Reflecting on 2020

The end of 2020 is just around the corner, and boy what a year it has been. Who would have thought that 2020 would be the year that a pandemic would bring the world to a semi-standstill? We certainly didn’t anticipate that ‘zoom’ would become a buzzword, facemasks would be the latest obligatory fashion accessory, sanitizer would be a must-pack handbag item, and working from home would be the new norm for most.

2020 is most certainly a year that will be remembered and spoken about for years to come. I have heard so many people comparing 2020 to a terrible rollercoaster ride when it comes to markets and emotions. If we had to break up the year (broadly) into three categories, it actually does resemble the motion of a rollercoaster.

 

Quarter One: The Climb and Collapse

The year started like any other. Shortly into the year, news regarding the outbreak of the Coronavirus in Wuhan started surfacing in the media. At this stage, most shrugged it off, thinking it would be contained and resolved quickly. In hindsight, this was the build-up phase of the rollercoaster, the slightly flat start that quickly elevates – just before the first big dip. In the middle of March, the dip came abruptly, with a deep fall that was filled with fear.

Globally countries went into lockdown, economies were brought to their knees and no one knew how long it would last. Markets sold off aggressively, the oil price collapsed, and South Africa’s sovereign debt was finally downgraded to sub-investment grade (which got a bit lost in all the other bad news at the time).

 

Quarter Two and Three: The Recovery

The next phase of this year saw the quickest recovery from a crash on record. The S&P 500 took a mere 33 days to recover where it took 517 days to recover from the crash of 2008. The rollercoaster completely tilted in the opposite direction – this time a fast and steep ride up. The largest driver of the quick recovery was arguably the enormous stimulus packages that were introduced by governments across the globe.

Investors quickly regretted not deploying more cash when markets were on its knees. Fund managers called March 2020 the “Covid gift”, a brief time where you had the opportunity to buy fantastic companies at bargain prices. Easier said than done. When humans are filled with fear, they tend to make irrational decisions which end up costing them in the form of investment returns over time.

 

Quarter Four: Market Jitters and the Rotation

As the second wave of Covid 19 hit countries and lockdown restrictions were imposed in some places again, investors started to fear another crash. Coupled with this was the uncertainty surrounding the US Elections. This phase of the rollercoaster can be compared to when you enter a dark tunnel and you know that something is about to happen, but you are unsure exactly what.

Uncertainty and the inability to see what lies ahead does warrant some jitters. If we have learnt anything, it is that markets hate uncertainty more than anything. But that was not all that happened in the fourth quarter. A possible vaccination is now on the horizon, and the Democrats celebrated victory over the Republicans in the US. Suddenly, the rollercoaster exited the dark tunnel, it was not upside down anymore and the light at the end of the tunnel was in sight.

November marks the month of the “rotation” where “stay-at-home” stocks were exchanged in favour of “out-in-the-world” stocks. The large technology stocks sold off aggressively and that money is finding its way towards the cheaper out-of-favour stocks – tourism shares and financials etc. increased by double-digit numbers in November alone. Despite what conspirators might claim, investors are slowly realising that the world is not about to end, that we will be able to travel, dine out and return to working with our colleagues in offices again.

The big questions now are – how long will this rotation last, is this the end of Covid 19, could a vaccine be distributed across the globe in a timely fashion, and does President Biden have the ability and power to change the direction of the US? Unfortunately, no one knows, and only time will tell.

What is more important, as we reflect on this past year, is to ask ourselves what we could have done differently. Perhaps you made emotional decisions when it came to your investments, perhaps you worried about things that were completely out of your control, perhaps you realised that you should be more diversified.

Wherever you may find yourself in December, take the time to reflect on 2020. What were your biggest lessons, and what would you have done differently?

Someone once said to me “Don’t bet against humanity”, and those words are so true. As people we are resilient, we are adaptable, and we will get through the difficult times.

Debra Slabber, CFA®

Business Development Manager

Morningstar Investment Management South Africa

Risk Warnings

This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar Investment Management South Africa (Pty) Ltd makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this commentary. Except as otherwise required by law, Morningstar Investment Management South Africa (Pty) Ltd shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.

This document may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

 

Morningstar Investment Management South Africa Disclosure

The Morningstar Investment Management group comprises Morningstar Inc.’s registered entities worldwide, including South Africa. Morningstar Investment Management South Africa (Pty) Ltd is an authorised financial services provider (FSP 45679) regulated by the Financial Sector Conduct Authority and is the entity providing the advisory/discretionary management services.

Has 2020 shifted your financial goals?

If this year has taught us anything, it is that we need to hope for the best, but plan for the worst. In financial planning, clients are advised to reassess their financial goals when faced with important life events and/or changes, such as getting married, having a child or with the loss of a loved one. This year, a significant event happened with the outbreak of COVID-19, impacting investors globally. As we approach the end of 2020 and the start of a new year, why not take the time to assess your current financial goals, whether these goals are still relevant, set new goals if needed and make sure you are set-up for success going into 2021.

 

As clients continue to deal with the stressors and worries caused by the pandemic, they may be having trouble making sound financial decisions. Research has shown that we all suffer from behavioural biases, and we can be even more prone to behavioural mistakes during times of uncertainty.

 

Uncovering your real goals

It is likely that 2020 has impacted investors livelihoods and financial circumstances, and thereby also their financial goals.

What are your top financial goals? As investors, we all face this question at some point, and we generally have an answer. But have you ever looked at how stable or consistent your answers are, when you think about them in different contexts or at different times? It may surprise you, but researchers have found that we tend to answer with whatever is top of mind, which may not always be our true, long-term goals.

For example, let’s say a friend recently read an article about vacation trips in Italy. When you ask about long-term goals, the response might be: “I’d like to travel more,” even though the person also cares deeply about leaving a legacy of charitable works. It’s not that the person is insincere or that other goals aren’t deeply held – it’s just that is what’s top of mind and easy to recall.

Tailoring your financial plan around your personal goals can both increase your total returns and motivate you to stay on track1. The success of this technique however depends entirely on having the right goals in place – which research suggests we, as investors, struggle to identify.

