Rare earth minerals are used in the manufacturing of powerful magnets found in electric motors, especially the primary drive motors of electric vehicles. In a high-end electric car such as a Tesla, they will also be found in the motors that open and close the doors and adjust the seats, mirrors and steering wheel. Photographer: Jasper Juinen/Bloomberg
The determination and patience of a small group of investors will eventually see the reopening of the Steenkampskraal mine in the Northern Cape to mine one of the world’s largest reserves of rare earth minerals. No more than five private shareholders have stuck with their vision for nearly 20 years, and have contributed millions in capital and loans to keep the opportunity alive.
These investors hold the major interest in Steenkampskraal Holdings Limited (SHL), which owns 74% of Steenkampskraal Monazite Mine (Pty) Ltd. The balance of 26% has been placed in a trust for the mine’s employees.
The Steenkampskraal ore body is considered to contain the largest known reserve of rare earth minerals, estimated to exceed 605 000 tons of ore containing an average of 14.4% rare earth minerals.
Rare earth minerals comprise a group of 17 very essential chemical elements that are used in modern applications such as electric vehicles, wind turbines, LED lighting, laptop computers, tablets and sophisticated cellular telephones.
Their main use is in the manufacturing of powerful yet lightweight magnets used in electric motors, especially the primary drive motors of electric vehicles. In the case of a high-end electric car such as a Tesla, rare earth minerals will also be found in the motors that adjust the seats, mirrors and steering wheel, and open and close the doors.
Global demand on the up
SHL says the total global demand for rare earth minerals increased from less than 5 000 tons per annum in the 1960s to 145 000 tons in 2015. The company says demand will probably exceed 200 000 tons next year.
In contrast, there are only a few deposits worldwide that contain concentrated amounts of these rare elements to enable economic mining and refining. China is the largest producer, but halted export of its strategic minerals last year. The only rare earth minerals mine in Canada, once the largest producer in the world, shut down in 1998 due to low world prices. The mine restarted in 2002, but stopped operating again in 2015 and was liquidated soon after.
Similarly, Steenkampskraal was the world’s largest producer of rare earth minerals for a while, between 1952 and 1963, when Anglo American mined the deposit primarily for radioactive thorium which was used for fuel in nuclear reactors in Britain, Germany and America. Anglo American shut the mine when nuclear reactors worldwide switched to uranium. Uranium was much cheaper, ironically produced as a by-product at a few SA gold mines.
Rare Earth Extraction Company (Rareco) acquired the mine from Anglo American in 1989 with plans to reopen it, but faltered when rare earth prices fell sharply.
The mine was almost forgotten, except that the dormant Rareco had to publish its results and annual report as it maintained its listing on the JSE for a few years, until it gave up even on that and the share was suspended.
Rareco and its mineral rights were acquired by a Canadian mining company, Great Western Minerals Group, for R150 million in 2010.
They spent around R400 million to refurbish the mine, but left it for dead once again when the holding company was liquidated in Canada. Some of the previous Rareco shareholders still believed in the project and acquired the old mine from the liquidators in 2015. They changed the name back to the original Steenkampskraal and have spent another R100 million or so since then.
Much of the work has been done
Trevor Blench, chairman of SHL and driving force behind the effort to reopen the mine since 1989, is still optimistic that the project will succeed. “Most of the work on the mine itself and the surrounding infrastructure has been completed,” he says. “We have also received the necessary licences and certificates to restart production.”
These include new mining rights (valid until 2030 and renewable), approval of the mining plan and the mine’s environmental management plan, as well as a certificate of registration from the National Nuclear Regulator to mine, process, transport and store materials that are radioactive by nature.
Legal issues that followed the liquidation were eventually laid to rest a few months ago when the Cape High Court dismissed the last claims against the company. “It took the last three years to sort out the mess of the liquidation,” says Blench, adding that it had to be settled before the company could complete its final feasibility study. The feasibility study will include the final detailed designs for the refining plants, and determine the optimum level of production and capital requirements.
In the meantime, SHL has completed its exploration of the ore body and has conducted major metallurgical tests.
Best grade in the world
These tests confirmed earlier results indicating that the Steenkampskraal deposit has the highest grade in the world, with an average of more than 14%, compared to other mines that are mining ore bodies with an average grade of around 2%, according to test results published by SHL.
The company also carried on with work to refurbish the old mine shaft left behind by Anglo American and had to look at supporting infrastructure such as new offices, security fences and access roads. It even needed boreholes for water and a reverse osmosis plant to produce drinking water.
Blench estimates that SHL will probably need another R500 million to complete the refurbishment of the mine and build a new refining plant. The refining plant is important: it will separate unwanted elements from the concentrate of valuable minerals, and separate the radioactive thorium.
There is a ready market for thorium and SHL has an additional opportunity to, in future, refine it further in a specialised plant that will manufacture nuclear fuel and medical isotopes for the treatment of cancer.
