Developing Economic & Financial Trends

Developing Economic & Financial Trends

It has often been said that the onset of the Covid-19 pandemic brought with it a period of introspection where focus shifted from the wider world to the here and now.  We battened down the hatches and concentrated on family, trying to stay safe and working out how to continue earning a living. While we have been taking it one day at a time, it’s easy to lose track of the bigger picture and feel a growing disconnect with the outside world, financial markets and global economic trends.

Here are a few highlights of noteworthy developments on the South African front and further afield. As South Africans we are often hyper aware of all our problems, but give ourselves little credit for the positives.

The commitment of the Ramaphosa government to stimulate growth through structural reform is steadily shaping up.

Fast broadband is the backbone of a modern economy. Telkom and eTV are using the courts to block the opening up of additional spectrum needed to allow for widespread 5G, but they are clutching at straws and political and commercial pressure for the spectrum release is strong. Meanwhile MTN is spending R300 million on new fibre services and a Google and Facebook consortium are building new undersea cables that will encircle Africa and come into operation in 2022.

A stable power grid is essential for long term growth. Gwede Mantashe has appointed seven preferred bidders for the production of emergency power and further successful bidders will be announced later in the year which will cumulatively generate the 5000 MW deficit that is causing load shedding. Notwithstanding Government plans, private companies are also forging ahead in the energy sector – Gold Fields is finalising plans to construct a 40MW solar plant at its South Deep gold mine, which will comprise 116 000 solar panels and cover 118 hectares, roughly the size of 200 soccer fields. BMW, Amazon and Sasol are already sourcing electricity from independent power producers. Changes in legislation allowing for the generation of up to 10MW without a licence should see load shedding being resolved in the not too distant future.

Major upgrades of harbour and rural bridges are in progress. A new container harbour in Durban with a R100 billion investment over 10 years will increase efficiency and productivity significantly. Another R100 million is being spent upgrading Western and Southern Cape fishing harbours that have been neglected for years. The 41 rural bridges being constructed across several provinces will certainly make rural living easier.

The suspension of Ace Magashule has been somewhat of a political watershed and has already been well received on the international front.

On the political front, it does appear that the battle against state capture and corruption is at last bearing fruit. The recent suspension of Ace Magashule was a watershed and shows that President Ramaphosa’s position is steadily getting stronger. Below the high-profile headlines, it is important to note that an additional 68 ANC members from eight provinces, who are being charged with a range of criminal offences, must all step aside. Corruption is deeply embedded in SA but there are encouraging signs that the tide is now turning.

These structural and political reforms will release constraints in the economy, attract investment and perhaps most importantly of all, boost confidence on a national and international level.

In the US President Biden is moving fast on projects he has been passionate about for many years.

Joe Biden has reversed the US position on climate change from the Trump administration and signed the Paris Climate Agreement as one of his first acts as President. Since then, he has pushed through legislation limiting the use of fossil fuels and proposes ambitious policies designed to make the US a world leader in green energy.

In March Biden signed into law the $1,9 trillion American Rescue plan to counter the effects of Covid-19 for lower-income families. The Federal Reserve continues its own stimulus policies as it has for the past decade. He has proposed further massive government spending policies of $4 trillion to revive the US middle class and rebuild crumbling infrastructure.

The US national debt is now at 130% of GDP. The additional stimulus programmes will only increase this problem*. In order to start balancing its books, the Biden administration has resolved to substantially increase taxes on wealthy Americans by increasing marginal tax rates and closing tax loopholes. US company tax will also be rapidly increased, and those multinationals that use tax havens are firmly in the sights of the US tax authorities.

*(For interest, SA’s national debt is at 80% of GDP – similar to Germany’s.)

If passed into law this will be the largest raft of government spending programmes since Roosevelt’s New Deal of the 1930s. The swing from Trump’s highly conservative policies which largely benefitted the rich, to Biden’s far more socialist agenda, is happening with incredible speed. The repercussions will be felt throughout the world.

