2017 and the case for a low return environment

-By Thiart van Der Merwe

A prolonged, low-growth environment and no real returns from our market were the main talking points as we entered 2017. With constant negative press on corruption and a deteriorating political landscape, one can understand the inclination to be pessimistic.

Up to the midway point the pessimists were right. The stock market surprised us with a 7% uptick (locally) in July that started the rally that brings the total year-to-date return to 20%.

 

 

It was a Naspers story

Although it is not all that it seems: Naspers rose 75% in 2017 and dominates the JSE All Share Index in size, now more than 20% of that index. Without Naspers, index returns would have been more pedestrian.

The table below illustrates the returns excluding Naspers.

 

Ending Oct-2017 1 Year 3 Year
ALSI 20.1% 29.5%
SWIX 17.3% 28.2%
Naspers 52.8% 152.9%
ALSI ex Naspers 14.2% 18.6%
SWIX ex Naspers 9.3% 13.2%

 

Below are some important points on Naspers:

  • Naspers owns a 33% stake in Tencent, a Chinese investment firm that focuses on internet value add services. Tencent is listed and at the time of writing this article, the value of the stake is worth R2, 199 billion.
  • At the current share price Naspers is valued at R1, 670 billion. This means markets are discounting roughly R400 billion of Tencent’s value or discounting Naspers’s other assets.
  • If we strip out Tencent, Naspers has had a negative operating cash flow for the last two years of reporting, as illustrated below.

 

 

On a look-through basis, this would mean that the JSE All Share Index has more than 20% exposure to operations in Chinese tech firms. This serves as a good hedge against low growth and a weakening Rand. However, this is also a significant risk in a passive solution where flexibility is limited.

The article below gives great insight into Naspers.

Would You Bet Your Life Savings On A Chinese Internet Company?

Passive or index tracking products have benefited from the rise of Naspers – passive or index products have outperformed recently. Most active managers are not allowed to hold such large positions in one share.  From a risk perspective, they should have lower exposures in any event. The graph below compares 9 of the best known active equity funds to two passive index funds tracking the JSE Top 40 Index and the JSE All Share Index. Only one fund managed to outperform the Top 40 during 2017. Only 3 funds outperformed the All Share Index.

 

 

Should the Tencent story start to disappoint, there is significant risk in the Naspers share price and hence the local equity indices. Expectations from Tencent are high – it’s not hard to imagine that it could disappoint. When Naspers falters, active managers will outperform size-based indices because of their obligatory underweight positions.

 

It didn’t pay to ‘wait and see’

Many investors have adopted a ‘wait and see’ attitude. It is clear from the flows in and out of unit trusts – flows into money market funds or safe haven funds have increased. This has proven to be the wrong move.  Markets did unexpectedly well – even active managers with well diversified portfolios delivered above average performance. This shows again that there is a low correlation between politics and short-term market returns.  Investors are losing out.

 

Poor economic conditions do not equate to poor future market returns

The South African market is well diversified with growth predominantly coming from outside our borders. Poor local economic and political conditions do not necessarily equal poor market conditions.

In addition, the local market already discounts the continuation of poor economic conditions.  Listed companies also have significant cash reserves in the current environment. A good outcome in December at the ANC Conference could lead to an uptick in business confidence with a well-needed cash injection into our domestic market. The potential is also there for an uptick in SA Inc. (all the shares with predominantly local earnings). The Financial index is up only 7% in 2017. Financial stocks are directly impacted by credit rating downgrades and currency weakness. The index is trading at a Price to Earnings ratio of 14 which is considered cheap. Active managers will be able to adjust portfolios to respond to certain opportunities should SA Inc. head into a more positive direction.

Considering almost three years of below expected returns prior to July 2017, I leave you with the following quote: “The stock market is a device of transferring money from the impatient to the patient,” Warren Buffett.

 

Gifts full of mindfulness and meaning

-By Elke Zeki & Sunél Veldtman

There is too much unwanted stuff on the planet. Too much stuff polluting our oceans, our soil, our water and the air. Christmas is ahead of us and many are thinking about gifts for our family and friends. Many will mindlessly buy another pair of unwanted socks wrapped in pretty paper tied with big bows. Think about the waste (of paper) – never mind the unwanted socks.

