Dear Investor,

Its halfway through the year, and what a crazy year it’s been so far! With COVID-19 at centre stage, there have now been more than 151,000 people infected with COVID-19 in South Africa, with the death toll at 2,657. South Africa is currently on Day 97 of its lockdown and on level 3 of an eased lockdown which has allowed millions of workers to return to work. We request all our clients and readers to please do their part and abide by the safety measures in order to stop the spread of this deadly virus.

In this month’s newsletter we cover the following topics:

1. Local economy update
2. International economy update
3. Rand update and forecasts
4. Investment feedback and ideas
5. Fuel prices
6. Market stats summary
7. Financial indicators
8. Conclusion

1. Local economy update

South Africa’s finances are in a dire shape with both our fiscal and current account deficits at very concerning levels:

• The fiscal deficit (difference between government income and expenses) in particular, is increasing due to the tax collections which declined by -28.7% y/y for May, compared to the 7.0% y/y rise in the same period last year. The collection of personal income tax will continue to be constrained by the significant job losses and reduced earnings anticipated due the pandemic. Additionally, the increase in business closures will continue to weigh heavily on corporate tax collections. Government’s inability to cut expenses is the final reason for the large fiscal deficit.
• The current account deficit (difference between SA imports and exports) will only be published on Thursday 9 July and is expected to decline to -1% of GDP from -1.3% of GDP. This is due to the decline in imports because of the COVID-19 lockdown and weak economic activity.

Treasury presented its supplementary budget on 24 June, modifying the budget outlined in February 2020 “to provide for the rapidly changing economic conditions and enable spending on the COVID-19 response”. This special budget was not good, but it was better than feared for the following reasons:

• There is no plan to increase local bond issuance by more than the already announced increase implemented in May. The funding shortfall will be funded by a combination of a drawdown on cash balances at the Reserve Bank and foreign loans from a combination of the New Development Bank, the IMF, the World Bank and perhaps the African Development Bank
• There was no deterioration in the government wage bill from the zero-increase tabled in the February 2020 budget
• Beyond the R3bn budgeted for the recapitalisation of Land Bank, there was no further allocation to state-owned enterprises
• There is a clear attempt to stabilise the debt burden at 87.4% of GDP by 2023/24 through significantly reduction in expenditure and using regulatory reform to stimulate growth
• This budget has been well processed with cabinet, therefore not simply the Finance Minister trying to dictate terms

The biggest problem with this budget lies in government’s ability to implement. It is important to also note the rating agencies are likely to downgrade SA further on the back of the supplementary budget, which highlighted a massive decline in the health of SA’s finances. Gross debt as % of GDP of 81.8% is projected for this fiscal year 2020/21, previously 65.6% of GDP was expected for this year.

Lastly, the contraction in SA GDP growth in 1Q.20 was better than Bloomberg consensus forecasts, declining by 2.0% q-o-q (Bloomberg consensus estimate at -4.0%), following a -1.4% q-o-q contraction in the previous quarter. However, this was the third consecutive quarter that the economy contracted.

2. International market update

As can be seen in the detailed stats below, most major markets across the world have also been negative for the first half of 2020. We do however believe developed markets may have seen the worst of the COVID-19 pandemic. This is due to the large-scale quantitative easing (QE) and liquidity that their governments and central banks can pump into the financial system. Emerging markets like South Africa, with twin deficits (both fiscal and current account), will unfortunately lag developed markets. As a result, we’re happy to allocate large portions of our clients assets towards offshore investments.

3. Rand update and forecasts

The Rand has been all over the show for the first half of 2020, trading at levels as high as R19.35/USD in April to R16.33/USD in June. The rally in June was a direct result of the QE occurring in developed markets, stimulating risk taking from financial market players seeking yield. After some recent consolidation, the Rand is currently trading at R17.25/USD as we pen this note. According to Investec it is likely to largely remain around current levels into Q3.20, and then strengthen somewhat further. Below their forecast for the Rand up to Q4.21:

4. Investment feedback and ideas

4.1 Cash in the bank not a good investment strategy anymore

With interest rates being cut by 2.5% already and potentially more cuts this year, you’re lucky if you earn more than 5% on your cash in the bank. At Vista Wealth we can assist investors finding better yield while remaining liquid and conservatively invested:

• Bond and income funds and exchange traded funds
• Tax efficient policy wrappers
• Notice term (30 to 60 days) deposits
• Fixed term (6 months to 5 years) deposits

4.2 Compulsory (pension) and discretionary asset allocations

Our preferred asset allocation for compulsory money remains 35% SA Bonds, 35% Income funds and 30% Offshore equities. For discretionary money we’re recommending as much as 60% Offshore exposure. With the advent of Covid-19, we’ve become circumspect about the Global Property asset class within our discretionary portfolios and would rather allocate to global equities which seems to offer more superior prospects.

4.3 Capital guaranteed structures

We’re still promoting the Investec China Seas capital guarantee as we believe this is a great investment opportunity so applicable to the times we live in. Even though participation through the Glacier International endowment wrapper is now closed, clients can still invest directly in the structure until Friday 10 July. Click here for more detail and below the most important points:

• Capital guarantee – Creating certainty during the Covid-19 pandemic while taking advantage of depressed market conditions
• Enhanced return – 1.1 times the growth in the Index with unlimited upside participation
• Geographic diversification – SA is not even 0.5% of global GDP and as a global citizen living in SA, it is critical to diversify offshore
• Stronger Rand – The Rand has strengthened significantly since Moody’s downgraded SA to junk status
• Short investment term – Investment structures’ terms are usually five years and longer, the China Seas term is only 3 years and 10 months
• Liquidity – While the capital guarantee and enhanced return is only applicable at maturity, daily liquidity in normal market conditions will be available for clients in need of an early exit
• Quality underlying index – 80% of the constituents of the Environmental World Index are also included in the S&P500 and Eurostoxx50 indices
• Tax benefits – The investment will also be available in your Glacier International Global Life Plan without additional custodian fees, thus keeping all your investments in one place and a tax rate of 30%
• Fees – Ongoing distributor fees are priced into the structure and not taken from the investor’s investment
• Minimum investment – USD10,000 or AUD14,000

 We’ve had a massive uptake in the China Seas structure and would like to thank all our clients who have participated, for their support!

4.4 Oil tanks

As published in our previous newsletter, we’ve been trading Oil in both our local and foreign share portfolios. Below the returns of the two Exchange Traded Products (ETPs) for the last 2 months:

#	Portfolio	Instrument	Currency	Performance for May’20	Performance for June’20
1	JSE share portfolio	SBAOIL	ZAR	24.95%	13.03%
2	Offshore share portfolio	USO	USD	36.32%	8.42%

SBAOIL is an exchange traded note (ETN) issued by Standard Bank that trades on the JSE and attempts to track the performance of the West Texas Intermediate (WTI) oil Dollar price per barrel converted to Rand. Each ETN is equivalent to 1/50th of a barrel of WTI oil. SBAOIL trades like a normal share on the JSE in your local share portfolio.

The United States Oil Fund (USO) is an exchange traded security designed to track the daily price movements of WTI light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca. The instrument trades like a normal share and is available to our clients through their JP Morgan and Glacier International / DMA offshore trading accounts.

We believe the oil trade still has some legs over the long term as we feel the demand for oil will increase as the world economies recover from the COVID-19 pandemic. The oil price will however remain volatile over the short term as second waves (or clusters) of new COVID-19 infections are increasing around the world. Some economies are also looking at lockdown restrictions again, with the availability of a mass vaccine still only expected in 2021. However, the consumption of oil is still below pre COVID-19 levels.

4.5 ETF portfolios

An Exchange Traded Fund (ETF) is a security, which represents a basket of shares, that you can buy or sell on a stock exchange. These investment vehicles allow investors a convenient way to purchase a broad basket of securities in a single transaction. Essentially, ETFs offer the convenience of a stock along with the diversification of a unit trust. It is arguably the cheapest and most diversified way to get access to the stock market. ETFs portfolios has in recent years proven to not only be very a very cost-effective underlying investment for our clients, but also been outperforming active fund managers.

Below our ETF portfolio performances as at 30 June 2020 on a cumulative basis:

#	ETF Portfolio	Currency	1 Year performance	2 Year performance	5 Year performance
1	Local ETF Portfolio	ZAR	7.28%	17.69%	Immeasurable
2	Offshore ETF Portfolio	USD	3.59%	5.94%	35.58%

*Past performance is no guarantee of future performance. Above returns excludes dividends, except where ETF is a total return ETF

4.6 Share-based-loans

Did you know that by pledging your JSE share portfolio as collateral, you can get a loan at prime interest rate which is now 7.25%? That means that on a R1m JSE share portfolio with a R500k share-based-loan (i.e. 50% Loan to Value), the total return of your portfolio ONLY has to be 3.625% per annum in order to service the interest on the share-based-loan. Click here to read more.

5. Fuel prices

Both petrol and diesel prices increased drastically on the 1^st of July with the increases ranging between R1.63 and R1.73 per litre. Rand strength over June, from R17.54/USD at the end of May to R17.35/USD end of June, or an average of R17.11/USD over June (May averaged R18.15/USD), was insufficient to counter the climb in the oil price, which has risen from an average of R589.24/bbl for May, to an average of R697.84/bbl in June.

6. Market stats summary

The red block shows the market stats for the month of June 2020. In short, the JSE All Share Total Return index was positive by a massive ↑7.7% for the month (still ↓-3.2% for the last 12 months). All sectors were positive with the Listed Property sector leading the way, up 13.4% for the month. The Resource sector was up ↑8.8% with the Industrial sector short on its heels, up ↑8.2% for the month. The Financial sector saw the least increase, up ↑4.1% for the month.

7. Financial Indicators as at 30 June 2020

 Global indices (Returns are measured in Rand percentage points. For example, the S&P 500 returned -1.27% for the month as measured in Rands):

JSE Sectors:

 Currencies (Positive indicates ZAR has weakened for the period, vice versa):

 Interest Rate:

                        

8. Conclusion

We’ve had to adapt quickly to changing times, as a business, as a team and as individuals. We’re proud of the way our small company has pivoted to a new way of working while maintaining our service levels. We’re very grateful to you, our valued clients, for your understanding and flexibility in working with us. Our purpose is to serve you and your families in order to secure your financial prosperity now and for generations to come. This purpose gives us something to focus on at this difficult time and something to look forward to as eventually we will be able to return to a more normal way of life. The lessons we’ve learned about what’s possible have been invaluable and we take this forward with renewed vigour.