The Rand has been one of the world’s best-performing currencies over the past year.

We all like to follow the Rand, and it is a volatile currency. Currently, the Rand has strengthened to the R14.10 level against the US$ from as high as R19.00 last year and R15.80 five years ago.

Over the long term, the Rand/$ exchange rate is influenced largely by the commodity cycle and the broad US$ cycle, while political shocks in South Africa tend to move the exchange rate in the shorter term. For example, in 2011, the commodity cycle was strong and the US$ was weak, so the Rand strengthened to R6.00 to the US$. While in 2001 at the time of the Dot Com bubble, the commodity cycle was weak and the US$ was strong – so the Rand weakened to a high of R12 to the Dollar.  

This shows that the Rand is not a one-way bet, and many investors have had their fingers burnt as the Rand has strengthened and remained strong for several years at a time.

Beware Cryptocurrencies

Lastly, since cryptocurrencies are always in the news these days, this perspective from the Governor of the Bank of England, Andrew Bailey is relevant. “…..they have no value. I’m going to say this very bluntly again – buy them only if you’re prepared to lose all your money.”

The macro trends we have briefly discussed may not affect your investments this week, but over the long-run structural reform in both SA and the US will have a profound effect on the markets and your investment portfolio.

Why you need to consider Gap Cover

Ever-increasing medical expenses are giving rise to bigger and bigger medical aid shortfalls. That is why you need to know the facts about gap cover.

Medical schemes have a medical scheme rate, which is the maximum amount they will pay for treatment. In many cases, this rate does not align with the rates charged by medical professionals, hospitals nor the cost of medication. Health professionals can charge up to 3 or 4 times the medical scheme rate in some instances, leaving you with significant unplanned medical expenses.

Gap cover helps to cover the shortfall between the rate charged by medical specialists and the rate paid out by a medical scheme. Moreover, gap cover assists with the fees associated with co-payments, sub-limits, and other medical expense shortfalls.

Gap cover is not an alternative to medical aid. It is a complimentary product to cover the difference between medical aid reimbursements of medical costs and the actual costs charged

Technically gap cover is a short-term insurance product, regulated by the Long-term and Short-term Insurance Act 1998 and is completely independent of your medical scheme.  If you change your medical scheme, your gap cover remains in place and vice versa. However, you cannot have gap cover unless you are a member of a medical scheme.

Gap cover often covers more than you realise

We tend to think of gap cover in relation to approved in-hospital specialist claims. However, many of the Gap plans also extend cover to specific out-patient procedures such as MRIs, CT scans, chemo, radiotherapy, and kidney dialysis.

10 month exclusionary waiting period on pregnancy and childbirth

Starting a family should be a period of great joy, but the medical expenses that typically accompany pregnancy, birth, and early childhood can cause a great deal of financial strain. If you are planning to start a family, it is important to note that gap cover providers exclude pregnancy and birth for a 10 month period. This means there could still be a problem, even if you were not pregnant when you signed up, and the baby was born early.

The example below from Stratum Benefits shows the true value of having gap cover. In the illustrated claim for childbirth, the Gap cover policy paid for 68% of the total claim – much more than the medical aid

Even if you are already pregnant, it’s never too late to sign up for Gap Cover

Ideally, you should have medical aid and gap cover in place before starting a family so that waiting periods are not an issue.  However, it’s not too late if you are already pregnant, because although the birth may be excluded, the baby will be covered on the parents’ gap cover policy from the date of birth provided that you inform the product provider within 90 days.

Interested in talking to us about Gap Cover?

Although everyone is trying to tighten the belt on expenses you cannot afford to be left unprotected in areas such as your family’s health care. Before buying gap insurance it’s a good idea to seek professional advice and make sure that it complements your particular medical plan and covers the gaps unique to your scenario for absolute peace of mind.

For more information and expert advice on Gap and Medical Aid products contact us at This email address is being protected from spambots. You need JavaScript enabled to view it. on 021 870 1555 or email This email address is being protected from spambots. You need JavaScript enabled to view it.