The more stuff we have, the more responsibility we have. Consider the extra storage space, insurance and energy required to deal with all our stuff.

Why not make this Christmas a time for thoughtful gifting, not only to save our planet, but ourselves? Give a sustainable and eco-friendly gift that will create memories and moments for your loved ones. In general, think about experiences rather than goods, consumables over stuff that will still be in your cupboards, and glass or paper over plastic.

Parents are often the worst when it comes to gifts. As first-time parents, boy do we need to keep an eye on our shopping enthusiasm! Between my husband and I, and the rest of the family – we have filled our daughters room with toys and clothes and she’s not even two years old yet. I know it’s exciting becoming a parent or a grandparent, but we often get completely carried away when it comes to shopping and gifts.

I’ve realized that my daughter could care less about the designer outfits or the best new toy.  She destroys everything she wears and can entertain herself with the simplest thing (like a fridge magnet) for hours!  Over the past year I have deliberately given away many of her toys and tried to keep the shopping to a minimum. As a family, I’d like to change the way we consume and shop – be more sustainable and mindful.

 

With this is mind; here are a few gift ideas for kids for Christmas:

  1. Courses, classes, or activities.
  2. What about dance, art or music lessons? Older children might love a scuba diving course, a fishing trip, or tickets to a show, a movie or a concert.
  3. Arts and crafts – DIY gifts that get their creative expression flowing.
  4. A journal or a mindfulness coloring book
  5. Music. An iTunes voucher is a great gift, especially for a teen.
  6. What about a digital magazine subscription like National Geographic Kids?
  7. Recipe books that encourage healthy eating.
  8. What about putting together some baking supplies with a family favorite recipe? You’re not only promoting spending time together, but you’ll have something yummy to enjoy together when you’re done.
  9. Story books or search-the-picture books like Where’s Wally, or Where’s Waldo? Takealot have a great selection – see this link Takealot Store – Where’s Wally Books
  10. Building blocks, Lego, or puzzles. There are also great Lego books that stir up kids imaginations with building ideas.
  11. Outside activity toys – like a gardening set, bug box and magnifying glass, a tent or sandpit toys.
  12. What about a small Zen garden to help teach little ones to manage anxiety and emotions? There are great ideas all over Pinterest that show you how to make one. Here’s a link to get you going – Pinterest – DIY Zen garden ideas
  13. Got a budding scientist on your hands? What about a science kit and a few supplies to build their own DIY project?
  14. Scented play dough. There are great essential oil based play dough’s and stress balls out there for kids. Here’s some inspiration: Scented play dough inspiration
  15. Make your little one a dress up box with props from a local thrift store. Inexpressive fun that lasts a lifetime.
  16. Fine motor board. These provide endless fun for toddlers – and are recommended by occupational therapists. See more at this link Fine Motor Boards on Pinterest

Here are some more mindful, meaningful options to go under the Christmas tree:

For the coffee lover, who also likes to get coffee on the way to the office, school or gym, this eco coffee cup is the ideal gift. Skip the plastic or paper cups and buy this eco-friendly, bamboo cup. They come in many beautiful colours and sizes – one for each family member.

 

Read more about the eco cup here:

Visit the Eco Cup website

On the subject of coffee: why not buy a voucher for your loved ones from their favourite coffee shop? A treat at your expense. We love Motherland Coffee Company’s ‘Drink the Love’ concept. It’s their way of caring for those who work in the communities that produce their coffee – right through to us, the consumers. Buy a voucher, make a date, stick it on their board and enjoy quality time together with coffee and cake.

