Dear Investor,

Our “view of the month” is a picture showing the arrival of the Johnson & Johnson Covid-19 vaccine. President Cyril Ramaphosa confirmed during a televised address on Sunday 28 February’21 that South Africa has secured enough Covid-19 vaccine doses to administer 43 million injections by the end of 2021. At the same time he announced that the country would move from alert level 3 to alert level 1. Below a short summary of what alert level 1 entails:

• The curfew hours will now be from 12 midnight to 4am.
• Gatherings will be permitted, subject to limitations on size, adherence to social distancing and other health protocols. These include religious, social, political and cultural gatherings.
• The maximum number of people allowed at any gathering is 100 people indoors or 250 people outdoors. Where the venue is too small to accommodate these numbers with appropriate social distancing, then no more than 50 per cent of the capacity of the venue may be used
• Night vigils or other gatherings before and after funerals are still not permitted.
• Night clubs will remain closed
• The sale of alcohol will be permitted, according to normal license provisions. However no alcohol may be sold during the hours of curfew
• The wearing of masks in public places is still mandatory, and failure to wear a mask when required remains a criminal offence.
• The 33 land boarder posts that have been closed throughout this period will remain closed, while the other 20 will remain open.
• Only five airports will be open for international travel with standard infection control measures. These are OR Tambo, Cape Town, King Shaka, Kruger Mpumalanga and Lanseria airports.

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

1. Five year anniversary
2. Should I Top-up my RA or invest offshore
   
3. Contrarian Investment Opportunity – Investec USD S&P 500 Value Index Autocall
4. Investec’s Rand forecasts
5. Oil tanks feeback
6. ETF portfolios feedback
7. Fuel prices
8. Market stats summary
9. Financial indicators as at 26 February 2021

1. Five year anniversary

1 March 2021 marked Vista Wealth Management’s fifth year anniversary! We would like to thank our valued clients for their continuous support over the last five years, we could not have reached this milestone without you and look forward to achieving mutual success in future.

2. Should I Top-up my RA or invest offshore?

This was the question posed most to us during the month of February. It is because investors have lost confidence in the local markets after years of poor performance and the restrictive exposure rules surrounding Retirement Annuities (RAs). The below graph indicates the performance of a random basket of SA Balanced funds compared to a basket of random Offshore equity feeder funds over the last 5 years:

As financial advisors, we cannot allow our general/opinion OR the politics of our country to determine the answer to this very important question posed by investors. As a result, we did the research and crunched the numbers. Below a short summary listing the main considerations between RAs and Offshore discretionary investing:

As a reminder, the main benefit of an RA is that contributions are before tax and investors are therefore allowed to contribute 27.5% of their gross annual income with a limit of R350k per annum (pa). Another important benefit of an RA is the fact that there is no capital gains tax on growth, or tax on dividends and interest.

In order to find a result to this question, we created an experiment where we assumed an investor that is affected by the 45% tax bracket. We presented two investment scenarios to this investor to either contribute annually R350k (before tax) towards an RA or R192,500 (R350k after 45% tax) towards an offshore discretionary investment. We assumed in both scenarios the contributions were made annually for 10 years.

The contributions were then future valued using the average returns over 5 years for both a basket of random SA Balanced funds and Offshore equity feeder funds as indicated in the graph above:

The results were profound! Like many readers, we thought that offshore discretionary investment would outperform RA investment by miles but due to the benefit of contributing larger amounts towards the RA before tax, the compound effect of a larger contribution outperformed the offshore discretionary investment by over 46%.

In a desperate attempt to demonstrate offshore investing is better, we took the experiment further, so that the investors start drawing an income off their savings and start paying income tax on the withdrawals. The hope was that since the income from the RA will be taxed according to the normal individual tax rates, it would be higher than the Capital Gains Tax (CGT) for the offshore discretionary investment, which works on an inclusion rate of 40%.

Not even the beneficial tax rules applicable to CGT and the fact that the investor paid zero taxes could help, and the RA annual income after tax was still 29% more than the offshore discretionary investment. In fact, the RA would have performed even better if we applied the one-third two-third rules. As a reminder, these rules state that that the investor must use two-thirds of their retirement savings to buy an annuity. The remaining one-third can be withdrawn in cash. The first R500k of the retirement cash lump sums (in aggregate) is not taxed.

