The first month of 2016 is under our belts and it followed the pattern of the last few months of 2015 leaving many investors decidedly uncomfortable.
The latter part of 2015 shaped up to deliver acceptable investment returns despite weak economic growth which is at the core of all our domestic problems, but this was overturned in an instant with the revolving door appointments of finance ministers in mid-December.
Local and international investors reacted violently with asset prices and the Rand plummeting. Significant pressure from a number of quarters led to the rapid reversal of President Zuma’s decision. The appointment of Pravin Gordhan has provided short-term stability, but the damage to the credibility of the Zuma administration has been severe. Nenegate is now old news, but the r everberations continue to be felt. During January the local situation has been exacerbated by the growing fears over the Chinese economy which impacted all emerging market stock markets and their currencies negatively.
It is important to take note of the global forces at work at present to place current conditions in context as well as our response to them. From the outset it must be made clear that it appears a meaningful recession is unlikely to occur in the major economies in 2016.
The US economy is growing robustly albeit slowly leading to rising interest rates in that country which will maintain the Dollar’s strength to the detriment of all other currencies. Europe is at least 3 years away from increasing interest rates and, with Japan, is in fact planning to shortly print more money to stimulate the economy. China and the rest of Asia are even further behind on this score. The continued Dollar strength will keep the pressure on those emerging countries with high Dollar debt levels and dependent on revenue from natural resources. These countries, like South Africa, which could not mine their resources fast enough in early 2000’s and then could not stop mining fast enough over the last 3 years, remains distinctly out of favour with investors. Matters are made worse by the fact that it appears that bond prices have already priced in a downgrade of SA’s credit rating to junk status.
Where does this leaves SA?
SA still appears the best of a bad bunch with Brazil on the verge of bankruptcy and a massive political crisis, Turkey is suffering from political instability, Russia is closed under sanctions and deteriorating fast while many Asian favourites are going downhill due to their connection with China. We therefore still have some good news to offer as long as we can stave off the impending ratings downgrade (as Mr Gordhan recently promised at Davos) and we start implementing more investor-friendly economic measures (as Mr Zuma also promised at Davos). After the 0.50% interest rate increase in January, there is now general acceptance that interest rates will have to rise to a neutral rate of 7.50% to protect the Rand for 2016. Over the next 6 months the State of the Nation address, the budget speech, the local elections and the ratings agency review will all be closely watched.
It is with some satisfaction that we can say that our portfolios managed to achieve their respective benchmarks during the 12 months ending December 2015. We envisage that 2016 will remain an extremely challenging environment with low growth rates across all asset classes, locally and globally. Diversification will therefore remain key with special attention focused on stock picking asset managers as the local stock market remains expensive. Bonds may provide more attractive returns while cash holdings across some of the portfolios and funds have already been increased. Increased international exposure remains imperative to protect against a weakening Rand.
This is however an area fraud with pitfalls as Dollar returns remains very low to negative and the Rand’s current weakness making many investment avenues unattractive. As such this will be discussed with each client individually and recommendations will be based on their specific goals and requirements. What is therefore clear is that there is no reason for panic yet and that the portfolios are performing in line with their predetermined benchmarks. Our best advice at this time is to focus on your long-term strategy of wealth creation, ignore all the short-term noise and to stay calm and remain invested.
Consider This
To encourage a culture of personal savings, Government had for the first time introduced tax-free savings accounts in 1 March 2015. This means that all the investment returns are completely tax-free. This product is suitable for an emergency fund, wealth creation, education and to save for a specific goal.
In summary
- The returns or growth you earn on your investments are completely tax free.
- Tax free investments give you flexibility, as you don’t have to commit to any future contributions
- You can invest up to R30 000 in one tax year and R500 000 in total over your lifetime.
- You have flexible access to your investment and there are no exit penalties.
While the account can be accessed in shorter periods, a time frame of 10 years or more will allow the power of compounding to take effect. We urge investors who have not initiated a tax free savings account to make a lump sum payment before the end of the tax year (29 February 2016). Talk to us for a personalised solution.