What about a vegetable gardening course or kit? Take a look at these fabulous options from Faithful To Nature. They have a great selection of heirloom seeds and herbs. Their Moonbloom Food Planting Calendar for 2018 will also make for a wonderful gift for the enthusiastic gardener in your family – Faithful to Nature – Gardening

Speaking of gardening… The Irene School of Garden Design offers a variety of courses for garden enthusiasts, designers and landscapers. It’s the only school offering part time, full time and short courses for garden design in South Africa.Take a look at their recent article on water wise gardening and get inspired to give someone you love a course or a water wise planting kit for Christmas. Garden Design School – Water Wise Gardening

Here is the link to their courses – Garden Design School – Courses

Artisanal courses are a wonderful gift option. Take a look at this bread-making course run by Crust and Crumb. Spend the day with a loved one learning how to make bread. Crust & Crumb – Take a bread making course

Eco friendly wrapping ideas. Scrap the conventional wrapping paper and get a roll of recycled brown paper, some organic cotton ribbons and have some fun. Look how beautifully newspaper and a ball of string can work too!

 

And finally – for those minimalist family members and friends, give a donation to a sustainable cause. Take a look at these two options:

For Good connects people to causes: For Good – Donate

Food and Trees For Africa is South Africa’s social and environmental enterprise improving lives and landscapes towards healthy people on a healthier planet, since 1990.Food and Trees For Africa

Kruiwa Community

– By Sunel Veldtman

A while ago I mentioned to my husband that I didn’t like the taste of lamb cooked on our gas braai. I prefer the smoky flavour of lamb done on a real wood fire. And so, the ‘kruiwa’ was born. (Kruiwa is the Afrikaans word for wheelbarrow.) He pulled out an old kruiwa from our store room, filled it with sand and wheeled it onto the middle of our lawn. We arranged our camping chairs around the fire. And we cooked the lamb on a real wood fire and sat around and spent a wonderful afternoon together talking to each other.

Then the kruiwa became our thing. We started having a kruiwa braai every Sunday night, after an afternoon working in the garden and a busy weekend, we would light the fire, pour a gin & tonic and watch the sun set. It became part of our routine. As my husband posted regular pictures on social media, people started asking for an invite to a kruiwa. Some of our friends began to invite themselves. They knew that, at a certain time on a Sunday night, there would be company around a fire in the middle of a busy city.

Sunday nights were not ideal for late nights and preparation for the week, especially not for our kids. We then moved kruiwa to a Friday night. Our friends know, that, come the end of the week, they can come to have a meal, to wind down and above all, to share the stories of their week. We don’t entertain. We open our home for a communal meal. Yet, somehow every Friday night, there is a feast. Someone pitches with meat from a favourite butcher, a new salad they’re trying out or occasionally a homemade pecan pie.

Sometimes we have many friends and loads of kids running around the garden. And other times, one couple pitches and we share an intimate evening. We now look forward to a Friday evening. If we’ve had a hectic week, a challenge or just an important story to share, we know there will be a time and a place. Conversations drift from politics or women’s rights to parenting or career challenges – our losses and our gains in the world. We have roared with laughter and we have cried, silently wiping tears from the corner of our eyes. We have celebrated life together and found a new appreciation for friendship. Our kids have become close and now beg their parents to pitch on a Friday night.

Our kruiwa nights have become an experiment in human connection in our time and place. Some of our friends have never accepted the standard, open invitation to arrive and join in. Some friends are keen and don’t want to miss out. Many around the kruiwa were strangers to each other but have gained new friendships over the year. They have become engaged in each other’s stories.

Kruiwa has become synonymous with connection. Somehow sitting around a fire with a few rickety camp chairs and blankets wrapped around us against the Highveld winter chill or fighting off mozzies in the summer, has created a space where people can connect. We have seen some friends beginning to heal from devastating loss and others’ stress uncoil slowly.

Adult friendships, especially for those in the midlife, can be a real challenge. Somehow sadly, our friendships are last in the line of priorities. We are starved of friendship time. Yet, there is so much research showing that we need connection; that it is the most important contributor to wellbeing. But, somehow, we neglect friendship and community. Somehow the stress of midlife careers, teenage children, changing physical realities and the world we live in, compels us to hibernate, to head in the opposite direction – away from people and connection. We have come to believe that alone time is the answer. Of course, there is a need for alone time, but not to the exclusion of community.

