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Watch: Your investments now and post Covid-19

Pressing questions around investments answered.

On Thursday, April 30, Global & Local hosted its very first webinar which was a great success, the title of the webinar was “Your Investments Now & Post Covid-19” which had a panel of 4 specialists within Global & Local.

It is evident that people out there are panicking about their investments and the current state of the economy and the purpose of the webinar was to touch base with our clients and answer those pressing questions as well as give them some hope during these uncertain times.

The following are the questions and answers from the webinar:

How long will it take for markets to return to normal and start to recover again?

The markets have recovered already, we’ve had an extraordinary month, the JSE All Share index was up 15% for the month of April, as at April 29 it was up 1.6%. The American Markets were up 17% for the month of April and the All World Equity Index was up 14.8%. Things are rocketing, whether it is real or not is a completely different issue. We’ve had an economic crisis caused by a virus. The world’s central banks have pumped trillions into the economies, America has pumped 12% of its entire gross domestic product into the economy, Germany has pumped in 10%, China has pumped in 9% and South  Africa has pumped 10%. They are trying everything that they can to help companies, people with bonds and to hold up the economies.

This is a fantastic thing, but over the last two months, companies have lost trillions in earnings. In the next six months, those companies will have their earnings results and profits will be down, it is about what effect that will have on the market then. The next issue is if the virus comes back again, what will happen then? In our opinion, over the next six months, the markets will probably recover very nicely, but after six months we do not know if that will last or not.

South Africa is in a completely different situation. The government is pumping R500 billion into our markets, R130 billion of that is from the budget, which was earmarked for education, roads, bridges etc. The other R370 billion is funds which are being raised, it is a debt and debts must be paid at an interest rate. Right now, the easing of the lockdown will help the markets and the markets will definitely increase. But, when the money runs out, it can only be raised by increasing Vat, increasing individual taxes and increasing company taxes and that hasn’t been mentioned, that is basic economics 101. In six months, when there is hope, I think it would be a good time with great earnings. But in six months, it will be a good time to lock in any profits. If there is a cure, everything changes, everything goes back to normal, but I think that is only a year away.

How have Global & Local’s core local and offshore investment strategies held up over the last quarter?

We need to understand that markets were decimated in Q1. They started off really well with the world feeling bullish after a solid 2019… and then Covid-19 happened.

Typically, our clients’ onshore portfolios were down about 14% for Q1. To provide a perspective the JSE Allshare index was down 21.4% in Q1. Offshore, the picture is similar depending on which currency we use to make this assessment.

In US dollar terms our clients were down about 17% in US dollars where the global markets were down 25% in Q1.

In rand terms, our clients were up about 9.5% in Q1 on their offshore investments which is a reflection of the depreciation of the rand. Year-to-date out of 36 currencies the rand was the third worst-performing currency against the dollar. Below rand is the Brazilian real and Russian ruble.

Since April 1, markets have had a bit of a recovery, so onshore our clients are up about 6%. Offshore clients are up about 4% in US dollar terms.

What have you been doing in your clients’ portfolios in the last few weeks?

At the end of February / beginning of March, we had an investment committee meeting looking at a world where financial markets were beginning to show the effects of the Covid-19 crisis and we began to adjust our clients’ onshore portfolios to reflect a higher allocation to cash and bond instruments.

To the point that we are now about 50% in bonds and cash.

With regards to property, is it an asset class that clients should be considering at the moment?

This is a loaded question! And we are not experts at this asset class, but in my opinion, I would not go into property in these uncertain times.

If you are considering property long term, it is not a good time to fix capital over the long-term right now.

We have to remember that this Covid-19 virus might be with us for a long time to come…property prices have fallen all over the world. Also, because in most economies, property transactions have been halted and thus valuations are difficult.

Commercial properties (offices) I would believe is also going to be depressed for some time as corporates realise that they hold too much office space because they realise many people can in fact work from home.

Then if we look at retail properties specifically, with a world in lockdown for some time to come, shopping centres are going to be empty especially in the period of lockdown many more shoppers are getting used to shopping online, thereby not making use of shopping centres.

Warehouses might be an opportunity, but I do think we are too early to jump on this one right now…if we consider the valuations argument.

The last thing to consider is across the world rentals are going down at the moment.

