South African Market Update South African equities ended higher for a fifth consecutive month, with positive performance across all three major local equity sectors. Local bonds ended the month lower, despite positive news on lower-than-expected inflation, a reduction in government bond auctions, a lower-than-expected budget deficit and a stronger rand. The weak performance from bonds was largely driven by SA yields drifting higher (moving prices lower) in reaction to movements in global bond markets. Local listed property ended the month higher, however, weak performance from some of the larger counters including Growthpoint and Redefine led to muted returns from the SA Listed Property Index. The rand was stronger against most major developed market currencies, despite weakening significantly against the US dollar at the beginning of March, only to recover the lost ground towards the end of the month. South African Economic Update The South African Reserve Bank’s Monetary Policy Committee (MPC) announced during the month that it will leave the repo rate unchanged at 3.5%. This was the fourth consecutive meeting where the MPC decided to leave the rate unchanged, however, unlike recent meetings, the decision was unanimous, with all five members voting to keep rates on hold. Available data for Q1 2021 appears to indicate a slow start to the year for economic growth, which can largely be attributed to the introduction of adjusted level 3 lockdown restrictions during January in reaction to the second Covid-19 wave in the country. SA headline CPI moved lower to a year-on-year figure of 2.9% for February (from 3.2% in January). This was only the third time in over a decade that year-on-year inflation has fallen below the bottom end of the target band and was largely driven by the contribution of lower medical insurance costs. Global Market and Economic Update Most major global equity markets ended the month with positive returns, as economic data reflecting the recovery from the Covid-19 pandemic continued to surprise on the upside. Equity investors continue to remain bullish, with another US stimulus package on the horizon, despite concerns around a ship stuck in the Suez Canal, which disrupted a major global shipping route for a few days during the month. March was dominated by market participants taking note of movements in global bond markets, as yields continued to move higher (moving prices lower), led by US Treasuries, as global bonds ended the quarter with their worst return in decades. The uptick in global bond yields appears to be connected to inflation expectations, with fixed income markets pricing in higher inflation in the medium term, which is likely to lead to interest rate increases from the US Federal Reserve (Fed). This, despite the Fed’s insistence that they will continue to keep monetary policy accommodative as the US economy continues its recovery from the shock of the Covid-19 pandemic. Source: Morningstar
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South African Market Update South African equities ended higher for a fourth consecutive month, driven largely by strong performance from large cap resource counters on the back of significant positive commodity price moves. Local bonds ended the month with flat performance, despite developed market sovereign bonds selling off significantly during February and ending with their worst monthly performance in over 35 years. Local listed property ended the month with strong performance in line with other SA risk assets, as investors looked forward to a resumption of economic activity amid declining Covid-19 cases in the country. The rand was broadly unchanged against most major developed market currencies, despite significant volatility during the month in connection with the budget speech as well as global bond yield movements. South African Economic Update On 24 February, Finance Minister Tito Mboweni tabled the 2021/2022 Budget in Parliament. The minister announced that revenue is expected to be around R100 billion ahead of expectations, largely due to tax collections from the mining sector coming in higher than expected due to booming commodity prices, coupled with a recovery in VAT. While the country’s debt burden remains unsustainable, the moves by National Treasury to cancel a proposed R40 billion in tax hikes over the next four years and above inflation increases in personal income tax brackets will be welcomed by local citizens. South African President Cyril Ramaphosa announced on 28 February that the country will move to a level 1 lockdown, to aid a resumption of economic activity amid declining daily Covid-19 cases. SA headline CPI moved higher to a year-on-year figure of 3.2% for January (from 3.1% in December), with increases in fuel, food and non-alcoholic beverages being the largest contributors to the move. Global Market and Economic Update Most major equity markets managed to end the month in positive territory, despite significant volatility in global bond markets towards the end of February amid concerns of rising inflation expectations and possible future interest rate moves. Markets were driven higher during the month by strong Q4 2020 company earnings announcements and positive news on vaccine rollouts, with the US approving the Johnson and Johnson vaccine on 28 February. There was also progress on a new US stimulus package, with a $1.9 trillion Covid relief bill passed by the US House of Representatives, following which it will be considered by the US Senate. Source: Morningstar