Our kruiwa has become a priority, a weekly non-negotiable diary inscription. We have learned that heading in the direction of people is healing and invigorating and uplifting. We have become friendship addicts.

Ps. If you’re a friend, know that you are invited to our kruiwa on a Friday night.

Pss. Alternatively, start your own version – any fire, even a candle light – whatever will bring community back to your world. I would love to hear your stories.

A worthwhile New Years’ resolution

-By Sunel Veldtman

New Years’ resolutions are so tiring. Few people stick to them. Loose weight. Spend less. Be more organised. And then we carry on after a few days or weeks just as we did before.

Better budgeting is high on the list of new years resolutions. Prioritising and limiting spending is key to financial freedom and wellness. Not only for those who have little but even more so for the wealthy.

Here are a few pointers to start a New Years’ resolution about your spending:

 

Spending plan vs. budget plan

Budgeting is such a negative concept. It sounds so restrictive. Why don’t we rather call it a spending plan? It is a positive concept. What can I spend my money on? Rather than how should I restrict my spending.

It puts you in control of the money flowing out of your bank account. Unless you live in absolute poverty and your basic needs are not met, you have wide open choices about your spending plan. And you need priorities like most people. We resent having to make choices but it is the reality of adulthood.

 

Start by looking back

Take three to six months’ worth of bank statements and categorise the expenses into broad areas like car/petrol, home, education, charity, travel/holidays and fun. This will quickly show you where your money is flowing. The numbers will tell you a story. Is this the story you want it to tell? Where is your money flowing?

 

Know what you value

Your money will only make you happy if it flows in the direction of your values. Do you know what you value? If you don’t, do an online values exercise.

If you value beauty make sure, that regardless of how tight your money situation is, you have some money to spend on this value. It might be one bunch of flowers or cards for writing birthday messages.

You might value security in which case you may want to build a fat bank balance to feel safe. Or you might value education, so you will be willing to sacrifice driving a nice car.

The importance of knowing what you value and arranging your spending around this, is that you feel in control. It was your choice.

It is your choice to prioritise certain spending over others as you give prioirty to your values. It is also helpful when you have a partner. Understanding how your values differ can help you have meaningful conversations.

 

Who is talking to you?

For many people, it feels like an outside voice prescribes how they should spend their money. It is true. Budgeting is where all our accumulated money messages come to play. If you have not been mindful about why you do what you do with your money, it is probably true for you. Think about the messages that play out in your bank balance. What are they? Think about message about risk taking, security or your career. Whose voices are talking to you when you spend your money? Parents, teachers, pastors or the boss?

When I received my first paycheck, my dad said to me, ‘It is not what you receive that will decide what you have left at the end of the month, it is how much you spend.’ This is a true and helpful message. I have also received other unhelpful messages that left me thinking that wealth is dangerous or detrimental to your life. These were unhelpful and harmful to me. I’ve had to let go of those messages.

Think about the messages playing out in your spending. Discard the ones that are no longer helpful.

 

Be mindful

Then as you spend, be mindful. Just take a few seconds to think about it. ‘I just spent R30 on a coffee.’ Or ‘R10 000 on new tyres for the car.’ ‘Or R1m on upgrading the holiday house.’ Do not judge your spending. Just let the thought enter your head.

And see what happens.

Happy spending in 2018.

 

 

 

Words Worth Reading

Productivity Is Really About What You Don’t Do

“The best productivity tip I ever got was the idea of a “stop-doing list” from Jim Collins. In this Age of Distraction, we’re all dodging and weaving between so much incoming information that what you don’t do on a daily basis has become as important—if not more—as what you do execute on.”

Here’s an excellent article about increasing your productivity by deciding what not to do. It’s about being creative so that you can maximise your time and do your best work. Some ideas might sound crazy, like: don’t read the news in the morning (or at all). Don’t schedule meetings in the morning. Don’t work past 6pm.

Getting Things Done

 

 

 

 

Words Worth Reading

This month we enjoyed these articles.

