VIEW OF THE MONTH NEWSLETTERAUGUST 2020
There can’t be a more beautiful country than South Africa during spring. Our “view of the month” is a picture of the blooming wild flowers in Namaqualand (Northern Cape area). It is an arid area that seems inhospitable, but once a year, after the winter rains, there is a springtime explosion of wildflowers. This occurs some time from mid-August to mid-September.
With the Covid-19 pandemic lockdown regulations, the South African travel and tourism industry has been one of the most affected industries. We call on all our readers to travel and support local this year.
In this month’s newsletter we cover the following topics:
- Government wants your pension?
- Capital protected investments
- Rand forecasts
- Oil tanks feedback
- ETF Portfolios feedback
- Share-based loans
- Fuel prices
- Market stats summary
- Financial indicators
There seems to be consensus amongst the private sector, the public sector, and the ANC, that increasing infrastructural spending is essential to grow the SA economy again. As part of these discussions, the ANC proposed changes to Regulation 28 (Reg 28) of the Pension Fund Act. For the cynics, this meant prescribed assets and therefore forced investment of pension money in failing state-owned entities (SOEs) or funding of a state-owned bank with your hard earned pension.
Before we go further, the ANC has subsequently stated that the idea behind the Reg 28 tweaks are NOT TO ENFORCE PRESCRIPTION, but rather to create an environment where pension trustees are able to invest in infrastructure projects, as long as those infrastructure projects are profitable. The recent spate of Covid-19 corruption and deployment of ANC cadres out on corruption charges, has however triggered public outrage and mistrust. Social media trends like #VoetsekANC indicates the people just don’t trust the ANC anymore.
Reg 28 governs the maximum exposure that retirement portfolios may have to various asset classes. It aims to ensure that individuals’ hard-earned retirement savings are invested in a sensible way and protected from poorly diversified portfolios. As an example, Reg 28-compliant portfolios are limited to exposures of 75% in equities, whether in South Africa or abroad, 25% in local or international property, 30% in foreign investments, excluding Africa, and 10% in Africa (outside South Africa) of the total capital invested. Particularly the 30% asset cap to offshore exposure has affected investment returns negatively over the last 5 years, but that is a topic for another day.
The point is, there is already regulation in the pension fund act that prescribe assets for pension savings and the fact that the ANC is looking at tweaking it is of grave concern to investors. Our aim with this section of the newsletter is to identify the pension products potentially impacted by a changed Reg 28 and highlight options available to investors in this regard. The cheat sheet table below summarises the main pension products in question: Whether they are governed by Reg 28? Can you can stop contributing towards them? Or withdraw your pension savings before the age of 55?
|Governed by Reg 28?
|Withdraw before 55?
|Retirement Annuity (RA)
|Living Annuity (LA)
1.1 Retirement Annuities (RAs) – Investors in these products will probably be the most affected by a negatively revised Reg 28. As a first option, concerned investors can decide to stop contributing towards their RA, even though some of the old school RAs might have penalties for doing that.
RA investors are not allowed to withdraw from the fund before age 55 and on retirement, are permitted to take a maximum of one third of the benefit in cash. The rest must be used to buy retirement income referred to as a compulsory annuity. An exception applies if the investor officially emigrates (financial emigration). In this case, the member may withdraw the full pension savings amount.
But even with financial emigration, there is a draft Tax Law Amendment Bill (TLAB) which could cause an obstacle. The draft TLAB is proposing to prevent a South African who has exited South Africa’s tax base, from withdrawing their retirement funds from the country, until an unbroken period of 3 years has passed where that person can prove non-tax residency.
1.2 Pension/Provident Funds – With this we refer to investors who are required to contribute a percentage of their salary toward their employer’s pension or provident fund. Generally, investors can opt to reduce the percentage contribution but not stop contributing. To withdraw funds from these Pension/Provident Funds is relatively easy. The investor would just opt to withdraw the funds from the employer’s Pension/Provident Fund upon resignation, therefore not opting to preserve the funds or retire.
1.3 Pension/Provident Preservation Funds – As with RAs and Pension/Provident Funds, Pension/Provident Preservation Funds are governed by Reg 28. Investors are however allowed to make one full or partial withdrawal from their Pension/Provident Preservation Fund before retirement, subject to the requirements of the transferring fund, legislation and/or regulatory authorities. If you make a partial withdrawal, you will not be allowed to make another withdrawal related to that contribution and the remaining amount will have to remain invested until retirement or death.
1.4 Living Annuity (LAs) – Very important, LAs are not governed by Reg 28 and is therefore not affected by potential negative changes. As a result, it might be an option for investors that have reached retirement age to convert their RAs and/or Preservations to LAs, to avoid being affected by negative changes to Reg 28. For example, with a Living Annuity, an investor can make their underlying investment 100% offshore, avoiding the impact of a weakening SA economy and Rand. The disadvantage of LAs is that investors will never be able to withdraw their savings, not even through financial emigration. Investors are required to take an income from their LA of between 2.5% and 17.5% annually. They can therefore opt to increase the income withdrawal to the maximum but mathematically they’ll never be able to withdraw their full pension.