The estimated capital requirement of R500 million to reopen the mine seems reasonable as far as capital expenditure on mining projects go and, more importantly, the value of the rare earth minerals.
According to a preliminary feasibility study that SHL completed last year, the target production of 2 700 tons of rare earths per annum has a value of $66 million – close to R1 billion at the current exchange rate.
“Prices of rare earth minerals have increased steadily over the last few years due to the development of electric vehicles and growth in renewable energy technology,” says Blench. “Demand increased significantly as China reduced global sales year after year. In fact, China was a net importer of rare earth minerals last year. [This] had a dramatic effect on prices. Progress in reopening the mine has resulted in enquiries from among others Germany, Britain, America and South Korea.”
When asked about a listing, Blench said there are as yet no plans to list SHL on the JSE again, but the possibility remains.
The company will be looking at raising capital from private equity funds as existing legislation requires investments of at least R1 million in unlisted companies, says Blench.
According to the current mining plan that makes provision for an output of 2 700 tons of minerals per annum, the mine will create 200 permanent employment opportunities. Admittedly not a lot, but welcome in the desolated Northern Cape.
Over the last few months, there has been significant debate around how cheap South African stocks are.
“In my opinion, you can fill a room with the smartest people you can find. You can give them six months to go out there and go and kick the tyres and see every management team and visit every business in South Africa, you’d never get away from the million-dollar question which is: is South Africa going to pull itself right?” Karl Leinberger, chief investment officer at Coronation Fund Managers, told advisors at the Investment Forum 2019.
No amount of work will provide this answer, he said.
During a presentation on the trade-offs between risk and return, Leinberger said Coronation’s investment team agonised over this, because if South Africa can pull itself back from the abyss in a meaningful way, there are incredibly cheap domestic stocks available.
Challenges may outweigh the case for recovery
Due to the risk that structural challenges may outweigh the case for cyclical recovery, it currently has very low exposure to domestic, economically sensitive assets.
Speaking more broadly, Leinberger said there is a massive emphasis on short-term performance in the industry, but very little focus on the risk taken to deliver those returns.
While textbooks often define risk as volatility, Coronation regards it as the probability of a permanent loss of capital.
“I firmly believe, after 20 years in the industry, that a manager reaching for return at the expense of risk could get away with it for much longer than any of us realise.”
But ultimately, they will be exposed, he said.
No one knows what the future holds
Managing retirement money is not a game. The first rule of investments is never to lose money. The second is that in an industry full of smart people with intimidating IQs and enormous confidence in the future, you shouldn’t forget that no one knows what the future will hold.
“We all need to fight hubris on a daily basis. The world is extraordinarily complex and uncertain.”
Coronation believes that risk matters more than return, he said.
“I cannot tell you how many shares on the JSE that we look at today [and] that we think are extremely cheap that we do not own in your portfolios. There are many stocks out there that we think could go up three, four, five times in the next five to 10 years and yet we don’t own them.”
One example is construction shares. Leinberger says Coronation doesn’t own construction shares even though one or two companies could deliver fantastic returns – the risks are just too high.
The same goes for gold shares.
“The world doesn’t need South Africa’s gold. We have marginal businesses with low quality reserves, high cost bases, unstable labour forces. We fundamentally think – although we could build a case around those shares doubling – we think they could just as easily halve and for that reason, we aren’t going to go there.”
While South Africa has a long list of worries, with load shedding currently top of mind, Leinberger also cited rising social tension and economic populism as a real concern.
“Almost every business we speak to is shrinking the number of people they employ. Large numbers of South Africans are being left without work, left behind by the economic system. We are seeing rising levels of frustration – far too many people in South Africa have nothing to lose.”
Leinberger said his biggest long-term concern is education.
Only 37% of people in South Africa who start school get a matric, while only a quarter of grade four students grasp what they are reading.
But even though risk abounds in South Africa as well as internationally, there is opportunity.
“Certainly in the domestic market valuations are much more attractive than they were five years ago, where generally markets were bullish about domestic assets – and we are finding opportunities as much in the equity market as the property market as the bond market.”
Listening to the daily corruption report from the Commission of Inquiry into State Capture one can easily miss some shards of optimism glinting through the cloud cover.
FTI Consulting’s The future of South Africa report released this week has some encouraging words from CEOs such as Discovery’s Adrian Gore and Goldman Sachs’s sub-Saharan Africa CEO Colin Coleman, who breaks rank with many of his peers in forecasting reasonably strong growth of 1.9% in 2019 and 2.8% by 2021.
Coleman says a good target for SA is to get back to 3% growth within three to four years. “During the Thabo Mbeki years, we were growing at 4% and during the Jacob Zuma years, at 1.5%. Over the combined period we had an average 3% growth rate.”