Happiness is Other People

The happiness industry has been teaching us that we should cultivate happiness by ourselves through self-reflection and self-actualisation. It has left our generation lonely, sick and anxious. It turns out that research is clear – the single biggest contributor to our happiness is spending time with other people.

Happiness is Other People. Read the full article here

 

 

Three Kinds of Expectations

The Art of Simple published this great piece on the three kinds of expectations. While we’re examining happiness, you can also read about how we can improve our relationships by lowering our expectations! Yes, as we expect less from our loved ones, we have happier relationships!

Read more: Three Kinds of Expectations

 

The REAL value of a financial advisor

-By Elke Zeki

 

Many people believe that financial advisors add significant value by fund & product choice, asset allocation and budgeting. What concerns us is that research shows (and has for a long time) that there are algorithms that can do this much better than any human being can. Yet advisors are slow to embrace this technology. They see it as a threat and instead of adjusting their value propositions – they put their heads in the sand.

We argue that financial advisors can use this technology to their advantage.

REAL advisors offer skills and add value that’s difficult to quantify and calculate, and typically cannot be done by algorithms. We call it the REAL value added. This is what we believe you should actually pay for

What skills are we talking about? Let’s unpack them over these five points:

 

This is not an easy thing to do.

  1. From confusion to clarity

A REAL advisor should help you figure out what your goals are; and then what the solutions are to helping you achieve those goals.

People generally see an advisor to address specific issues or seek investment advice. This is often driven by questions raised through media or discussions with friends around the braai. This can be confusing and cause anxiety with regards to finances and investments.

It’s rare that advisors dig deeper to understand the bigger picture and help identify your most important values and life goals. A doctor always diagnoses before writing a prescription.

Understanding and defining these goals is like understanding a doctor’s diagnosis and treatment plan. You may ask for a prescription for headache medication but the doctor has to dig deeper. The sometimes-illegible prescription for meds you’ve never even heard of doesn’t matter if you actually get better.

In our view, the most important role of an advisor is not to prescribe the best solution, but to diagnose the problem first and to help by setting some long-term goals.

With clear goals that reflect your life stage and unique circumstances, it’s easy to stay focused on what is important.

 

2. Complexity and noise to simplicity

Most people don’t understand risk well enough to know what level of risk they are willing or able to take. Emotion plays a role in answering these questions. We believe an empathetic and analytical advisor is far better positioned to help come up with suitable solutions. This always trumps a series of generic questions.

Unfortunately, standardized questionnaires are widely used by advisors and can lead to inappropriate advice.

This often coincides with a variety of solutions presented to a client. This can also cause major angst because at the end of the day – how many of us actually understand which risk profile we fall under.

Advisors are also notoriously good with the technical stuff but make it too complex for people to understand. Add to that all the variety and clients are left confused. Complexity does not equal intelligence in money matters.

At Foundation Family Wealth, our sense is that people want clear guidelines and simplicity. It may be a complex process to get from A to B, but the most important thing for a person is just to get from A to B. Advisors that can do this in a clear and understandable way, add REAL value – often undervalued by the client.

3. Being mindful of human behaviour

Research shows that investors consistently underperform relative to the market benchmarks over time (https://www.dalbar.com/QAIB/Index). This is a global phenomenon driven by investor behaviour.   Advisors are not immune to making behavioural mistakes, however REAL advisors are aware of the problem and guide investors through market uncertainty and volatility. Sometimes it’s difficult to sit still or to stick to the same strategy, but often that’s exactly what you should do. This is again an important advisor skill underrated by clients.

 

4. Being a generalist

A skilled advisor can tie large areas of expertise such as investments, tax and estate planning together when making investment decisions and selecting appropriate products. Understanding the impact of tax on certain investments and staying on top of regulatory changes can add significant value when constructing an investment portfolio.

Tax structures and legislation changes a lot – which means that products and structures need to be reviewed and adjusted accordingly. The recent changes to trust legislation are a good example.

Having an advisor that can combine these skills and expertise and take into account your personal circumstances and your family situation, will not only save you time and money but will add significant value to your life.