At this point it is worth mentioning a couple of important observations about investment vehicles:

• The limited offshore exposure dilemma associated with the RA scenario can be reduced by utilising a Personal Share Portfolio (PSP) where the underlying shares are all the JSE blue chip shares which happen to be listed in SA only. Speak to Vista Wealth Management to find out more about this solution
• The offshore investor could have made use of an Endowment which is an investment structure that offers tax benefits to investors with marginal tax rates of more than 30%. This is because the life assurer pays tax on behalf of the investor and the proceeds are tax-free in the investor’s hands. For individuals, life assures pay tax at 30% on all income in the policy. This means an individual’s effective CGT rate in an endowment is 12% as opposed to 18% for high income earners affected by the 45% tax bracket in SA

Lastly, the above experiment excludes many risk factors which are difficult to measure and therefore take into consideration. These factors can very easily present the RA investor with massive hurdles without a way out viz:

• RAs forced to invest in government projects and State-Owned Entities (SOEs) through prescribed assets.
• SA growth reduces even more as a result of continuous mismanagement and looting of state resources
• The ZAR weakens drastically as a result of continuous downgrades by rating agencies and reductions in foreign direct investments

Therefore, at Vista Wealth Management we advise our investors to diversify their retirement savings across both their pension allowance and offshore allowance. Always start contributing towards pension and then move over to your offshore exposure portfolio.

In conclusion, Albert Einstein was correct when he said that the eighth wonder of the world is compounded interest. As seen by result from the growth, the fact that a larger amount is contributed to your RAs has a massive benefit and should not be underestimated. We can only hope that law makers will, in future, increase the offshore exposure allowed by Regulation 28 of the pension fund act. This will make contributing to your pension savings a no brainer and research like this unnecessary.

3. Contrarian Investment Opportunity – Investec USD S&P 500 Value Index Autocall

The cumulative difference between the S&P500 growth and value stocks has grown drastically over the last year with Covid-19 lockdowns contributing to the success of tech and therefore growth stocks. To therefore invest in value stocks would be contrarian as the momentum has been with growth stocks. This, even though value stocks are at their cheapest levels in 100 years on a relative basis.

Enters the Investec USD S&P500 Value Index Autocall – a contrarian investment opportunity which can be either be hosted in your JSE Local Trading account or your Glacier International investment accounts. The investment has the following salient features

Participation closing dates:
Glacier International USD portfolio – 8 March 2021
JSE Local share portfolio – 15 March 2021

Click here for the complete brochure

4. Investec’s Rand forecasts 

The Rand returned to over R15.00 to the USD on the market realisation that the SA Budget still potrays a poor fiscal outlook for SA, despite a slight improvement. Some of the highlights of the SA Budget delivered by the Minister of Finance during February’21:

• Reduced debt peak
• Revenue over-run of approximately R100b
• No tax hikes in the Budget
• National Treasury holds the line on expenditure

Below Investec’s exchange rate forecasts as published during February’21:

5. Oil tanks feedback

Oil prices have rallied off the back of possible vaccines for Covid-19 and therefore an increased demand for oil. As published in our previous newsletters, we’ve been trading oil in both our local and foreign share portfolios. See below returns over the last 4 months of the two Exchange Traded Products (ETPs) used to get exposure to oil:

6. ETF portfolios feedback

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. ETF portfolios have in recent years proven to not only be cost-effective investments for our clients but has also been outperforming active fund managers. 

Below our ETF house view portfolio performances as at 26 January 2021 on a cumulative basis:

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

 

7. Fuel prices

Remember to fill up as there is another massive fuel price increases becoming effective on Wednesday, 3 March’21. According to the Automobile Association, the price of petrol is expected to increase by up to 66 cents a litre, diesel by 57 cents, and illuminating paraffin by 49 cents. The Automobile Association (AA) said the latest price hike was due to the increased economic activity because of the global rollout of the Covid-19 vaccines, firming demand for oil. Despite the Rand not performing too bad against the USD, it was not enough to ease the climb in oil prices

8. Market stats summary

The red block shows the market stats for the month of February’21. In short, the JSE All Share Total Return index was up ↑5.9% for the month (↑23.5% for the last 12 months). The Resource sector was the best performing sector for the month, up a massive ↑11.6%. The Property sector was the second best performing sector up ↑8.6% for the month, unfortunately still down ↓21.3% for the last 12 months. The Financial and Industrial sector was both up ↑4.8% and ↑2.3% respectively for the month.

9. Financial Indicators as at 29 January 2021

 Global indices (NB! Returns are measured in Rand percentage points. For example, the S&P 500 was down -0.02% for the month as measured in Rands) 

JSE Sectors:

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

Interest Rates: