts has been a grey area for some time. The proposed changes in legislation was published for comment recently. We now have a better idea of what’s potentially on the cards. Government’s intention is to limit the ability of taxpayers to transfer wealth from one generation to the next without being subject to tax.

The key point of the Draft Taxation Laws Amendment Bill (TLAB) is the issue of interest-free loans. Interest-free loans to trusts will not be liable for donations tax and will help to lessen the burden of estate duty, as is currently the case. However, these donations will be liable for income tax in the future. This will also apply to loans with interest rates set below an accepted market rate (currently 8%).

The new legislation, if passed, will be applicable to any new loan made to a trust, as well as any existing loans already in place.

Tony Barrett writes in his blog “A testing time for trusts” that existing trust structures with loan agreements will have to be examined to find a suitable strategy for the future:

  1. Charge an 8% p.a. market related interest on the loan accounts. This results in taxable interest income accruing to the lender, and more often than not, no equivalent tax deduction in the trust.
  2. The lender pays 20% donations tax and donates the loan to the trust, thereby doing away with the loan.
  3. The trust repays the loan to the lender. This course of action may result in a hefty CGT charge for the trust as it realizes assets to repay the loan.
  4. The anticipated new legislation is adopted and deemed interest is taxable in the hands of the lender.

There are still uncertainties regarding the practical implementation of the bill. A consultation process is now in place. If this Taxation Laws Amendment Bill (TLAB) is passed, it will be effective from 1 March 2017. The best thing to do is to seek professional tax advice early, and certainly well in advance of the new tax year.

 

Sources:

Splashing out on a car or investing in your future?

Wealth Analyst Thiart van der Merwe writes the first article in our series on general financial planning for yuppies. Thiart is passionate about the everyday decisions we make, and how these affect our futures much more than our investment returns.

Many young professionals can’t wait to put their first paycheck towards a fancy car. Most of us want the vehicle our friends will envy. But, what we don’t realise is that it generally comes hand in hand with a six-year-long down payment that could’ve been spent more wisely. It may seem small at first but in the long-term it’s an investment guzzler.

So, what if we decided to buy a less flashy car – whether we’re starting out or upgrading every five years? The kind that fits our budget at the time?

I’ve done an analysis on this below, and assumed we invest the difference into a balanced investment to return 7% (above inflation). In this analysis I’ve assumed the following “smart choices” instead of the more popular choice.

Smart Choice VS Popular Choice
Smart Choice VS Popular Choice

I’ve also assumed that from the age of 40 onward you continue driving a car in the range of a Audi Q3 instead of the range of a Audi Q5.

If you had invested this difference throughout your lifetime you would have R5 million (in today’s money) at the age of 60. This is a considerable amount that can go a long way to fund your retirement.

The staggering thing about this analysis is that I did not select bottom of the range cars as the “smart choice” at the given age; I merely chose the car that would fit a certain age bracket and showed you that if you just wait to buy that dream bakkie or BMW – how beneficial it could be in the long run.

The more astonishing analysis comes when you are content with driving a car in the class of the Ford Ecosport, or any car in the R300K range – for the rest of your life. If this were the case you would have saved R7.5 million by the time you reach the age of 60. To put that in perspective, that would be the price of a four-bedroom home in a popular Johannesburg suburb like Northcliff or Parkhurst.

This is a bit of a minefield: there are a number of arguments to support buying certain pricey cars with their great service plans etc. If you do decide to purchase an expensive car and drive the said car for 20 plus years that’s a great decision. But, few people actually do that: they walk out of the dealership with their “popular choice” car, only to replace it with a brand new one within the next five years.

As a young professional the ball is in your court and it’s up to you to make smart financial choices. You are never too young to start saving and as Albert Einstein said: “Compound Interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.”

 

 

Words Worth Reading

 

Is it me, or is the world going crazy?

Mark Manson writes a thought-provoking piece on the “attention-economy”, negativity, the hidden dangers of the global community, and the real fight for freedom.

… “And this is what disturbs me: the fact that people today, despite living with more safety and wealth and access to information than anyone in human history, feel as though the world is going crazy and something drastic must be changed.” …

 

https://markmanson.net/crazy-world

 

The Top Jobs In 10 Years Might Not Be What You Expect

Three futurists talk about what the hot jobs of 2025 could be, and their answers may surprise you. Think ‘Personal Worker Brand Coach”, “Urban Farmer”, “Freelance Professors”, Neuro-implant technicians”, “Smart-home Handyperson” or “Sex Worker Coach”…

https://www.fastcompany.com/3046277/the-new-rules-of-work/the-top-jobs-in-10-years-might-not-be-what-you-expect

 

“We’re trusted to do a good job, then leave”: why the Danes finish work on time, every single day

 Helen Russell writes about the world’s happiest country and how Danes don’t do presenteeism and come ‘Cinderella Hour’, offices empty for the day – something that’s good for all of us…

‘Still at the office, pulling a late one,’ reads the message from a friend I’m supposed to be meeting for coffee. This is followed by a crying cat and angry sheep emoji. ‘So sorry. Will make it up to you,’ she apologises before sending a picture of herself looking forlorn in an otherwise deserted office.

It’s only 5.30pm, but this is the equivalent of burning the midnight oil in Denmark. Read the full article here: http://www.stylist.co.uk/life/living-danishly-how-and-why-to-leave-work-on-time-every-single-day-job-careers-work-life-balance-happiness

 

Why You Should Spend Your Money On Experiences, Not Things

http://www.forbes.com/sites/travisbradberry/2016/08/09/why-you-should-spend-your-money-on-experiences-not-things/#1e231101c080

“When you work hard every single day and there’s only so much money left after your regular expenses, you have to make certain it’s well spent. Spend your limited funds on what science says will make you happy…”

Ah. We love this article. Now stop reading and go and do something with your money that makes you happy!