 

5. The way you make me feel

It’s hard to quantify or explain, but sometimes we just go with our gut. We go with what feels right. An advisor that listens, shows empathy and asks strategic questions is more likely to get my business than the arrogant salesman. Foundation’s motto is Wealth for Life. This not only refers to preserving our clients’ wealth and capital for life, but also to using that capital to fund REAL life for you and your family. It also speaks to preserving the relationship between us and our clients.

So, next time you question your advisor fees or read about cheap do-it-yourself solutions, ask yourself what REAL value you’re getting in return.

Do you currently have a financial advisor or a REAL financial advisor? A good doctor has the ability to diagnose and treat a serious condition and possibly save your life. No wonder we don’t mind paying their fees. Similarly we believe that a REAL financial advisor can add significant value to your life that far outweighs their fees.

 

Credit to Carl Richards for his graphs and inspiration. And we can’t rave enough about his brilliant book. Read more here: The Behaviour Gap Book

 

The secret to happiness in retirement

-By Elke Zeki

 

Planning for retirement is one of the most interesting aspects of financial planning. Despite our vastly different circumstances and financial situations, we generally have the same underlying goal: to retire happily and in good health.

The desire for happiness and health is not just exclusive to retirees though. In our later years these things are just magnified because we have less distractions (like work or raising children) and more time to focus on ourselves.

A recent survey of millennials (done by the Professor of Psychology at San Diego State University) looked at what their most important life goals are. Over 80% of them ranked ‘having money’ as one of their most important goals. More than 50% of the same individuals ranked ‘fame’ and ‘image’ very high too.

The world’s longest study on adult development (done by Harvard University) followed two groups of boys over the course of 79 years – one group from a wealthy and privileged neighbourhood and the other from a very poor area. Over the years the researchers started including the wives and extended family members in their study. The program still runs today. This particular study found that money and fame don’t make you happy or healthier. Of course, we know this, but then what does?

Turns out that the key to happiness is relationships! Good strong relationships are just as important to your physical and mental health as eating well and exercise.

“People who are more isolated than they want to be from others find that they are less happy and that their health declines earlier in midlife. Their brain functioning declines sooner too, and they live shorter lives than people who are not lonely”. This is according to Robert Waldinger in his TedTalk entitled: “What Makes A Good Life”. He goes on to say that good, close relationships seem to buffer us from some of the slings and arrows of getting old. Watch the full video here:

TED talk by Professor Robert J Waldinger

We loved this research as we see evidence of this every day in our interactions with our clients! Even though we work with money and money related goals, it’s very rarely the thing that makes our clients happiest.

Our experience tells us that happily retired people all have the following in common:

  • They plan their retirement long in advance.
  • They know what’s important to them (i.e. their core values) – and they make sure that their financial plan is constructed with this in mind.
  • They live within their means.
  • They actively seek to replace workmates with playmates.
  • They focus on the important relationships in their lives. Quality over quantity.
  • They focus on fitness and health.

One client told us a lovely story about a little old lady she knew who was visiting the doctor. She was not wealthy but viewed herself that way because of her children and grandchildren. As she left the doctor’s rooms he picked up her purse from the chair and handed it to her. Feeling the weight he jokingly said, “You must be very rich” to which she replied, “Yes, I am indeed”.

In a world where we are easily distracted by social media, money, fame and privilege, let’s not forget what truly matters. The wonderful thing about relationships is that it’s never too late to work on them. And what better time to invest in these than over the upcoming holiday season.

 

Topline: The Market This Quarter

By Thiart van Der Merwe

Quarter 3 Review

 

Source: PortfolioMetrix

 

There’s been a rally in SA equities in the last quarter. Some sectors have done really well. If we compare the returns to the rest of the world however, we are lagging. Why? Own goals on the political front.

Against our Emerging Market peers, we have underperformed by more than 50% over the last two years in dollar terms.

Global sentiment is certainly picking up with investors seeking high yields across the globe due to depressed interest rates in the developed world. We continue to see inflows into our own bond market despite the credit ratings downgrades and political uncertainty.