Do I need to take funds offshore now? What is the difference in expectations for local vs offshore investments? 

Let me first put this into perspective. For the last 10 years, I have advised everybody to put at least a third of their assets offshore, if not half. The South African market represents about 0.1% compared to the world economy. To put that into perspective, Hong Kong has just under 0.8%. Our markets are tiny, it’s crazy to put your eggs all in one [basket]. But it’s always a factor of risk if you invest offshore. What is your appetite? If you don’t want any risk at all, you can earn 0.1% in the bank if you’re lucky or you can enter into a bond in Germany and pay them to look after your money (that’s crazy!). If you enter into individual shares, the fluctuations over the last few months are insane! Then you’ve got the rand: from January 1, 2020, the rand has fallen 23.5% against the US dollar, 20.8% against the euro and 18.5% against the pound.

If you invest offshore, are you thinking the rand will fall further? Or are you thinking the rand will strengthen? The rand is a factor of two things, one: the difference between our interest rates and offshore interest rates and two, the country’s risk, which cannot be measured right now because the entire world is in the same situation as us.

Will the rand come back? Probably, probably R16.50 / R16.80, but we don’t know when and we don’t know for how long. If I were to take my money offshore, I would probably wait a bit because these rates are insane. On April 29 the rand strengthened 3% and on April 30 it fell again. Long term offshore investing is a good idea, your overall risk is spread. If you invest offshore right now and the rand strengthens 10%, you’ll lose 10%. I would hold on until things make more sense.

If I already have investments offshore should I consider bringing those funds back to South Africa while the exchange rate is so weak?

It depends on what funds you have offshore. If they are in the markets they are probably down. If you’ve had them for a long time and you do cash them in it will attract capital gains tax. If it is in the bank, you can bring the funds back. My argument is, will the rand rise or will the rand fall? If you do bring the funds back, you don’t have to change them into rands for up to a month. Remember when you do change them back that fee could be anything up to 1% & 6%, in order to earn the rand has to have weakened by that amount or more. Would I do it right now? No, what you have offshore leave it there.

Speculation is insane right now, if the American president makes any more comments relating to infections being cured by household detergents, the markets could fall again and the rand could weaken further, but if American markets and our markets rally further, the rrand could fall. The speculation is too cloudy, I would not recommend it.

I have received correspondence from Global & Local regarding a Category II mandate. What is a CAT II mandate and how does it work?

Global & Local are holders of a Category II license which allows us the discretion to manage our clients’ portfolios more efficiently. The biggest benefit of this is being able to use our discretion to make switches within a clients’ portfolio if needed, within good turnaround time. To give an example of what has happened with regards to the coronavirus outbreak, we had an investment committee meeting and decided that it was crucial to make changes to our clients’ portfolios, which meant investing our clients to portfolios that are a little bit more protected during these volatile market conditions. We were able to action such switches efficiently for clients who have signed CAT II mandates. Clients who have not signed CAT II mandates will run on the Category I license, which means we would need to communicate the recommended changes to the client and wait for them to come back and confirm that they are happy for us to make the changes and then only would we be able to implement the changes. That could be a little risky because between the time that we sent the communication to the client and received a response back, we might have missed the boat in terms of catching the markets at the right time.

What if I would still prefer to invest in other products outside of the offering from Global & Local. Can you still help me to facilitate these investments? 

Global & Local offer a wide range of products and funds, if you would like to invest in a specific mix of funds, we are more than happy to assist. With regards to the platforms that we invest it, there is a wide range of funds that you can select from and if for some reason the fund is not there, we will apply to that investment company and ask them to add it to the platform. We are also very happy to investigate other product offerings and take up contracts with those specific product providers if need be or provide our opinion on any other offerings.

Can I stop my contributions to my company pension/provident fund or my RA?

Service providers have given some options in terms of stopping contributions, I am aware that with the more modern type of RA’s, you may stop debit orders and start again at any time. With regards to the older generation RA’s, they have imposed penalties in the past with regards to stopping debit orders, but they have relaxed the penalties due to the current situation and they are offering a premium holiday of six months. With regards to employee benefits schemes and contributions made to pension and provident funds, service providers are very happy to assist in terms of decreasing contributions in employees have had a salary cut.