Gore introduces some much-needed optimism into the picture, pointing out that life in SA gets better with time. “Our GDP is 2.5 times the size it was in 1994 on a dollar basis; formal housing has increased by 131% from 1996 to 2016; new HIV infections are down 60% from 1999-2016; and the murder rate per 100 000 is down 50% from 1994 to 2017.”
South Africans tend to wallow in gloom, which leads them to make erroneous predictions. In a recent survey involving 28 countries, South Africans gave the least accurate guesses on global and national development figures.
South Africans move on quickly
Gore points out that South Africans tend to obsess over the problems of the day and move on quickly to the next one: HIV, crime, labour unrest, the Eskom crisis, state capture and land expropriation. “It is precisely because these problems change that they cannot be intractable,” he says. “I’m not minimising these problems. They are tragic and need to be solved. I’m making the point that we have the ability to gain traction on these issues, albeit at times in a messy way.”
Claire Lawrie, senior MD at FTI Consulting, points out that SA tends to mirror global economic cycles and is currently lagging global growth rates. A key sign of improved outlook is the rise in foreign direct investment, which last year touched 2.25% of GDP.
Poverty rates are down over the last decade, though 14 million people are still unable to afford basic necessities.
Lumkile Mondi, Wits University lecturer and economist, says SA is headed for a difficult period of low growth akin to the 1988-1994 period preceding the country’s first democratic elections. The growth of the black middle class was a result of state intervention and preferential procurement for black people. We first need to accept that we are in a crisis before we can get out of it, he says. “We’re going to see more violence as claims having to do with the past come up. There [are] no consequences for breaking the law in SA. We need to reclaim our democracy.
‘Everything seems to be about BEE’
“SA has too many competing interests, and everything seems to be about BEE.” He cited the example of a much-needed Highlands Water Project phase that was held up by the relevant minister because there were not enough BEE participants.
Investec group economist Annabel Bishop agreed that SA is going to have to go through a period of repair, similar to 1994, when it took five years to fix national finances. SA has yet to benefit from the upswing in commodity prices, in large part because of higher energy and deep-level mining costs.
Dr Rod Crompton, director of the Energy Leadership Centre at Wits University, says several transformations are happening simultaneously, including deindustrialisation and IT modernisation.
“Only organised business can save the country,” says Crompton. “It needs to come out from behind the parapet and play its part.”
One sector to watch as an engine of growth is the gas and petroleum sector following the massive gas discovery by oil company Total off the SA coast. The centre of power in energy will shift from the state to the private sector, and this will undermine the business model of municipalities which generate revenue from electricity sales.
For a new democracy, SA’s public sector swallows 16.7% of GDP, well above that of other Brics countries and on a par with Sweden. “The public sector contributes 16.7% to GDP and 16.3% to employment, but takes a 35% share of South Africa’s total wage bill. This is a strain on public finances and reigning it in will be the litmus test of whether the government is taken seriously on sound economic management. There is a growing public perception that the public sector does not provide value for money for the services delivered,” says the report.
Bishop says business confidence is at levels previously seen during the global recession in 2009. SA risks credit rating downgrades on the weakness of government and state-owned company finances. “The private corporate sector has been increasingly crowded out by the substantial fiscal expansion of the past 10 years, as government debt has escalated rapidly, the budget deficit has widened and government expenditure consistently exceeds revenue.”
FTI Consulting suggests five enablers of growth:
Creating policy certainty
Addressing the skills mismatch between what exists and what is needed in a technological economy
Re-industrialising the economy
Improving investment attractiveness, and
Ensuring sustainable energy supply.
Annual GDP growth, SA and the world
Source: FTI Consulting, World Bank
South African GDP growth performance
Source: FTI Consulting, Statistics SA
Gini coefficient (the higher the score, the greater the inequality)
Stanlib’s Kevin Lings says the housing market is an obvious win for South Africa – but banks would rather approve credit for shopping than grant home loans to those who earn too much to qualify for an RDP house. Picture: Supplied
South Africa cannot be successful until business confidence returns to an index level of at least 50, a level considered neutral.
Speaking at the Investment Forum 2019, Stanlib chief economist Kevin Lings said if South Africa’s business confidence had been at a level of around 50 in 2018, the economy would have grown at 2% instead of 0.8%.
Business has suffered from a lack of confidence in recent years (see below) and political turmoil and policy uncertainty have weighed on growth.
Sources: BER, South African Reserve Bank
A recent SA Reserve Bank study found that every 1% increase in business confidence leads to a 0.5% increase in fixed investment.
“So what does it say to me?
“If you want to grow this economy, just make business happy – they will do the rest.”
Although South Africa grew at an average of around 4% prior to the global financial crisis, growth has gradually slowed to an average of roughly 1% over the past 10 years.
Lings says given South Africa’s population growth, economic growth of 1% is unacceptable and – if left unchecked – will lead to social chaos.