To prompt more-thoughtful goal identification, past research suggests that a carefully curated list —a master list — of common objectives can be effective. Master lists have been shown to improve preference identification across a variety of areas. Our research tested the effectiveness of lists for identifying financial goals. We wanted the answer to the question: How can we help investors identify their true financial goals, and not only those that are top of mind?

We found that many people seemed to prioritise goals that were more personalised, detailed, and emotionally grounded after viewing the master list, and the use of a master list also seemed to nudge investors toward more-specific goals.

We found that about half of the people who changed their top goal focused on emotions instead of the outcome. Using a master list drew an important parallel between emotional returns and financial returns. Many people who changed their goals settled on outcomes that revolved around emotional security, such as “to feel secure about my finances now” and “to not be a financial burden to my family as I grow older”. While emotions are often seen as anathema to sound financial decisions, our results suggest that there’s a big emotional component to holistically defining financial goals.

If your goals changed, you’re not alone. At Morningstar, we created a worksheet to guide clients through the process of setting financial goals. Advisors can use this printable exercise to nudge clients toward deeper consideration of what goals are most important to them. This can prompt a meaningful discussion around goal setting and help people avoid top-of-mind, but superficial, goals. We also recommend that you read our research report Mining for goals to find out more about the research behind the worksheet.

Behavioural biases, that often creep in during the goal-setting process, surface when we are facing uncertainty — and when it comes to investment decisions, these biases can hurt more than they help. Investors may benefit from having a resource of their own from which to learn the impact of behavioural mistakes on their finances and how to avoid them. We created a checklist you can send to your clients to help them start to incorporate behavioural techniques into their financial decisions.

This checklist is written for investors, so you can offer clients a resource they can peruse on their own time as well as in your virtual check-ins. This way, you can both work together to help clients thoughtfully navigate their financial decisions and empower them to use behavioural techniques on their own when they may need them the most.

Investors are facing quite a few obstacles when it comes to making thoughtful financial decisions. We can’t erase the emotions and biases that come with these unprecedented times, but effective planning and practicing some behavioural techniques can help investors prevent these factors from getting in the way of their long-term financial goals.

This is where advisors can turn to lessons from behavioural science to help keep investors on track. We’ve created a guide and checklist for advisors to explore how to use these behavioural techniques in their practice.

Understanding your financial goals is central to financial planning but identifying goals that truly matter can be tough. Now, more than ever, we must take the time to avoid behavioural biases, establish strong financial goals, and implement behaviours to help meet these goals.

1 – Blanchett 2015; Locke et al. 1990).

Victoria Reuvers

Managing Director

Morningstar Investment Management South Africa

Risk Warnings
This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar Investment Management South Africa (Pty) Ltd makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this commentary. Except as otherwise required by law, Morningstar Investment Management South Africa (Pty) Ltd shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.
This document may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.
Morningstar Investment Management South Africa Disclosure
The Morningstar Investment Management group comprises Morningstar Inc.’s registered entities worldwide, including South Africa. Morningstar Investment Management South Africa (Pty) Ltd is an authorised financial services provider (FSP 45679) regulated by the Financial Sector Conduct Authority and is the entity providing the advisory/discretionary management services.
+ t: (0)21 201 4645 + e: MIMSouthAfrica@morningstar.com + 5th Floor, 20 Vineyard Road, Claremont, 7708.

Retirees: over-exposure to cash-like investments risks disappointment

The expected returns from cash, near cash and income funds will be significantly lower for the foreseeable future.

 

Retired investors who rely on drawing an income from their investment portfolio, but also need protection against inflation, could be setting themselves up for further disappointment if they are over-exposed to cash-like investments.

Since the beginning of 2016, close to R75 billon has flowed out of multi-asset class funds with low- or medium exposure to equities. That equates to a withdrawal of about 25% of the assets invested in these more conservative balanced funds. And the pace of withdrawal has been accelerating, even during 2019 when these funds delivered good performance.

The Covid-19 lockdown shock added to risk-aversion, causing more investors to reduce the level of risk in their portfolios.

Meanwhile, about R130 billion of net new money was invested in managed income and bond funds over the same four-and-a-half-year period. Another R150 billion was invested even more conservatively in money market and cash plus funds.

The net outcome is that many retirees are more conservatively positioned than is justifiable when applying textbook theory. This is especially concerning given the collapse in cash yields since March this year.

Return gap prompts shift into cash-like investments

So why has there been a such a significant move out of more conservative multi-asset funds?

The shift to cash-like investments is simply an understandable response to disappointing historical performance delivered by these funds. Investors expect to be rewarded for taking on additional risk, with many of the more conservative funds targeting annual returns of inflation plus 3% to 4%. This translates to a return target of around 9% over the past five years. Given the weak state of the local economy, the local equity and property markets performed poorly over the past five years, with annual returns of less than 4% per year and minus 15% per year respectively.

While the more conservative multi-asset funds did better, by on average eking out positive returns of around 5% per year in the recent past, a return gap emerged. These funds also underperformed money market and managed income funds, that on average delivered a little more than 7% per year.

Many investors responded to this gap by switching to managed income and even more conservative cash-like funds.

What investors should remember, however, is that an extended period with no reward for risk is unusual. While managed income funds performed better or the same as the conservative multi-asset funds in three of the past five years, this outcome is not the norm. Looking at the previous five years (2010-2014), the multi-asset funds with larger risk budgets delivered better returns than the income funds in four of the five years. Over this period, these funds returned 10% to 11% per year, more than double the recent experience, while the managed income and cash funds returned a similar 7.2% per year.

Expected returns from cash, income funds to fall

You may rightly think that we can’t plan for the future by looking only in the rear-view-mirror. While we do not know whether the reward for taking additional risk over the next five years will be more like the past five years or the early 2010s, there is one datapoint that there can be no dispute on. This is where we think the biggest risk lies for many retirees, given how conservative their investment portfolios are positioned.

The Covid-19 crisis this year has resulted in a dramatic and unprecedented steepening in the yield curve. Longer-dated government bonds trade at historical highs, with for example the 15-year bond yielding around 11% compared with 9.6% a year ago. At the same time, cash yields have fallen from 6.5% a year ago to 3.5% today.

The net result is that the additional annual yield paid by longer-dated bonds compared with cash has increased to around 7% now from 3% a year ago. While the higher long bond yields are attractive, they are not without risk, as it reflects the market’s concerns about the sustainability of government’s finances. If these concerns were to grow, yields could rise further, resulting in capital losses for existing bondholders.

This argues strongly for the judicious introduction of riskier assets in retirement-funding portfolios.

Avoiding the next possible return disappointment

 

Our key concern is that the current conservative positioning of many retirees is setting them up for another possible return disappointment over the next five years. Cash yields are at historically low levels and could well remain low for a lengthy period. Long bond yields are high, but that doesn’t come without risk. And local equities are now so unloved that they are undemandingly valued.

We therefore encourage retirees to consider adjusting to the current financial market realities and prudently re-risk their investment exposure. They can do this by investing in a multi-asset class fund that is appropriately risk-conscious.

In so doing, they will be able to gain exposure to the more attractive return prospects available from both international and local asset classes that cannot be accessed through income and cash funds. In our view, these funds are better positioned to take advantage of the investment opportunity set that currently exists than managed income and cash funds.

By Pieter Koekemoer

Pieter Koekemoer is head of personal investments at Coronation./span>

Source: https://www.moneyweb.co.za/mymoney/retirement/retirees-over-exposure-to-cash-like-investments-risks-disappointment/

South Africa, approaching an income desert?

Income is a dominant driver of most asset class returns over the long run. John Stopford and Jason Borbora, co-portfolio managers of the Ninety One Global Multi-Asset Income Fund, recently wrote a thought piece1 in which they said; “given the importance of income, the decline in yields on most asset classes since the Global Financial Crisis (GFC), and the further fall during the COVID-19 crisis, appears to bode ill for conservative investors … The good news, however, is that there are still attractive opportunities across a range of asset markets and securities.” They conclude, that the key to thriving in this income desert is to build a diversified portfolio by selecting attractively priced individual bonds and equities offering decent yields, but whose income payments are comfortably covered by sustainable cash flows.

1 – Thriving in an income desert, July 2020.

Income also dominates as a driver of total returns when deconstructing the make-up of South African equity, property and bond index returns. In fact, over the past 10 years, capital has detracted from the total return generated by South African property and bond indices, while reinvested dividends are typically responsible for approximately one third of cumulative total returns for SA equities, as evidenced in Figure 1. Importantly, this is at an index level and does not represent the opportunities available at an individual security level to bottom-up stockpickers. While we do not have index data going back 10 years for South African investment grade corporate credit, we would expect the picture to be similar to that of government bonds, being that the income received exceeded the total return due to a portion of capital being lost to corporate defaults.

Current income environment

Official interest rates have been cut to very low or negative levels in most developed countries and the South African Reserve Bank (SARB) has rapidly followed suit. Year-to-date, the SARB’s Monetary Policy Committee has cut the repo rate by a substantial 3%, from 6.5% at the start of the year to the current rate of 3.5%. This collapse in the repo rate will have a material impact on the returns investors can earn from money market and cash-like investments; we can expect the average money market unit trust fund to trend down towards the current repo rate of 3.5%2. And while South African government bond yields have spiked, this is not entirely a good thing as it reflects an increase in the perceived risk of lending to the South African (SA) government.

At the same time, in the wake of Covid-19 and the related recession, many companies have suspended the payment of dividends. Globally dividends were down 22% in quarter 2, 2020, the biggest 3-month fall since 20093. Share buyback programmes have also been widely halted. In South Africa, the South African Reserve Bank went so far as to advise SA banks to preserve capital by not paying dividends, and real estate companies are deferring dividends as they attempt to shore up their balance sheets. Glencore, Capitec, Investec, Redefine, Rand Merchant Bank and Sasol are all examples of companies that have suspended the payment of dividends this year. Unfortunately, quantifying the resultant economic damage will take considerable time and therefore it is too early to know when many of these companies will be able to reinstate their dividends.

Simply put, the income desert has come to South Africa.

2 – See Cash trending towards trash, May 2020.

3 – Janus Henderson.

Preventing desertification requires an innovative approach

As a drastic response to the growing desertification of western and north-central Africa, countries across the region implemented the extraordinary idea of transforming their degraded landscapes through a “Great Green Wall” stretching across the width of Africa, from Senegal in the West to Djibouti in the East. The aim of this Great Green Wall of trees 10 miles wide and 4 350 miles long is to create a barrier against climate change and for it to form a transitional zone between the arid Sahara Desert to the north and the belt of humid savannas to the south.

Investment managers, on behalf of financial advisors and investors, will need to look to a similarly innovative response to ensure real returns for conservative investors. Fortunately, there are attractive opportunities across a range of asset classes and underlying securities, which continue to be identified and exploited by the Ninety One Quality capability’s structured, disciplined and effective investment approach.

In constructing portfolios, the Quality team seeks to balance risk and returns, and considers more than just income (and any potential for income growth) when evaluating individual securities within the various local and offshore asset classes available to them – equities, bonds, credit, property and cash. Where appropriate they also consider the potential for any capital appreciation and the impact of any currency movement in calculating the individual security’s expected total return, increasingly important in this lower yield world. Understanding how the various securities and asset classes behave in a holistic portfolio is also a key consideration, as is considering any downside sensitivities.

By way of example, the US dollar acts as a through-the-cycle shock absorber for SA portfolios and there is a negative correlation between SA bonds and high-quality global equities.

The Ninety One Cautious Managed Fund

The Ninety One Cautious Managed Fund (the Fund) is the ideal vehicle for investors who require a low risk, conservative investment option that still has the potential to beat inflation substantially and take advantage of rising markets. The Fund has a strong focus on capital preservation and absolute returns driven primarily by income through active asset allocation and stock selection decisions; the Fund’s impressive track record is evident in figure 2 below, which illustrates that the Fund has only had 1 negative 18-month return out of 151 rolling 18-month periods.

Past performance is not a reliable indicator of future results, losses may be made. Source: Morningstar, dates to 30 June 2020, performance figures above are based on lump sum investment, NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested, fees are not applicable to market indices, where funds have an international allocation this is subject to dividend withholding tax, in South African Rand. * Inception date 31 March 2006. Annualised performance is the average return per year over the period. Individual investor’s performance may vary depending on actual investment dates. Highest and Lowest returns are those achieved during any rolling 12 months over the period specified. Since inception: Feb-10: 23.8% and Feb-09: -6.8%. The Fund is actively managed. Any index is shown for illustrative purposes only.

Rather than trying to outperform other conservative funds or the market, the portfolio manager aims to achieve inflation-beating returns at the lowest possible risk – the fund targets inflation plus 4% over rolling 3 years. When making investment decisions the possibility of losing money is a more important consideration than the potential investment gain. This risk-cognisant approach is not only reflected in our approach to asset allocation, but also in terms of our equity stock selection.

Current positioning

In a recent report back, co-portfolio manager and head of SA Quality, Duane Cable, emphasised that we continue to focus on the highest quality opportunities. In the context of South African assets this means select government bonds, given the high coupon (real yield of approximately 6%) and resultant attractive risk/return characteristics, especially compared to SA equities and cash (and even considering downside risks to the fiscus). We then balance this with growth assets in the form of high-quality global equities with low leverage and low economic sensitivity. We favour those businesses that generate high and sustainable returns on invested capital in excess of their cost of capital. Importantly, these quality stocks tend to outperform in difficult market circumstances because of their balance sheet strength and more resilient earnings. Validating the strength of this approach, Microsoft, which is the second largest offshore holding in the Ninety One Cautious Managed Fund, has joined the list of top 10 global dividend payers for the first time.

In summary, we do not believe it appropriate to position the Ninety One Cautious Managed Fund for any event or crisis. Instead, we maintain a balance of exposures which offers protection against a range of potential outcomes, while generating inflation-beating returns over the medium to long term. As always, we remain unwavering in our commitment to growing capital in a prudent manner.

Paul Hutchinson

Sales Manager

Important information

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long term investments and the manager, Ninety One Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. Additional information on the funds may be obtained, free of charge, at www.NinetyOne.com. Ninety One SA (Pty) Ltd (“Ninety One SA”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA). Investment Team: There is no assurance that the persons referenced herein will continue to be involved with investing for this Fund, or that other persons not identified herein will become involved with investing assets for the Manager or assets of the Fund at any time without notice.

Investment Process: Any description or information regarding investment process or strategies is provided for illustrative purposes only, may not be fully indicative of any present or future investments and may be changed at the discretion of the manager without notice. References to specific investments, strategies or investment vehicles are for illustrative purposes only and should not be relied upon as a recommendation to purchase or sell such investments or to engage in any particular strategy. Portfolio data is expected to change and there is no assurance that the actual portfolio will remain as described herein. There is no assurance that the investments presented will be available in the future at the levels presented, with the same characteristics or be available at all. Past performance is no guarantee of future results and has no bearing upon the ability of Manager to construct the illustrative portfolio and implement its investment strategy or investment objective. In the event that specific funds are mentioned please refer to the relevant minimum disclosure document in order to obtain all the necessary information in regard to that fund. This presentation is the copyright of Ninety One SA and its contents may not be re-used without Ninety One’s prior permission.

How Big Tech Makes Their Billions 2020

How Big Tech Makes Their Billions

The world’s largest companies are all in technology, and four out of five of those “Big Tech” companies have grown to trillion-dollar market capitalizations.

Despite their similarities, each of the five technology companies (Amazon, Apple, Facebook, Microsoft, and Alphabet) have very different cashflow breakdowns and growth trajectories. Some have a diversified mix of applications and cloud services, products, and data accumulation, while others have a more singular focus.

But through growth in almost all segments, Big Tech has eclipsed Big Oil and other major industry groups to comprise the most valuable publicly-traded companies in the world. By continuing to grow, these companies have strengthened the financial position of their billionaire founders and led the tech-heavy NASDAQ to new record highs.

Unfortunately, with growth comes difficulty. Data-use, diversity, and treatment of workers have all become hot-button issues on a global scale, putting Big Tech on the defensive with advertisers and governments alike.

Still, even this hasn’t stopped the tech giants from (almost) all posting massive revenue growth.

Revenues for Big Tech Keep Increasing

Across the board, greater technological adoption is the biggest driver of increased revenues.

Amazon earned the most in total revenue compared with last year’s figures, with leaps in almost all of the company’s operations. Revenue from online sales and third-party seller services increased by almost $30 billion, while Amazon Web Services and Amazon Prime saw increased revenues of $15 billion combined.

The only chunk of the Amazon pie that didn’t increase were physical store sales, which have stagnated after previously being the fastest growing segment.

Big Tech Revenues (2019 vs. 2018)

Services and ads drove increased revenues for the rest of Big Tech as well. Alphabet’s ad revenue from Google properties and networks increased by $20 billion. Meanwhile, Google Cloud has seen continued adoption and grown into its own $8.9 billion segment.

For Microsoft, growth in cloud computing and services led to stronger revenue in almost all segments. Most interestingly, growth for Azure services outpaced that of Office and Windows to become the company’s largest share of revenue.

And greater adoption of services and ad integration were a big boost for ad-driven Facebook. Largely due to continued increases in average revenue per user, Facebook generated an additional $20 billion in revenue.

Comparing the Tech Giants

The one company that didn’t post massive revenue increases was Apple, though it did see gains in some revenue segments.

iPhone revenue, still the cornerstone of the business, dropped by almost $25 billion. That offset an almost $10 billion increase in revenue from services and about $3 billion from iPad sales.

However, with net income of $55.2 billion, Apple leads Big Tech in both net income and market capitalization.

Big Tech: The Full Picture

Bigger Than Countries

They might have different revenue streams and margins, but together the tech giants have grown from Silicon Valley upstarts to global forces.

The tech giants combined for almost $900 billion in revenues in 2019, greater than the GDP of four of the G20 nations. By comparison, Big Tech’s earnings would make it the #18 largest country by GDP, ahead of Saudi Arabia and just behind the Netherlands.

Big Tech earns billions by capitalizing on their platforms and growing user databases. Through increased growth and adoption of software, cloud computing, and ad proliferation, those billions should continue to increase.

As technology use has increased in 2020, and is only forecast to continue growing, how much more will Big Tech be able to earn in the future?