Can I revise my percentage as I am not getting enough money to make ends meet?

Yes, you can always revise your living annuity income. Up to now, it has been only at anniversary date and between the perimeters of 2.5% to 17.5% of the capital value per year.

Recently there has been a directive that has been issued on living annuities that one can now draw as low as 0.5% to a maximum of 20% of the capital value per year and this can be done at any time so the annuitant does not have to wait for the anniversary date. BUT before an annuitant can take advantage of this we are waiting for Treasury to gazette this amendment, which will provide the final details, then the financial institutions need to amend their systems to accommodate this practice, then finally the annuitant can inform the product provider of their wishes to amend the income drawdown from the living annuity.

Two things to consider:

  • The higher the income drawdown, the greater the effect on the capital value is.
  • Living annuity income is deemed income in terms of tax, therefore the more you drawdown, the higher the tax implications.

My advice is to draw as little as possible and rather leave the capital to grow so that the capital value can sustain you for much longer.

I am retiring within the next few months should I rather consider a fixed annuity to avoid unexpected changes in my income after retirement?

I am not a fan of fixed annuities especially in an environment where interest rates are trending lower.

A fixed annuity is where an insurance company accepts capital from a pension/provident/retirement annuity and invests the capital providing the annuitant a pre-determined guaranteed income for either life or for the next 10 years depending on how the particular plan is structured.

There is a single life annuity where the annuity will receive income from the annuity at the pre-determined rate for life. At death, there is no benefit to a beneficiary. No matter of the value left in the annuity.

A joint-life annuity is where at the death of the first annuitant the annuity income is then paid to the spouse at a lower rate (usually 75% of the income paid to the first annuitant) at death of the second annuitant there is no further benefit to a beneficiary. No matter the value left in the annuity.

Current annuity rates are at the lowest ever, and when an investor purchases a fixed annuity those rates are fixed and cannot be amended.

Whereas I always prefer a living annuity because the annuitant can select the level of income as mentioned above in accordance to their needs and the performance of the markets and at death, the capital is then available to their nominated beneficiary. Even though technically the annuitant could deplete the capital and thereby deplete the source of income when invested in a living annuity. I do still prefer the living annuity as the level of income can be amended the underlying funds can be amended. The living annuity itself can be moved from one product provider to another and at death, there is a benefit to a nominated beneficiary. Altogether a more flexible investment product. But it does require a little bit of management.

With all that is going on, can the government force me to invest my company pension/provident fund/RA in the state by way of prescribed investments? Can we expect radical policy changes like new taxes to pay for this or tighter exchange control rules?

Prescribed assets have been a topic going around for quite some time now, it is still in discussion and nothing has been finalised as yet. In our opinion, it is very possible that it could happen but the government will really need to think about how they are going to implement it because they wouldn’t want individuals to exit out of their pension funds or resign, they would want to make sure that they retain the pension fund money without massive amounts leaving. We are definitely keeping a close eye on this topic and if any changes are submitted or any formal documents, we will notify all our clients.

With regards to taxes, the government will need to find some sort of funding and we think that the only way for the government to do that is to increase our taxes. In the last budget speech, we were expecting a Vat increase or maybe an increase in the tax brackets which didn’t happen, so, going forward this may be something that will need to be implemented.

In terms of the exchange control regulations, there was no news on that any more restrictions were going to be implemented, as it stands our restrictions are very high so we will have to wait and see.

Lastly, should I be doing anything differently?

Six weeks ago, I had to choose between buying a kit to make cheese and a kit to make whiskey and I picked the cheese and I haven’t even opened it yet and I’m really disappointed…

So…. What should you be doing differently? Nothing at all.

Don’t panic, hope will come back! In the last 23 years that I’ve been in the industry, markets have repeatedly collapsed and repeatedly gone up. In 2008 the markets feel almost 50%, the end was nigh! It was over, we were finished! Panic was in the street. One year late the markets were all up again and everyone said, “I can’t remember 2008”. This is different because it is also a virus, but it will pass, economies will recover. Up until the beginning of February the world was pumping, we’ve had a bit of a break. Companies will fall, airlines will fall, holidays will be so cheap.

It’s all about patience, don’t watch the news every day because it’s all doom and gloom.

Happiness will occur again; bottle stores will open!

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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