“We need to create 600 000 jobs a year to deal with the emerging population.
“You can’t grow at 1% and create 600 000 jobs. That will not happen.”
But with government’s debt-to-GDP ratio heading towards 60%, it would be naïve to think that government can spend its way out of its economic predicament.
Lings argues that any solution to the problem will need to meet three criteria. It has to be politically acceptable, something government has already spoken about, and of low energy intensity.
While there are various potential solutions that would meet these criteria, Lings highlighted three: make it easier to do business, build houses and lure more tourists to the country.
“I would argue that you do any one of those things better – any one – and you would start to change sentiment in this country, and that is what you are ultimately after.”
1. Make it easier to do business
South Africa currently ranks 82nd on the World Bank’s Ease of Doing Business Index.
“We used to rank around about 40 or so, but in the last four years the ease of doing business has deteriorated. We make it incredibly difficult to do business.”
In his State of the Nation Address, President Cyril Ramaphosa announced that he wants the country to get back into the top 50 within the next three years.
Lings says this doesn’t require a significant amount of effort, is achievable and will lift business confidence.
It is incredibly difficult to start a business. South Africa is ranked 134th out of 190 countries on this metric, falling from 61st just four years ago.
Rwanda is ranked 29th in the world, following its introduction of new technology that allows for online registration.
Although government doesn’t always deliver on its promises, its ability to develop housing over a long period of time has been pretty good. Yet, over the last 10 years mortgage finance growth in the private sector has been muted.
“If you are able to develop a housing market in any country it does incredible things to lift confidence and growth, and there are a huge number of people in South Africa that earn too much money to qualify for an RDP house but too little money for banks to be interested.”
Lings says banks are currently more willing to grant personal loans for people to go shopping than give a young family a mortgage to buy their first home.
“That stifles the economy. Developing housing does way more for a country than going shopping.”
The level of fixed investment in housing in South Africa is extremely low when compared with developed countries that don’t need more housing.
“The housing market is an obvious win for South Africa.”
By almost any measure, global tourism is currently at an all-time high. There are more aeroplanes and a greater amount airport space than ever before. More than 4 billion people fly once a year.
Although the amount of money South Africa receives from foreign tourism has reached a record high, in dollar terms the picture looks much less rosy.
South Africa is currently ranked 107th in the world in terms of the size of its tourism market relative to GDP.
Lings says it is hard to believe that this is the country’s true ranking, given its natural attractions. It should be in the top 50.
At the moment, only 4.5% of people employed are either employed directly in tourism or associated with tourism. The global average is 10%.
“If South Africa could start to attract the average level of tourism given the size of our economy, that would do wonders for employment.”
Lings says if South Africa can get any one of these three things right, business confidence will improve.
“Ultimately this is what is stopping South Africa [from] achieving more economic success. South Africa cannot be successful until this number [business confidence] is at the 50 index level.”
Moody’s said on Tuesday that South Africa’s sovereign credit rating was still investment grade, further boosting the rand several days after the ratings agency delayed a review of the country’s creditworthiness.
Moody’s is the last of the big three ratings agencies to give South Africa an investment-grade rating, so markets are sensitive to any pronouncement it makes on the fiscal and economic strength of Africa’s most industrialised economy.
Its credit opinion report, which does not constitute a rating action, Moody’s said that South Africa’s credit rating was still Baa3, the lowest rung of investment grade, with a stable outlook.
“While economic growth will remain slow and fiscal strength will continue eroding, we expect South Africa’s credit profile to remain in line with those of Baa3-rated sovereigns,” the report said.
“South Africa’s credit profile is supported by a diversified economy, a sound macroeconomic policy framework and a deep pool of domestic investors thanks to well-developed financial sector and markets,” it said.
The rand rallied on Monday after Moody’s said late on Friday that it would not publish a review of South Africa’s debt rating as planned.
In accordance with European Union regulations, Moody’s provides dates for the potential release of both solicited and unsolicited sovereign credit-rating actions, but it can alter those dates at its discretion.
Some South Africa-focused investors had worried that wider deficit projections in this year’s budget and a spate of national power cuts could prompt Moody’s to downgrade the outlook, or even the rating, on Friday.
The rand added to Monday’s gains after Moody’s published its report on Tuesday.
Over my 30-plus year career consulting on technology, I’ve encountered many mistakes my clients have made regarding hardware, software, and technology in general. As technology has become more integral and complicated, I’ve seen an increasing number of companies struggle with it. These problems aren’t just minor issues; in many cases they could threaten a company’s survival.
Consider these questions: Could your company survive a data breach in which your private customer data are made public? Could your company withstand a computer server crash that wipes out your accounting data? Could your company cope with a flawed accounting system that produces inaccurate inventory reports and financialstatements?
In response to the growing complexity of technology, in recent years I’ve been conducting technology review engagements for my clients that are designed to ferret out serious technology problems and issues, with recommended solutions. My specialized brand of technology review engagement employs procedures based on several dozen workplans, questionnaires, and checklists, each focusing on approximately 30 specific aspects of a company’s technology (such as hardware, accounting software, printers, internet, security, backup procedures, training, smartphones, cloud policies, password policies, file-sharing tools, etc.). In conducting these types of engagements, I’ve identified 12 common technology mistakes made by many of my clients; this article describes those common mistakes and offers recommendations for avoiding them.
1. Email messages are unencrypted
Perhaps the top security risk many companies routinely ignore is the failure to encrypt their emails. Some companies forgo email encryption because it can be costly and complicated, while others simply dismiss the threat as insignificant. This is a mistake. You should assume that every email message you send could be intercepted by unscrupulous people and bad actors. Without encryption, all your email messages are vulnerable.
Solution: Set up an email encryption system to protect all your email messages and attachments. One relatively easy approach is to use a free Google Gmail or Microsoft Outlook.com account, as these accounts automatically encrypt your email messages — but only when sent to other Gmail or Outlook.com users. Another approach is to purchase and install an email encryption system such as Trend Micro Hosted Email Security (starting at $27 per user per year) or Enlocked (prices range from free for 10 messages sent each month, to $29.99 per month for 10,000 messages).
2. Old computers are still used
It is common to find old computers lurking around most companies. This can be problematic because these older devices almost always lack new features, freeze up more often, and are slower at performing common tasks such as booting up, launching applications, printing, and surfing the internet. In addition, as we found with the WannaCry and Petya ransomware attacks of 2017, older computer systems can be more vulnerable to cyberattacks. Issues related to older computers can rob employees of productivity and put your data at greater risk.
Solution: Computers should be replaced frequently, perhaps as often as every three years, or within 12 months of each new Windows operating system release. Why so often? In my opinion, most computers typically have a “power life” of approximately three years (though the computer’s monitors can have a much longer life span); after three years, newer, more powerful computer models are generally available. Also, new operating systems are typically designed to be compatible with the latest motherboard, chips, and video card technologies. As such, their performance on older computers can be inconsistent. A few signs that it’s time to replace a computer system are:
The computer is more than 3 years old, and a newer operating system is available.
The computer takes more than 30 seconds to boot up.
Excel or Word take more than five seconds to launch.
The user complains of significant bugs, issues, or freeze-ups.
Not ready for new computers? You might be able to tune up your slower computer systems instead of replacing them, as suggested in the article “Boost Your Computer’s Performance” in the September 2015 JofA.
3. Employees are not adequately trained
The most common problem revealed by technology reviews is that many employees are not adequately trained to use their technologies. You can ferret out these shortcomings rather easily simply by asking employees which features they use in common products, including Excel, Word, Outlook, Windows, and their accounting system. Based on questionnaires I’ve reviewed, many employees have never used key features such as PivotTables, the Subtotalcommand, or Grouping, Querying, or Mapping in Excel; Tables, Styles, Page Numbering, Columns, or Mail Mergein Word; default Signatures, Junk Mail Blocking, Meeting Requests, Rules, or the Convert Email to a Task tool in Outlook; or Indexed Searching, Voice Recognition, Disk Cleanup, or the Snipping tool in Windows. These examples are good indicators that those employees are not familiar enough with those products to leverage them for their highest possible levels of productivity.
Solution: After being initially trained in using the company’s products, employees should receive continual, periodic “update training” on all the software applications they frequently use. For example, employees might receive two or three days of update training on Excel, Word, PowerPoint, and Outlook in one year, followed by two or three additional days of update training on Windows, smartphones, and the company’s accounting system the following year. Similar training classes should then be repeated every other year to ensure employees are well-versed in the software programs and hardware they operate.
4. Accounting system features are underutilized
Most reviews find that a company’s advanced accounting system features are underutilized. As examples, invoices may be mailed instead of sent electronically, inventory needs may be calculated manually instead of being backflushed by the system, and automated sales price capabilities may be completely ignored. The result is akin to pushing a self-propelledlawn mower. This shortcoming is usually attributed to a lack of knowledge about using the system’s more advanced features and functionality.
Solution: To ensure you are fully using your accounting system’s capabilities, assign at least one employee the task of fully mastering your accounting or ERP system’s full set of features and functions, and have this employee regularly share this knowledge with your team of system users. To bolster his or her proficiency, the designated accounting system guru should study educational training videos, YouTube clips, books about your accounting system, blogs, professional reviews, and the vendor’s end-user support pages. In addition, he or she should attend the vendor’s annual conference and annual end-user training courses.
5. Paperless systems are inadequately implemented
Often, a company’s paperless systems are found to have not been fully implemented, as evidenced by stacks of papers, folders, and file cabinets in plain view. Paperless systems offer many advantages, such as ease in locating and sharing data, cost savings in storing data, easier copy and paste capabilities, and more reliable data backup. But in many cases, it takes a leap of faith for employees to fully commit the company’s data to an electronic format. Some employees have a difficult time letting go of paper-based methods. As a result, your paperless system may not result in the paperless environment you intended.
Solution: To ensure your transition to a paperless office is complete, remove all file cabinets (perhaps to an archive location) and conduct “paper patrols” periodically in search of excessive papers or folders.As violators are identified, work with them to make a full transition to the company’s paperless system.
6. Physical security is lacking
Particularly among smaller organizations, a company’s physical security is often found to be inadequate. Specifically, the building’s windows, doors, and door locks are low-grade products easily beaten by a determined criminal. Even worse, those buildings often lack security systems, or they employ security systems that aren’t functioning properly. In many cases, doors accessed by keys have locks that can be easily picked, and no mechanism is in place to monitor who enters the premises. In some cases, current and former employees have lost their office keys, yet the company has not replaced the key locks and issued new keys.
Solution: Your building(s) should not be vulnerable. Steel doors, pick-proof locks (i.e., digital key locks), rugged windows, and alarm systems are a must. Preferably, you should install a digital key system that records employees as they enter the premises, and you should deploy alarm systems with high-resolution cameras that continuously record the view of all access points and key traffic points throughout the building.
7. Smartphones are underutilized
Many companies have little or no mobile device strategy. Of course, smartphones offer the ability to communicate via voice over a cellular network, but they are capable of much more. Smartphones can also be used to manage company email, manage calendars and to-do lists, provide GPS-based driving directions to traveling employees, connect to cloud storage for data access, accept credit card payments, manage contacts, access customer relationship management systems, track business expenses, take customer orders, provide customer service apps, and more.
Solution: Companies should prepare a solid mobile device strategy that ensures employees are as productive as possible while away from the office. This means identifying and installing apps and solutions on employee’s smartphones and providing the proper training so employees fully understand how to use those apps. It may also mean setting standards for the types of smartphones used, providing employees with smartphones, or implementing an employee smartphone purchase plan in which the company covers some or all the costs of employee smartphones and the related insurance. Don’t forget to establish security and policies to encourage safe and proper smartphone practices.
8. Cloud computing isn’t used
Cloud computing has emerged as a more powerful and efficient platform for business than in-house servers or desktop systems. This is because data in the cloud are more easily accessible to employees, customers, and other authorized users. In many cases, cloud-based applications increasingly offer greater functionality compared with their on-premisecounterparts. In some cases, cloud solutions are less expensive. In many cases, cloud computing is more secure compared to in-house computer operations that may lack proper physical security, firewalls, anti-virus solutions, or backup systems. Unfortunately, too many companies either embrace the cloud inconsistently or treat it as an afterthought.
Solution: Companies should prepare a cloud strategy and consider moving at least some of their computer applications and data to the cloud soon. As companies begin their transition to the cloud, they should hire or engage the appropriate IT technician(s) to ensure systems are installed, configured, and operated properly. Company employees should be trained to properly use the new cloud-based systems.
9. Work areas are poorly designed
In some companies, work areas and workstations are ergonomically lacking, which can hamper employee productivity. As examples, chairs may be uncomfortable, desk space may be limited, keyboards and monitors may be positioned at the wrong height, monitors may be too small, lighting may be inadequate, or persistent noises and interruptions may distract employees. As employee salaries are usually a company’s biggest expenditure, it makes sense to ensure that employees are comfortable and well-equipped so they can achieve the highest productivity possible.
Solution: Examine employee workspaces with ergonomics in mind and invest in making sure employee work areas and workstations are adequately designed to encourage good health and higher employee productivity. To wit, employees should have comfortable chairs with wheels. Monitors should be larger and positioned high enough to promote good posture. Keyboards and mice should be correctly positioned so the employee’s arms are parallel to the floor and do not rest on sharp desk corners, which could lead to carpal tunnel syndrome or other health issues.
10. Color printing is underutilized
Color printed documents, reports, proposals, and brochures often convey a better company image than black-and-whiteprinted documents. Unfortunately, some companies underutilize color printing or have no color printing capabilities. Additionally, some companies use older color printers that require more expensive ink cartridges to be constantly replaced. As a result, these companies run the risk of coming across to their customers, prospects, and others as old-fashioned, or perhaps, less successful.
Solution: Companies should consider purchasing a color printer with high-capacity toner, such as the Epson WorkForce Pro ET-8700 EcoTank All-in-One Supertank Printer ($999.99 from Epson Direct as of November 2018), which includes up to a two-year supply of ink (according to Epson, based on average use). In addition to saving money on toner and labor related to securing and replacing toner cartridges, this printer can duplex print and serve as a fax machine, scanner, and low-use color copier.