 

Source: https://www.visualcapitalist.com/how-big-tech-makes-their-billions-2020/

You can’t predict but you can prepare

The importance of good saving habits

As we emerge from the stringent lockdown restrictions of the past 100 plus days, many of us are now facing a world that looks quite different from what we were used to merely months ago. For many of us, things have changed drastically, especially financially. With July being “National Savings Month” in South Africa, it is perhaps time to pause and dwell a bit on the topic of savings.

 

Countless individuals have been faced with and/or might still face retrenchment, having to take unpaid leave, drastic salary cuts or the possibility of losing their business. This reality hits home hard. Due to the unforeseen and devastating aftermath of the Covid-19 pandemic, many individuals have been forced to tap into their savings. The current circumstances have made people acutely aware of how important it is to have an emergency fund and/or contingency plan.

 

With this in mind, let’s unpack the famous words of the well-known investor, Howard Marks: “you can’t predict but you can prepare”.

 

Prediction is a fool’s game

The first point to highlight is that trying to predict the market is fool’s game, however, it is human nature to try to find comfort in some sort of prediction of an outcome. This is because humans like to think they know what is going to happen next.

 

Using a very simple mathematical example, the below equation illustrates how the odds are against you when trying to predict an outcome. Firstly, you have to predict the event correctly, and secondly, you have to predict how the market will react as a result of the event. If you don’t get both right you won’t be able to capitalize on the opportunity. Let’s say you are exceptionally good at predicting and you get it right 70% of the time, the odds are still the same as flipping a coin.

 

Probability of predicting the event correctly x Probability of predicting the market’s reaction correctly

= 70% * 70%

= 49% (same odds as flipping a coin)

 

The table below details two examples of recent events that an investor could have predicted accurately, but most people got the second prediction – how the markets will react – wrong.

 

 

As we reflect on the events of the past couple of months, one thing is certain: it was impossible to predict the events that have unfolded this year and the resulted reaction of markets, governments and economies.

 

The only thing we can do is to do our best to prepare for times like these.

 

Preparing for the unknown

In a world filled with randomness and uncertainty a far better strategy than to prepare for the unknown is to focus on the known. What is known is that there are three primary drivers of results in life:

 

1) Your luck (randomness).

2) Your strategy (choices).

3) Your actions (habits).

 

Only two of these three drivers are within your control – your strategy and your actions. By focusing your efforts on your choices and habits, you take ownership of your finances, instead of leaving it up to chance.

 

The best way to prepare for these unknown and unprecedented times is to build up a nest egg. The most obvious way of doing this is by saving and taking advantage of the power of compounding.

 

In the words of Warren Buffett – “Do not save what is left after spending but spend what is left after saving”. Unfortunately, many investors tend to spend first and save what is left. Often these investors also make the mistake of not saving the little that is left, as they believe it won’t make a difference.

 

In January 2020, Victoria Reuvers, managing director of Morningstar Investment Management South Africa wrote an article in which she shows that anyone has the ability to become a millionaire. What it requires are two simple, but not easy, habits – firstly, start and stick to the habit of saving and secondly, be patient. Most investors’ path to becoming a millionaire is not by investing in the next big thing and making a quick buck overnight. For most of us, it is about building good habits and being disciplined when it comes to saving – even if it is just R200 a month.

 

We encourage investors to use July as an opportunity to re-think their budget, savings and spending habits and encourage their children to practice good habits from a young age. Think about a good savings habit like brushing your teeth. Twice a day for two minutes is all it takes, and although it may not feel like a big action at the time, the long-term positive effects are enormous. The problem when you don’t do it is that you only see the damage your poor habits have caused after a long period of time.

 

Some practical ideas to start saving

In South Africa, you can save R36,000 per annum in a tax-free savings account, and a maximum of R500,000 over a lifetime. This is probably the easiest vehicle to ensure you get the benefit of investment returns without the concern of a tax bill at the end of the financial year. Another effortless way to save is to set up a monthly debit order to an investment account. Not only do you then save first and spend after saving, but you also have the option to increase this amount annually and/or make lump sum contributions as well.

 

Other tips to start saving money every month:

  • Assess what you are paying in bank charges and if you are using all the additional services. You can perhaps switch to a cheaper offering.
  • Contact your insurance provider to re-negotiate your monthly premium.
  • Cancel any memberships that you don’t use.
  • To save electricity consider replacing all your lightbulbs in the house with energy-efficient ones and use gas appliances where possible.
  • Reduce discretionary spend: Try to buy clothes, furniture, appliances and other discretionary items only when they go on sale and don’t buy these items on credit.
  • Buying groceries in bulk can greatly reduce your grocery bill.
  • When going on holiday, shop around for special deals on flights and accommodation and search for discount coupons in the area that you are visiting.

These are just a few examples and there are many more ways to save a couple of Rand every month. Don’t ever think that it is too little to have an impact. There is a lot of power in compounding value.

 

Conclusion

In unusual times like these, investors might feel vulnerable and powerless. But it is often during times like these that we should try to form new healthy habits and leave behind bad habits. Let’s try to kick the practice of trying to predict everything and kickstart the habit of saving, even if only in small increments.

Debra Slabber, CFA®

Business Development Manager

Morningstar Investment Management South Africa

Risk Warnings

This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar Investment Management South Africa (Pty) Ltd makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this commentary. Except as otherwise required by law, Morningstar Investment Management South Africa (Pty) Ltd shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.

This document may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

 

Morningstar Investment Management South Africa Disclosure

The Morningstar Investment Management group comprises Morningstar Inc.’s registered entities worldwide, including South Africa. Morningstar Investment Management South Africa (Pty) Ltd is an authorised financial services provider (FSP 45679) regulated by the Financial Sector Conduct Authority and is the entity providing the advisory/discretionary management services.

Start of a bull rally or more volatility to come?

We live in eventful times. During these tough economic times, it can certainly feel like the glass is half empty. The disconnect between the current economic environment and the recent rally in equity markets has left many people scratching their heads. Is this the start of a strong bull market or merely a slight recovery from the aggressive sell-off we saw in March 2020?

The world was overturned in March when outbreaks of Covid-19 started accelerating and affecting most markets across the globe. This saw almost one-third of the world’s population going into lockdown and many companies coming to a complete standstill.