New Year - New Investment

Are you planning to make some investments this year?

Maybe you have an existing policy maturing, or you need to start investing for retirement, or you’re simply not happy with your current returns. Then you may well want to explore the options offered by Rutherford’s extensive range of model portfolios.


International best practice indicates that model portfolios are much more likely to achieve the financial outcomes you desire for the level of risk that you are prepared (or can afford) to take.


Here are some of the questions that we are frequently asked which will help you to understand the philosophy and methodology behind model portfolios and explain why they work.

What is a model portfolio?

Our model portfolios are a professionally blended combination of market-leading unit trust funds which are designed to provide a broad diversification of asset classes and management styles to help investors consistently achieve their target returns.

Why are model portfolios now international best practice?

Many clients around the world experience poor investment returns even when stock markets have performed well, and this is usually a result of inconsistent fund selection. The professional approach of model portfolios provides more dependable investment returns.

How are Rutherford model portfolios different from what I have now?

Our model portfolios benefit from a rigorous fund selection process and ongoing rebalancing to ensure optimum asset allocation at all times. You should therefore enjoy better long-term returns and lower volatility.

How will they lower my risks?

Since our model portfolios are always aligned with your risk profile you do not have the risk of being over-or under-exposed to any one type of asset. You will essentially own a basket of assets that are well suited to your financial objectives and stage in life.

What performance can I expect?

Each model portfolio is designed to achieve a target return, taking into account a specified amount of risk as defined by your personal risk profile. This means that you will have a clear idea of the expected returns of the model portfolio before you invest.

How to achieve my investment goals?

Humans have evolved to follow the herd (and so we end up buying yesterday’s winners) and this behavioural bias leads to poor investing habits, which is why really disciplined investors like Warren Buffett are so famous. Model portfolios provide a professional and disciplined framework, which will help you achieve more consistent returns and reach your investment goals.

Why is diversification so important? 

One of the key benefits of our model portfolios is a high level of diversification.  The various asset classes (such as property or cash) perform very differently over market cycles. Our investors gain access to all the core benefits of multiple asset classes and fund management expertise, with the added layer of diversification through our blend of fund managers.

Do I have to change my investment?

No. Using model portfolios is only a fund choice, so your existing RA, Living Annuity, Endowment or TFSA stays exactly the same – only the fund selected changes.

 

What's New in Motor Insurance

Are you driving less?

Have you stopped to think about how the pandemic has changed your driving habits? If you were previously commuting to the office and are now working from home, you may find that you are on average driving far fewer kilometres. Social distancing has curtailed many of our social activities, shopping expeditions and weekend trips all of which means your car probably spends a lot more time parked than in previous years. 

Insurers who are offering policyholders discounts on car insurance

Prompted by significant changes in the daily routines of South Africans, three major insurers are offering discounts on premiums based on a reduced number of kilometres driven.

 

Discovery Dynamic Distance Cash Back was introduced as part of Discovery’s response to Covid-19 when people were encouraged to stay at home and consequently drive their cars much less. They have, however, decided to extend their Dynamic Distance discount and make it part of their standard plan terms. 

In order to qualify you need to have Vitality Drive on your plan and the vehicle must have a working DQ Track or Smart Tag installed. Vehicles that drive less than 250km per month will earn up to 25% of their motor premiums back as a premium discount or cashback. This discount is available to all primary drivers listed on the policy.

https://www.discovery.co.za/car-and-home-insurance/dynamic-distance-cash-back

 

Santam SmartPark™  brought to you by Santam, could save you up to 20% on your insurance premium if you’re driving less than 15 000km a year.

Santam SmartPark™ is a distance-based insurance benefit, whereby your insurance premium is recalculated and discounted based on the revised number of kilometres you are likely to drive. The plan comes with 3 driving bands. You choose one band based on your predicted annual kilometres and a premium discount is loaded to the policy. The bands are 0-5000km, 5001 to 10000 and 100001 to 15000. This benefit is available to all new and existing policies.

https://www.santam.co.za/media/2686038/smartpark-brochure-eng.pdf

 

King Price Chilli

A very innovative policy from King Price means you only pay for the kilometres you drive. The Chilli policy amends your premiums at regular intervals based on the kilometres you actually drive and the value of the vehicle. To qualify, clients need to download the King Price Chilli app and submit a kilometre reading monthly – this is necessary to calculate the correct premiums.

https://www.kingprice.co.za/insurance-products/chilli-insurance/

 

Interested in taking advantage of these offers?

It is worthwhile reviewing your car and household insurance on an annual basis to ensure that all your valuables are covered and that where applicable, values are adjusted. For more information and expert advice on these and other offers contact us at This email address is being protected from spambots. You need JavaScript enabled to view it. on 021 870 1555 or email This email address is being protected from spambots. You need JavaScript enabled to view it.

Should I Invest Overseas?

The Covid 19 lockdown has plunged South Africa into a deep recession, travel and sport are restricted, the news everywhere seems to be bad, and to add insult to injury Eskom load-shedding in 2020 was the worst on record.

It’s no wonder that everyone seems to be investing overseas at the moment. But what are the pros and cons of offshore investing and should you be planning to hold some investments overseas as part of your portfolio?

The benefits of investing overseas seem to be obvious – South Africa makes up less than 1% of the global investment universe so international investing allows for greater diversification, with access to developed markets such as the USA and Europe as well as emerging market giants such as China and India. In addition, the Rand seems to weaken every year, so holding Dollars or Euros makes sense doesn’t it?

Rand strength can surprise – In 2001 one US$ was worth R12 but 5 years later one US$ was worth only R6.

As with most things the answer is not so clear-cut, and the solution that works for you must take into account your personal circumstances. For instance:

  • Are you planning to emigrate one day? If you are, then utilising your annual allowance to regularly transfer cash abroad may make sense. However, international bank accounts are often subject to inheritance and SITUS taxes, which can be over 30% of your portfolio value, and probate overseas is often lengthy and expensive. So, holding your overseas assets in a legal structure that mitigates these taxes could add tremendous value.

  • Are you looking to create a legacy for your children and grandchildren? An offshore trust can often be expensive and inefficient. Furthermore, many are situated in countries that have poor governance. However, if you look in well-regulated jurisdictions such as the Channel Islands, it is possible to find world-class trust companies that are easy to work with and will ensure the long-term protection of your family assets.

  • Do you want to have a nest egg outside of South Africa? This is a common goal, but if you need to draw a regular income from your overseas assets, you may find that Rand volatility becomes your enemy. This is because while the Rand does indeed weaken against the US$ over time, there are also periods when it strengthens substantially, which increases your investment risk.

Many South African investors end up with poor returns on their offshore investments because they make emotional decisions. After reading a particularly disturbing news article or chatting with friends at the weekend braai they feel compelled to get money out of South Africa as quickly as possible, without first seeking professional advice and formulating a comprehensive investment plan.

Investing overseas is not as straight forward as it might seem.

Some of the most common adverse scenarios that South Africans encounter when investing offshore include the fact that many overseas financial markets are not as well-regulated as those in South Africa, and costs are often higher overseas. Also, interest rates on bank deposits are very low in most developed countries and at the moment Euro bank deposits, far from paying you good interest will actually cost you money.

The JSE has performed poorly over the last 5 years but over the long term, it is the best performing world market in real terms.

South African balanced funds usually comply with Regulation 28 and are allowed a maximum of 30% overseas assets, which combined with the fact that the bulk of JSE company earnings are derived from outside the country means that investors in South African funds can easily get access to a good degree of foreign exposure anyway.

Investing abroad makes a tremendous amount of sense, but a well thought out investment plan is essential to generate consistently good long-term returns and avoid common pitfalls.