11. Social media are underutilized
Many companies fail to leverage social media for marketing purposes. It is true than many people waste a lot of time and do a lot of inappropriate things on social media, but it is also true the major social media outlets offer access to billions of users — Facebook alone reports more than 2 billion active monthly users. Add to this the fact that in most cases a basic corporate social media presence is free and marketing opportunities are relatively inexpensive, and it’s easy to conclude that it’s unwise to ignore marketing via social media.
Solution: Companies should consider establishing a business presence on Facebook, LinkedIn, Pinterest, Twitter, and other social media websites at a minimum, and exclusive deals and relevant marketing programs should be delivered through those channels. Of course, all marketing efforts should be tailored to mirror the style and panache expected in those media channels.
12. Websites are inadequate
Many companies have websites that are little more than glorified brochures online. In some cases, those websites lack useful content and are seldom updated. A company’s website should be more than a mere online business card or four-panel brochure; it should offer a wealth of useful information to attract readers and potential customers and hold their attention. For example, a CPA firm’s website should offer useful articles and videos on retirement planning, tax savings, investing, financial management solutions, wealth acquisition, protecting against identity fraud, etc. The website might also provide links to filing calendars, financial calculators, economic articles and statistics, case studies, a section for readers to ask questions, etc.
Solution: Add useful content to your website to attract the attention of readers and potential customers, update the content as needed, and add to that content regularly. Make sure to include interactive sections of your website to capture reader information, such as names and email addresses.
About the author
J. Carlton Collins, CPA, is an accounting systems consultant, a continuing professional development conference presenter, and a JofA contributing editor.
NASTASSIA ARENDSE: President Cyril Ramaphosa has chosen the former chief executive officer of the country’s largest insurance and retirement fund advisor to restore South Africa’s tax agency, which has missed annual collection targets each year since 2015. None other than Edward Kieswetter has been tasked with rebuilding skills and trust within Sars, and between Sars and taxpayers as well.
Edward joins us on the line this evening. Edward, I must start off with congratulations on your appointment. I can imagine it is with a feeling of excitement, but also of understanding the daunting task ahead of you. How are you feeling at this point?
EDWARD KIESWETTER: Thank you. Good evening. I think you hit the nail right on the head. It is a mixed feeling. On the one hand it’s a huge honour and privilege to be asked to serve in such a critical role at such a delicate time in our country’s history. At the same time I step into it understanding the daunting nature of the task.
But thankfully this is not a one-man show, and I will rely on the help of many, many thousands of committed, honest and hardworking men and women. I particularly would like to commend the incumbent acting commissioner, Mark Kingon, who has done a sterling job holding the fort in this interim period.
NASTASSIA ARENDSE: When the South African Airways CEO was appointed, Vuyani Jarana, the first question I asked him in an interview was “Why did you apply for this job, because SAA seems like such a complex institution to try to fix?” His response was that he felt that, based on his experience, he had a lot to offer in order to change the way we viewed SAA. Is it the same for you, taking into consideration your corporate experience, but also including your experience within Sars? How are you planning to approach this journey ahead?
EDWARD KIESWETTER: When our president made his inaugural State of the Nation address, and reached out with his sincere and genuine Thuma Mina invitation, what came out was it’s easier to stand on the side and to criticise. But eventually some of us must be prepared to roll up our sleeves and offer our help, especially in areas where we think we can add value. So it’s not a difficult decision to put one’s name into the hat and to say “I’m here to serve”.
When I left Alexander Forbes, it was my very intention to lead a more balanced life, spend more time with my family, and go into some sort of semi-retirement. I am here to tell you I have miserably failed in retirement. So I decided to join government – and especially to support our president in this role is a privilege and honour.
NASTASSIA ARENDSE: I know you haven’t started, and I suppose we’ll do one of those things where, from May 1, we’ll give you 100 days and then we’ll check with you to see if everything is okay, and if you are still happy with your decision. Nonetheless, you’ve probably had an opportunity to see what has been happening within Sars, particularly when it comes to some of the revelations that have come out of the Sars inquiry. I suppose a whole host of things worry you – with the taxpayers and yourself and the president as well. But as I mentioned in the intro, you are being tasked with rebuilding skills and trust in Sars. Where do we even start? The low-hanging fruit, in your opinion? I know it’s before you even walk into the building, but from your perspective right now, how do we build that trust between Sars and taxpayers?
EDWARD KIESWETTER: You know, leadership is an important role in any organisation. It’s not nice when you get up every morning and read in the newspapers and on the media negative press about your organisation. It’s understandable that people lose faith and the morale dips, and they lose confidence and trust. At the top of one’s priorities has to be to openly engage with our staff and to create a sense of hope and trust; but also to restore within them the pride to work for an organisation that is respected. For me that’s very important.