 

During this time most financial markets sold off aggressively due to the uncertainty around the effect on businesses both locally and abroad. This resulted in some of the most aggressive local and global sell-offs seen in history and, in turn, also resulting in one of the fastest sell-offs in history. With this being said – in the weeks post 18 March, markets have also seen some of the strongest returns, resulting in most equity markets clawing back most of its losses.

 

So, the question begs, is the sell-off/risk-off trade done?

Let’s look at previous sell-offs and their subsequent recoveries in the South African equity market, namely 1998 (emerging markets) 2003 (technology) and 2008 (financial crisis) as well as 2020.

 

The graph below demonstrates the four above mentioned crises, the time the sell-offs started and the period it took for all capital losses to be recouped.

 

In other words, if an investor invested R100 on the day the sell-off started, the below graph shows how long it took (measured in days) the investment to reach the bottom (lowest amount) along with the subsequent recovery (in other words, how long it took for an investor to get back to the initial R100 investment). The x-axis signifies the number of days and the y-axis the change in the value of the initial R100 investment.

 

 

From the above graph, it becomes clear that the most recent sell-off was one of the most aggressive sell-offs, but the rebound has also been one of the quickest.

 

So, is it the end? Unfortunately, it is unlikely. Remember that share prices reflect the future earnings expectations of companies. So while prices of shares might have adjusted, companies haven’t realised earnings yet. There might still be some further headwinds that the market will have to digest as companies release their earnings results and the real impact of the lockdown is realised.

 

From the above graph, we can see that it can take anything from 190 days to 600 days to make up previous losses. You can get cycles during a 12-month time frame that feel like they should actually be playing out over the course of 12 years.

 

Once you start digging into the historical numbers you begin to realize the equity market is even more unsystematic than advertised. Surprisingly, huge up and down moves happening in the same year is not out of the ordinary.

 

Investments with more cyclical equities (such as airlines, banks and energy companies, to name but a few) are typically more volatile. That’s because a share’s return is based on the business’ profitability, which is difficult to predict. In uncertain market environments, like the current one, investors tend to be especially pessimistic about how businesses will perform, which can result in an overreaction (to the downside) in the share price.

 

So, why would you want to own equities when there is so much uncertainty? Because you’re likely to be rewarded with a higher return over the long haul if you can remain calm and stomach the volatility and noise.

 

When your portfolio’s value has declined amid this volatility, you might think that you’ve taken on too much risk. However, you shouldn’t necessarily conflate volatility with risk. Risk could be better defined as the permanent loss of capital (which is realised if you exit at a low point) and the chance that you won’t meet a financial goal. Even though a portfolio that is heavily tilted toward equity might bounce around in volatile environments like this, your total portfolio asset allocation might not be overly risky.

 

By reducing your exposure to more volatile or “risky” assets such as equities, you could significantly limit your portfolio’s potential return over the long run. If you have decades left to invest, a lower return could prevent your rands from multiplying at the necessary pace to reach your investment goals.

 

It’s easy to overplay the significance of volatility because it means we can address the overwhelming feelings of anxiety that occur in times of market stress. But with volatility comes opportunity, especially for the patient and sensible investor. Ultimately, equity market gains have offset shorter-term losses during market turmoil, and market volatility can be an opportunity to buy equities at a low price.

Eugene Visagie, CFA®, FRM®

Client Portfolio Manager

Morningstar Investment Management South Africa

Risk Warnings

This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar Investment Management South Africa (Pty) Ltd makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this commentary. Except as otherwise required by law, Morningstar Investment Management South Africa (Pty) Ltd shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.

This document may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

 

Morningstar Investment Management South Africa Disclosure

The Morningstar Investment Management group comprises Morningstar Inc.’s registered entities worldwide, including South Africa. Morningstar Investment Management South Africa (Pty) Ltd is an authorised financial services provider (FSP 45679) regulated by the Financial Sector Conduct Authority and is the entity providing the advisory/discretionary management services.

Don’t let financial jargon throw you off your game

What to understand about downmarket jargon.

Market downturns leave many investors hopeless for various reasons. Portfolio values and income levels that have declined, the confusion as to what to do about it, a bombardment of information from various sources, and explanations by industry experts using terms you have never heard before. How should you know what to do if you don’t even understand what the problem is in the first place?

While it is impossible to control what happens in markets, you can make sense of these events by gaining a better understanding of relevant investment terms. In the following article, we look at a few financial terms that are often used during market downturns with the hope of assisting investors to make better sense of the myriad of terms being used.

 

Recession

The term “recession” in its strictest definition means that an economy experiences two consecutive quarters of negative economic growth as a result of a significant decline in general economic activity.

During a recession, businesses experience less demand (i.e. they sell fewer products and/or services). These businesses then usually react to this by cutting costs and sometimes laying off staff in order to protect the bottom line and profitability of the business. When staff are retrenched, this leads to higher unemployment rates.

Generally, a recession does not last as long as an expansion does. Historically, the average recession (globally) lasted 15 months, compared to the average expansion that lasted 48 months.

Causes of a recession can vary. While COVID-19 has certainly put a drag on the global economy, it remains to be seen whether it will have lasting effects on economic output. It is important to realise that recessions are a normal part of an economic cycle and every person will experience a few in their lifetime.

 

Bear Market

A bear market is when a market experiences a decline of at least 20%, usually over a two-month period or longer. Bear markets often arise from negative investor sentiment because the economy is slowing or due to the expectation that it will slow down. Signs of a slowing economy may include a decrease in productivity, a rise in unemployment, a decrease in company profits and lower disposable income. When someone talks about having a “bearish” view, it means they have a pessimistic outlook.

While a recession and a bear market often go hand in hand they are associated with different issues. The distinction between a bear market and a recession is that a recession is measured by a decline in economic output (also known as gross domestic product or GDP), whereas a bear market is identified by a decline in stock market values in excess of 20% over a prolonged period as a result of negative investor sentiment.

Some other terms that you might come across when reading up on market downturns include:

  • A pullback, which is a short-term price decline within a longer-term trend of price increases.
  • A correction, which is when an asset’s price falls by at least 10%.
  • A market crash, which is a drastic market decline over a short period.
  • A depression, which is a long-term recession that can last multiple years.