China posted returns in excess of 40% for 2017. Sentiment out of Europe is also improving with good returns from the major European countries. The story in Europe will unfold as the European Central Bank looks at its monetary policy and its QE-program (Quantitative Easing).

 

Source: Investec Asset Management

 

Domestically, earnings growth has improved by almost 30% year-on-year. This was partially driven by some of the resource stocks reporting satisfactory results. Resources have been the standout performer from an investor viewpoint – up 17.8% for the three months ending September. One of the contributing factors was an uptick in commodity prices with The Economist Metals Index recovering from the deflated prices in 2015. The All Share Index’s Price to Earnings Ratio, which measures how expensive the index is, has dropped from 22.8 in October 2016 to 15.3 in September 2017. This indicates a cheap domestic market and generally appetite increases at a lower PE ratio.

Foreigners have been net sellers of SA equities in September following the trend over the last two years. This is a further indication that despite the improving earnings figures, we are lacking investment into our local market. Although politics may not be the only factor, the uncertainty of what happens after the ANC conference in December and policy direction chosen, plays a significant role in this lack of investment.

#GuptaLeaks

 

Source: Google Images

 

As the #GuptaLeaks emails were scrutinized, some big private sector firms got caught in this web and are starting to face the music. KPMG withdrew their findings on the controversial SARS Spy Tape Report that was instrumental in the axing of finance minister Pravin Gordhan. The repercussions were severe as eight senior executives resigned and large firms that used KPMG have taken their business elsewhere. The financial impact could cost KPMG their place as one of our top audit firms with analysts predicting an exit from SA within 24 months.

Internationally, Bell Pottinger and McKinsey are facing the same fate as they came under fire for their ties with the Gupta’s. The US regulators have been alerted on the McKinsey debacle and possible fraud. If they do intervene, that could turn this into a criminal case that may even lead to prosecutions. Not so long ago we saw leaders from Emerging Market countries such as Brazil and South Korea getting sentenced to jail for corruption – so a similar fate may await some of South Africa’s political elite. This could take years to resolve but there is a good chance that we will see some connected individuals and politicians behind bars.

Global Consumer Confidence

Source: Stanlib

 

In a survey by IPSOS that measures consumer confidence in 24 countries, SA was the only country that recorded a noticeable drop in confidence – down roughly 3%.

Interestingly China leads the pack both in consumer confidence as well as global returns.

In September, business confidence in SA fell to its lowest point in 30 years. Economists point out that to fix our economy, we need to fix confidence. The lack of confidence is also evident in the cash piles of over R1.4 trillion of JSE listed companies according to the Centre of Competition, Regulation and Economic Development. The reluctance of the private sector to invest can directly be linked to the lack of confidence and the uncertain political environment that we are heading into with the ANC Leadership Conference coming up in December.

War of Tweets

Source: Twitter

 

Could a war of tweets potentially lead to World War 3?

In recent weeks, North Korea has performed six nuclear tests with the main aim to hit mainland United States with a nuclear tipped missile.

Trump has reiterated that talking is not the answer – indicating that an attack on North Korea could be the only solution. The UN has imposed further sanctions on North Korea that could cost them an estimated $1 billion per year. The effectiveness of the sanctions would rely heavily on China and Russia’s enforcement, which has been lacking in the past.

Underpinning President Trumps’ campaign from the get-go is the “America First” rhetoric – aimed at establishing a sense of nationalism with Americans. Unfortunately this has not translated well – and has caused further division – often interpreted as an America for white supremacists. One can only hope that this doesn’t contribute to full-scale war.

Markets have shown short-term volatility with jumps in safe haven assets such as gold, but there has been no significant market reaction to this as yet. May sanity prevail as this is a major geo-political risk that will hurt returns across the spectrum.

In Summary

Source: PortfolioMetrix

 

Local equity had a very good quarter – up roughly 9% over three months. This was mainly driven by a rally in resources. With all major indices in positive territory, there is more appetite for riskier assets worldwide. There are signs that economic conditions are improving worldwide. Historically when markets are cheap – prices tend to go up. Time will tell whether South Africa can overcome our structural issues and share in the positive global sentiment.