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This article is courtesy of Morningstar Investment Management, our Discretionary Investment Manager. Global markets continued to climb higher in May following a strong rebound in April, as investors reacted positively to the news of many economies reopening following the Covid-19 induced lockdowns. The positive performance generated by most global equity markets came despite concerns around a possible second wave of infections and political tensions between the US and China, initially around Covid-19 and later around Beijing’s treatment of Hong Kong. Economic data continues to show signs of the damage caused by the Covid-19 pandemic, with forecasts indicating that the US economy lost another 8.3 million jobs in May, following the 20.5 million lost in April. This would push the US unemployment rate to close to 20%, after it ended April at a level of 14.7%. South African equities ended the month largely flat, however, there was significant dispersion among the index constituents during the month. Platinum group metals counters (PGM’s) and diversified miners delivered strong performance during the month, however, this was offset by continued weakness in banking and financial counters. Local bonds were the standout performer during the month in terms of local asset classes. Yields continued to fall dramatically during May (moving prices higher), as the asset class delivered its best monthly performance since July 2008. Local listed property continued to struggle during the month as the benefit of lower interest rates appeared to be offset by tenants struggling to deliver on contractual rental obligations. The rand was significantly stronger against most major developed market currencies during the month, recovering some lost ground following significant depreciation since the start of the year. The Governor of the South African Reserve Bank (SARB), Lesetja Kganyago, announced another reduction in the repo rate of 50 basis points during May, bringing the rate to a record low of 3.75%. President Cyril Ramaphosa announced the re-opening of some sectors of the economy under Level 4 lockdown restrictions and also announced that the country will move to Level 3 from the 1 st of June, which will allow many businesses to return to full operation. Local equity sector performance was mixed, with Resources (+5.6%) delivering strong performance, while Industrials (-1.8%) and Financials (-3.2%) fared slightly worse. Most major developed equity markets ended the month higher, as investors welcomed the reopening of many global economies post the lockdowns in countries around the world. The MSCI World Index delivered a return of +4.9% for the month. Emerging market equities managed to deliver positive performance for the month, however, returns were slightly more muted than those in developed equity markets. The MSCI Emerging Markets Index delivered a return of +0.8% for the month. Most major equity markets ended the month with strong returns, with Germany’s FSE DAX (+8.3%), Japan’s Nikkei 225 (+7.5%) and the UK’s FTSE 100 (+1.3%) ending the month higher. China’s Shanghai SE Composite (-1.6%) bucked the global trend, ending the month lower. US equities also ended the month higher, with both the NASDAQ 100 (+6.3%) and the S&P 500 (+4.8%) both delivering strong returns. Impact on client portfolios
Most portfolios ended May with positive returns, largely driven by strong performance from the SA bond market as well as continued strength in global equity markets. Rand strength during the month against major developed market currencies did detract slightly from the positive contribution from global exposures. Income focused investors received decent returns from portfolios during the month, as local bond allocations drove positive performance during May. What is apparent is that despite global economic data showing strain from the impact of the global lockdowns, markets appear to be reacting positively to the gradual opening of industries across the world. The significant amount of monetary and fiscal stimulus announced by governments and central banks has also provided significant support to global markets. We will continue to follow a disciplined valuation driven approach in managing client portfolios, with risk management currently more important than ever given the noisy market environment. Click here to download market performance HIGH ON THE agenda of many dinner conversations these days is the topic of investing offshore. With persisting uncertainty around our country’s economic future, we understand that many South Africans may feel unsettled about their own financial futures. At Coronation, we believe that, no matter the current market sentiment, it’s always a good time to consider the long-term benefits of owning a balanced portfolio of both international and domestic assets. It’s not a question of when to invest offshore, but rather how. From a young age we are taught not to put all our eggs in one basket. This truism stems from the value of diversification, which is the key benefit of having at least some of your assets offshore. International assets make your portfolio better by diversifying economic-, jurisdictional-, currency-, industry-, and company-specific risks, without necessarily reducing expected long-term returns. The more than 5 000 investable shares in the global universe allow access to growth opportunities, industries and geographies not available in the local equity market, which consists of only 160 investable shares. NO ASSET CLASS WINS ALL THE TIMEWhile much of the current emphasis is on how global markets performed better than the local market over the past decade, as shown in Table 1, this has not always been the case. Over the past 20 years, the local market materially outperformed global equity markets, as the outcomes through most of the 2000s were very different to their more recent performances. Another point to ponder is how US equity market returns dominated over the past decade. There is no guarantee that this outcome will be repeated over the next decade, especially considering the high valuations base in the US. If you are interested in unpacking the relative performance of local and global markets further, you can read the brief summary of key market events over the past two decades. It is worthwhile to highlight that eventual return outcomes are sometimes surprisingly different to the consensus view informed by the events of the day. For example, the rand weakened materially in 2000 as a result of a global risk-off episode that impacted all emerging markets, despite South Africa achieving its first investment-grade rating. Then, in 2001, the local share index managed to outperform the global index despite a 37% fall in the value of the rand. Another way to look at this is to consider the correlation between relative equity market performance and the dollar/rand exchange rate. The rand depreciated against the dollar in 12 of the last 20 years, but global equity markets outperformed the local equity market in only eight of the 20 years, as shown in Table 2. One of the reasons for this discrepancy is that most of the underlying business activities of the companies that happen to be listed on the JSE take place outside of South Africa. HOW TO GAIN OFFSHORE EXPOSURE If you are invested in one of our multi-asset class funds, you already have a considerable international allocation. This allocation consists of direct offshore exposure and the portion of the value we place on local shares that derives from economic activity outside of South Africa. Figure 1 shows the effective rand-hedge exposure across our multi-asset class funds over time. For our Balanced Plus and Market Plus funds, with long-term growth objectives, this is typically more than 50% of the portfolio. For the more conservative Capital Plus and Balanced Defensive funds, which have near-term capital preservation targets in rands, the range is somewhat lower. Each of these funds provide the easiest way to gain hassle-free international exposure, as you mandate us to manage the scope of international allocation on your behalf. In addition, it’s easy to top up your investment or to draw an income from these funds, as they are accessible with low minimum investment requirements, and can be used in tax-efficient investment vehicles such as retirement annuities and tax-free investments. If you want more international exposure, you can also invest in rand-denominated international funds. You may want to do this with your discretionary (non-retirement) savings in order to further diversify your risk. The reality is that by living, working and owning a home in South Africa, you already have significant country-specific risk, arguing for an additional international allocation. These funds, such as the Coronation Global Managed and Coronation Optimum Growth funds, allocate all or most assets to international investments, while remaining easy to use and access, as the funds are established in South Africa. However, while they provide full economic diversification, they still operate under the laws of South Africa and therefore do not diversify jurisdictional risk. One example of jurisdictional risk is that South Africa still enforces exchange controls, which limit the amount that asset managers can invest outside of South Africa on behalf of clients1. While highly unlikely, these limits may be reduced in future, which may lead to an enforced and unwanted reduction in offshore exposure. If you have a substantial amount to invest offshore, you can externalise your rands and invest in a fund incorporated in another country, most often in the EU. In this case, the laws of the country of incorporation govern your investment. Coronation offers a range of funds incorporated in Ireland with the same economic exposure as our rand-denominated international funds, but with the added benefit of jurisdictional diversification. The downside of investing via this route is more complex administrative requirements due to cross-border banking, and you may have to apply for South African Revenue Service clearance if you want to invest more than the annual R1 million general offshore allowance. These funds have a minimum investment amount of $15 000. REASON MUST BE YOUR GUIDESo, the message is to cut through media hype of doom and gloom, and to keep your eye on your goals when allocating to international assets. It is also useful to avoid the myopia of the moment and take some time to consider the bigger picture. When you unpack historical market returns, it becomes evident that investing is about well-considered diversification across asset classes and geographies rather than extreme, sentiment-driven moves between local and global assets. Key market events since 2000: a tale of two contrasting decades Comparing local vs global market performance* To invest in an offshore account contact Kevin email:[email protected] tel:(011)658-1333 Source: Coronation Offshore investing should be part of any long-term financial plan, especially if you are keen to leave the country before or after retirement or want your children to study abroad.
Explaining offshore investments Offshore investments are any investments housed in a country other than the investor’s country of residence. This could be in developed or emerging countries such as China, India, Brazil, Russia or Turkey. The key to offshore investing is to not only invest in a different country but also in different economies, markets and currencies, thereby diversifying your investment portfolio. Factors to consider before investing offshore The prospect of investing money outside of your country can be daunting, given the sheer size of the investment universe. As a new investor, you might feel uncomfortable with the idea of placing assets and investments in another country with foreign organisations. You also have to consider product and government rules, regulations and restrictions on purchasing offshore assets. With 50 different offshore centres, 126 different legal and tax systems, 27 000 different listed equities and an estimated 36 000 different unit trusts to choose from, where do you invest? The answer is simple. Stick with people and organisations you know and trust. Seek the advice of a locally- based, competent financial planner who has a sound track record of investing offshore. Whatever your reason for choosing to invest internationally, it is important to consider the following factors: Your objective or motivation for investing offshore • The time horizon or length of time for which you want to invest • The risk tolerance of your investment • If you want the funds to be invested offshore permanently • All relevant foreign exchange control regulations • Tax implications and banking charges associated with your offshore investment Limits to offshore investing South Africans in good standing with the Receiver are allowed to invest up to R10 million offshore each year (2015/2016 tax year), subject to tax clearance from the South African Reserve Bank. You are also allowed to invest R1 million annually, without tax clearance, by means of a single discretionary allowance. This allowance still needs to be registered with the Reserve Bank. How to invest offshore You can either invest into one of the foreign-denominated currencies, such as the dollar, euro or pound, or by an asset swap in rand-denominated locally available offshore unit trusts. The advantages of offshore unit trusts are much lower limits and fewer administrative requirements. Liquidation of these funds will also happen in rands as they are not invested offshore permanently. The simplest and most cost-effective way is to invest in foreign currency offshore unit trusts through an offshore platform which is operated locally by a registered and reputable provider. In addition, exchange-traded funds are also available. You can also invest in offshore share portfolios that are managed and reported on locally or in endowments. These funds will be expatriated permanently using your annual offshore allowance, or can be paid to you anywhere in the world, including South Africa. You can also consider opening an offshore bank account or investing in gold or certificates of deposit. Other options include using your bank account for online share trading through a brokerage or investing in property and more exotic investments using offshore trusts. The latter are usually more risky, and may consist of financial instruments such as sovereign and corporate debt, high-yield investment schemes and other investments which are outside of your domestic reach. Regulation of offshore investments Only funds that are approved by the South African regulator, the Financial Services Board (FSB), can be marketed in this country. Investing in FSB-registered funds reduces your investment risk, as these funds are subject to oversight by the local regulator. Advantages of investing offshore The South African financial market comprises only one percent of the global market. If you only invest locally, you deny yourself the opportunity to invest in those companies that have an international footprint and could generate substantial profits for investors across different economies and markets. By allocating a portion of your investments offshore, you could spread the risk, and enhance the possibility of generating better returns by diversifying. It also gives you access to sectors that you would not find on the JSE. It is important to keep in mind that you need to have a longer time frame for offshore investing because of the dual volatility of currencies and the markets. Another reason for investing offshore is to save tax in tax havens or lowtax jurisdictions. Offshore investments could be owned by an offshore trust for estate planning purposes. Your financial planner and fiduciary specialist can advise you on this. As mentioned earlier, investing offshore can also provide for children’s tertiary education at overseas universities, travelling extensively or wanting to retire overseas. Offshore investing offers a hedge for people who fear political or social unrest and is also a way to protect your investments against the depreciation of the rand. Risks of investing offshore
To set up an appointment with our Financial Planners, please contact Kevin, email: [email protected] tel no: (011 658-1333) Source: Old Mutual |
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