 

Volatility

Markets have been highly volatile of late, meaning equity prices have bounced up and down rather severely from one day to the next. Volatility marks how much an investment’s price rises or falls. If an investment’s price changes more dramatically and/or more often, it’s considered more volatile.

Price volatility is usually expressed in terms of standard deviation, or how much an investment’s price has fluctuated around its average price over a certain period. A higher standard deviation implies an investment’s price is more volatile.

Investments with more uncertain outlooks, like equities, are typically more volatile. That is because equity returns are based on a company’s profitability, which is difficult to predict. In uncertain market environments, like the current one, investors tend to be especially pessimistic about how businesses will perform, which can result in steep market declines.

So, why would you want to invest in a more volatile investment? Because you are likely to be rewarded with a higher return over the long-term.

 

Risk

Volatility and risk are terms often used interchangeably, although they are very different. Risk should be defined as “permanent capital loss” or the chance that you won’t meet your financial goal.

For a retiree, one risk might be not taking on enough risk. By reducing your exposure to more volatile or “risky” assets such as equities, you could significantly limit your portfolio’s potential return over the long run. By remaining in cash for prolonged periods of time you run the risk of increasing your tax bill significantly (due to interest earned being fully taxable) or losing purchasing power due to the eroding effects of inflation.

Even though a more equity orientated portfolio will experience more volatility in environments like what we are facing now, your asset allocation might not be overly risky. If you’re far away from retirement, you have time to ride out your portfolio’s short-term volatility and take advantage of longer-term gains that equity markets will generate.

 

Loss Aversion

Loss aversion is the theory that investors feel more pain when they lose a certain amount of money than they feel pleasure when they gain an equal sum. In other words, you would feel more discomfort from losing R1,000 than pleasure from gaining R1,000.

Time and time again it has been proven that selling your investments in a downturn and giving up on your long-term financial plan is detrimental to a successful investment outcome.

 

So where does that leave investors?

Things might not be so hopeless after all. Recessions, bear markets, drawdowns and volatility are all part of the world of investing and building long-term wealth. What matters most is our actions and habits during this time. These can either hurt you or help you, but most importantly always remember that “this too shall pass”.

Debra Slabber, CFA®

Business Development Manager

Morningstar Investment Management South Africa

Risk Warnings

This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar Investment Management South Africa (Pty) Ltd makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this commentary. Except as otherwise required by law, Morningstar Investment Management South Africa (Pty) Ltd shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.

This document may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

Morningstar Investment Management South Africa Disclosure

The Morningstar Investment Management group comprises Morningstar Inc.’s registered entities worldwide, including South Africa. Morningstar Investment Management South Africa (Pty) Ltd is an authorised financial services provider (FSP 45679) regulated by the Financial Sector Conduct Authority and is the entity providing the advisory/discretionary management services.

Opinion: Counting the economic cost of South Africa’s lockdown

As South Africans, we want our country to prosper and the quality of life for all those living within our borders to improve. Millions live in total poverty and rely on family or intermittent work to get by: life is tough, and often short, as malnutrition and hardship take their toll. The most effective way to lift people out of poverty and improve quality of life is through education and economic growth. 

I am concerned that our government’s lockdown approach and the subsequent economic hardship inflicted on our people will cost more lives than it can save. I realise this is a controversial statement in a context where people are very fearful and understandably concerned about their health and the wellbeing of their families. An effective government must make difficult decisions that involve trade-offs and cost-benefit analysis. I am not saying we should trade lives for economic growth; I am saying we must consider how we can save as many lives as possible and give better lives to as many South Africans as possible with our limited resources.

President Cyril Ramaphosa’s initial lockdown decision was justified to buy time in order to gather our health resources and prepare our hospitals. It was never meant to be a strategy to eliminate the COVID-19 virus – this is an impossibility. The idea behind lockdown is that the same number of people get ill, but the infections are spread over a longer time in an effort not to overwhelm the health system. Our government’s lockdown strategy has morphed into something else entirely.

As new information emerges, it seems the virus mortality rate is substantially less than many feared, and many of the more alarmist predictions that led to lockdowns across the globe have proven to be flawed. The government must absorb this information, particularly given the youthful South African population.

There are two important questions:

  • How many COVID-19 fatalities can be avoided through the lockdown?
  • What is the economic, and therefore human, cost of the lockdown?

I will not go into detail on the potential number of lives saved by the lockdown. There is a great deal of information available* that indicates the lives saved by this strategy will be minimal unless the lockdown means the number of infections can be supressed until a vaccine becomes available. Data indicates the mortality rate for those below 70 years of age is less than 0.2%; only 2.9% of South Africa’s population is older than 70. Furthermore, lockdowns or a lack thereof, seem to make little difference to the total number of cases a country experiences. It sounds tragic and defeatist, but it is not possible to make the virus disappear through lockdown, particularly in a country like South Africa.

Economic and human costs are two sides of the same coin. Studies indicate that mortality rates double with job losses. A smaller economy means fewer resources to allocate to healthcare and education in future. National Treasury thinks up to seven million people could lose their jobs. This could lead to tens of thousands of additional deaths.

The stimulus package outlined by the government is R500bn. SARS thinks tax collection could fall by R250bn this year as a result of the shutdown. Given government reallocations, this means additional debt of approximately R500bn in a single year. The economic damage will linger, tax collections are unlikely to recover to previous levels for years to come. The R50bn interest bill on this additional debt burden means R50bn less to spend on education, healthcare or other services – not just in 2020, but in perpetuity.

An extreme worst-case scenario for South Africa is 150 000 COVID-19 deaths (most models indicate worst-case scenarios of 50 000). This is based on 50% of people contracting the virus with a 0.5% fatality rate. (A more likely worst case is a 0.2% mortality rate of 50% of the population, which is 60 000). This is a huge number of deaths and a great tragedy. Let’s assume the lockdown manages to reduce the number of fatalities by 50% by supressing the illness until a vaccine is discovered: This would be an incredible success. 75 000 lives would be saved. The direct cost per life saved in this scenario is R6.6 million; indirect costs will be far greater. I know this puts a price on human life but, unfortunately, this is what government has to do every day when allocating resources. On  the other end of the spectrum, if the disease can’t be stopped, and a vaccine is not discovered, then almost no lives will be saved from COVID, but we will have destroyed the economy, increased government debt by R500bn, and lost a great number of lives through higher mortality not related to COVID. South Africa’s 2020 budget called for healthcare spending of R229bn and police expenditure of R221bn: small amounts in comparison.