1.5 Withdrawal benefits – We thought it useful to display the SARS tax table that applies when withdrawing before retirement below:
1.6 Retirement & Death Benefits or Severance Benefits – If you have reached the minimum retirement age stipulated by the fund rules or legislation, you can also choose to retire and benefit from the more favourable retirement lump sum tax table below:
1.7 Conclusion – the ANC has indicated that there is no truth in the rumors that pensions will be used to bail out SOEs and they’re only exploring ways to make it easier for pension fund trustees to invest in infrastructure projects. Saving, utilising a pension vehicle, has massive benefits since contributions, growth, dividends, and interest within these vehicles are tax free, which could lead to compounded returns. Concerned pension investors do however have options as indicated in the above sections
Continuing with our “Cash is NOT king” theme, South African interest rates have been reduced by 3% this year already. Conservative investors making use of interest bearing bank or money market investments are lucky if they earn more than 4% per annum, therefore hardly keeping up with inflation.
This month we bring you 4 great capital protected investment ideas which are more aggressive than interest bearing instruments but still protect investor’s capital. The underlying for these investments are all international indices also providing a Rand hedge for investors – listed in order of participation closing date:
2.1 ABSA Twin Fixed Return and Growth Protector – Issue 16
– Closing date 9 September 2020
– Hosted within JSE Trading Account
2.2 Investec S&P500 Autocall
– Closing date 14 September 2020
– Hosted within JSE Trading Account
2.3 Glacier Sustainable World Enhancer – 400% enhanced return
– Closing date 16 September 2020
– Hosted within Glacier sinking fund
– Minimum investment R100k
2.4 Absa Global Growth Basket – USD Issue21
– Closing date 28 September 2020
– Hosted within Glacier International Global Life Plan
Key points from a Rand Note by Investec as published on 25 August’20 includes:
- The Rand was stronger during August’20 instead of weaker as is traditional in the Northern Hemisphere summer. With many market players on vacation in this period (even if reduced this year on restrictions) thin trade in prior years often meant higher risk aversion levels
- However, this year the directional trend is towards strength for emerging markets in Q3.20, instead of weakness as has been normal. Q3.20 has been underlaid with US dollar weakness on a departure from safe haven assets as markets continue to price in recovery for the global economy, with traders fearful of missing out on this play
- Indeed, market players likely feel that the most severe events this year have already transpired from a risk-off perspective, while the severe shutdowns, and resultant crippling impact to economic activity, has been localised in Q2.20 and by default both Q3.20 and Q4.20 will experience strong recovery
- The Rand could move towards R16.50/USD in the first week of September, but then run into some volatility thereafter. Market risk averse asset sentiment could rise as early as the second week of September on politicking ahead of the US Presidential elections.
- Below base case forecasts for the ZAR/USD exchange rate:
The US Energy Information Administration has said it expects high inventory levels and surplus crude oil production capacity will limit upward price pressures in the coming months, but as inventories decline into 2021, those upward price pressures will increase. In turn, OPEC said looking ahead, crude and product price developments in H2.20 will continue to be impacted by concerns over a second wave of infections and higher global stocks. Product inventories may remain elevated due to weak road and air transport fuel demand.
As a result of the above, it is expected that Brent crude oil price will average just over US$40/bbl this year, and around US$50/bbl next year as price pressures build over 2021 on improving global economic activity, and so higher demand for commodities, including oil.
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 4 months. Due to the Oil price at expected levels for the year and Rand strengthening forecasted, it might be time to take profit on the SA positions:
|Performance for May’20
|Performance for June’20
|Performance for July’20
|Performance for August’20
|JSE share portfolio
|Offshore share portfolio
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 have in recent years proven to not only be cost-effective underlying investment for our clients, but also been outperforming active fund managers.
Below our ETF portfolio performances as at 31 August 2020 on a cumulative basis:
|1 Year performance
|2 Year performance
|5 Year performance
|Local ETF Portfolio
|Offshore ETF Portfolio
*Past performance is no guarantee of future performance. Above returns excludes dividends, except where ETF is a total return ETF
On the flip side of the “cash is not king” dilemma, it is now much cheaper to gear your JSE share portfolio. By pledging your JSE share portfolio as collateral, you can get a loan at prime interest rate which is now 7%. 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 3.5% per annum in order to service the interest on the share-based-loan. Click here to read more.
7. Fuel prices
The Department of Energy has published the official fuel price adjustments for September 2020, showing a marginal increase for petrol drivers, and a sizeable drop for diesel. According to the department, the following adjustments will be made on Wednesday (2 September):
- Petrol: ↑ 1 cent per litre
- Diesel: ↓ 21 cents per litre
The red block shows the market stats for the month of August 2020. In short, the JSE All Share Total Return index was negative ↓-0.3% for the month (↑3.9% for the last 12 months). The Industrial and Resource sectors were slightly up ↑0.5% and ↑0.3% respectively. The Financial and Listed Property sector were both convincingly down ↓-4.3% and ↓-8.6% respectively.
Global indices (NB! Returns are measured in Rand percentage points. For example, the S&P 500 returned 6.17% for the month as measured in Rands):
Currencies (Positive indicates ZAR has weakened for the period, vice versa):