Sadly, because South Africa is a poor country, we have a very high mortality rate, and therefore low life expectancy. 410 000 South Africans die from natural causes each year, including 37 000 people from TB and 32 000 from diabetes. In addition, 15 000 die in road accidents and 21 000 are murdered. These deaths are equally tragic and perhaps even more so as they are often preventable.

Unlike Europe, South Africa has a limited social security net and an informal economy. Many people have no savings and have lost their livelihood with the lockdown. Hunger is an immediate reality. Malnourished children are disadvantaged for the remainder of their lives due to stunting. The government provides a child grant, but there are millions of immigrant children who have no access to this grant.

Just as economic growth and prosperity save lives, economic destruction and poverty cost lives.

So why am I writing this now? Firstly, every week the lockdown continues, the economic cost compounds. Since the lockdown was enacted six weeks ago, I have urged government to consider the full picture, including the human and economic costs of their decisions, and I have provided them with balanced data. I have detailed how this data indicates the lockdown strategy is tragically flawed. We can no longer afford to blame “the virus”, when the vast majority of the job losses and suffering is the consequence of a strategy that has not fully accounted for the human cost of the lockdown on the economy. I hope that in making this commentary I am contributing to a heightened awareness of the issues, not emotion, underpinning this discourse. 

Secondly, it is to reiterate how we think about managing your portfolios against this backdrop. We all have our views on what is the right or wrong strategy for government. However, most importantly for us as investors, we must deal with the situation as it is, and invest your funds accordingly to protect capital and maximise long-term returns. 

The above comments represent my personal opinions and I understand that many people may strongly disagree with my views. 

Andrew joined Allan Gray in February 2001 as a fixed interest trader and moved to the Investment team as an equity analyst in February 2003. He was appointed as fixed interest portfolio manager in June 2006, began managing a portion of client equity and balanced portfolios in February 2008 and was appointed as chief investment officer in March 2016. He also manages African equities. Andrew holds a Bachelor of Science degree in Engineering and a Bachelor of Commerce degree in Accounting, both from the University of Cape Town, and is a CFA® charterholder.

Link to Original Article: Click Here

Budget 2020

On 26 February 2020, Finance Minister Tito Mboweni delivered the annual budget speech, providing an update on South Africa’s finances. Despite the budget speech highlighting the fragile state of the country’s fiscal position, the finance minister announced some much-needed relief for South African citizens. There were no major tax increases on individuals, while ambitious plans were announced to reduce expenditure over the next three years.

A high-level summary of the key points from the budget speech has been included below:

KEY TAKE OUTS

Revenue and deficits

  • Low growth has led to an R63 billion downward revision to estimates of tax revenue in 2019/2020 relative to the 2019 budget.
  • The consolidated budget deficit is now estimated to be 6.3% for the 2019/20 fiscal year and move lower to 5.7% for the 2022/23 fiscal year, with debt to GDP expected to rise to 72% over this period.

Taking a look at tax

  • There will be above-inflation increases in the personal income tax brackets and rebates (for the first time since 2014) which will provide relief to taxpayers.
  • There will be no changes to the tax-free portion of interest income (R23,800 for under 65’s and R34,500 for over 65’s).
  • The annual limit for investments in tax-free savings accounts will be increased to R36,000 and the lifetime limit will be kept unchanged at R500,000.
  • There will be no change to the corporate income tax or VAT rates, however, the minister announced that the corporate tax system will be restructured over the medium term, with the rate likely to be reduced.
  • The cap on the exemption of foreign remuneration earned by South African tax residents will be increased to R1.25 million from 1 March 2020.
  • In terms of capital gains tax (CGT), the inclusion rate remains at 40%, the annual exclusion remains at R40,000 and the exclusion for the sale of a primary residence remains at R2 million.
  • In terms of transfer duty on property, the purchase amount free of transfer duty increases to R1 million.
  • The deductible monthly medical aid contributions were increased to R319 for the first two members and R215 for each additional dependent.

Expenditure

  • National Treasury announced plans to reduce expenditure by R261 billion over the next three years, including a reduction in the wage bill of national and provincial departments and national public entities of R160 billion.

Levies, duties and charges

  • The fuel levy will be increased by 25c per litre, which will consist of a 16c per litre increase in the general fuel levy and a 9c per litre increase in the RAF levy.
  • Excise duties on alcohol and tobacco will increase by between 4.4% and 7.5%. Government will also introduce a new excise duty on heated tobacco products, which will be at 75% of the cigarette excise rate.

State initiatives

  • Government will move ahead with plans for a sovereign wealth fund, which will initially have a targeted capital amount of R30 billion.
  • The establishment of a state-owned bank will involve the amalgamation of existing state-owned banks, including Postbank, with the aim of lending money to lower-income consumers and small businesses at favourable interest rates and terms.

In closing

Overall, the budget speech was well received by market participants, with both the rand and local bond yields reacting favourably on the day. The budget was largely pro-consumer, with no additional taxes being announced for individuals. In a surprise move, above-inflation increases in the tax brackets for individuals were also announced for the first time since 2014. The business sector will most likely welcome the state’s plans to restructure the corporate tax system over the medium term.

The most ambitious element of the budget speech was no doubt the plan to reduce the public sector wage bill by R160 billion over the next three years. With expenditure on public sector wages currently making up 35% of total expenditure, implementation of this reduction will be key.

Michael Kruger

Investment Analyst

Morningstar Investment Management South Africa

Risk Warnings

This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar Investment Management South Africa (Pty) Ltd makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this commentary. Except as otherwise required by law, Morningstar Investment Management South Africa (Pty) Ltd shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.
This document may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

 

Morningstar Investment Management South Africa Disclosure

The Morningstar Investment Management group comprises Morningstar Inc.’s registered entities worldwide, including South Africa. Morningstar Investment Management South Africa (Pty) Ltd is an authorised financial services provider (FSP 45679) regulated by the Financial Sector Conduct Authority and is the entity providing the advisory/discretionary management services.