In addition to that, it’s important to address all of those skills, capabilities and efficiencies that have been eroded over the last number of years. So that’s the first thing, and that’s an internal assignment.
Alongside that, and equally important – because, remember, one of the key priorities of Sars is to collect the revenue that is due, and we have seen the decline in revenue – is the need to reach out to South Africans, to the taxpaying public, and to also restore their confidence and trust. The South African Revenue Service must be respected, not feared, and to do that we must be able to continue to provide unquestionable service, led by an extensive higher purpose. And then, where necessary, enforce responsibility because, unfortunately, you’ll always have those individuals, corporates and citizens, who may take chances. In the past 10 years we’ve seen some of that blossoming.
I would like to believe that now that we have restored certainty to the institution we can also begin the work of addressing those inefficiencies and ensuring that government receives the revenue that is its due, in order for government to continue to build and address the needs of South Africans.
NASTASSIA ARENDSE: On that note, we are always hoping that Sars becomes that institution that was highly recognised, highly ranked. How do we as South African citizens help you and your team to get Sars to where it should be?
EDWARD KIESWETTER: There was a time, before I joined Sars the first time, when it was fashionable to sit around dinner tables and to talk about how we had ‘scored’ against Sars.
Then we reached an era where South Africans across all spectrums were proud to be taxpayers, and paid their taxes on time and joined the queues. I think they called those the ‘tax-filing seasons’ that they announced every year. That’s what we have to restore. We call on every single South African to understand that without us paying our taxes, we do not have a democracy. Any chance we have in restoring and rebuilding the fibre of our society begins with every South African feeling part of this project of paying their taxes to comply with the obligation under the law.
Naturally, the flip side of that is to hold our public office bearers accountable for the quality and the nature of how that money is spent, and every South African is called to be an activist and to become involved in the wellbeing of our country, and not to stand on the side and be indifferent.
NASTASSIA ARENDSE: Edward, thank you so much for your time this evening.
Eskom said on Sunday evening that it is unlikely to implement rolling blackouts this week thanks to an improvement in plant performance.
After a nightmare week for businesses and consumers, during which the utility implemented stage-four load shedding, Eskom said the fact that more generation plant is back on line, coupled with replenished diesel and water reserves, means that rolling power cuts probably won’t be necessary in the coming days.
The company said that an increase in imports from Mozambique’s Cahora Bassa hydroelectric dam — of 850MW — has also eased the strain on the system.
“The risk of load shedding remains as the system continues to be vulnerable,” Eskom said. “But load shedding will only be implemented when absolutely necessary.”
The nation’s energy regulator said on Thursday Eskom can raise electricity prices by 9.4% from April 1. That takes the total increase to 13.8% after adding the 4.4 percentage-point increase for the recovery of cost in the four years through 2017 that the regulator announced in October. It’s almost 50% more than the assumption the central bank used in its latest projections for 2019, which forecast inflation will stay below 5% this year.
Still, the increase is less than what Eskom had asked for. Higher power prices could add to domestic inflation pressures after gasoline costs rose 7.7% in March from a year earlier. Taxes and levies on fuel will increase more than 5% from April 1. Consumer prices rose 4% from a year earlier in January, the slowest pace of gains in 10 months.
South Africa’s economic growth will probably remain stunted unless household spending and investment pick up.
While the economy emerged from a recession in the three months through September, a report from the statistics office on Tuesday will probably show growth slowed in the fourth quarter, according to the median estimate of 17 economists in a Bloomberg survey.
Gross domestic product is estimated to have expanded 0.7% in 2018, according to the government and central bank. That’s almost half the growth rate of the last year of Jacob Zuma’s scandal-ridden presidency.
Africa’s most-industrialised economy is struggling to gain momentum after the improvement in sentiment that followed President Cyril Ramaphosa’s rise to power turned out to be temporary. Business confidence is back at the level it was before Ramaphosa became leader of the ruling African National Congress in December 2017 and consumer confidence is heading the same way as reforms fell short of expectations. That hampers domestic fixed investment, which the government estimates contracted last year, and household consumption, which accounts for almost 60% of the economy.
“There’s more downside risks than there are upsides,” Mpho Tsebe, an economist at FirstRand Group’s Rand Merchant Bank, said by phone. Higher fuel prices and the lack of tax relief in the budget will weigh on household consumption and companies will adopt a “wait-and-see approach” to investment ahead of the May 8 general election, she said.
The return of rolling blackouts as the nation’s power utility struggles to supply enough electricity is a further drag on output. The Purchasing Managers’ Index fell for a second straight month in February as so-called load-shedding weighed on business activity in the manufacturing industry.
The ANC’s need to placate its labor union allies and efforts to ensure it doesn’t lose votes to the populist Economic Freedom Fighters hamper the state’s ability to implement reforms that may be unpopular, such as selling off state companies and reducing the government workforce.
South Africa’s economic growth trajectory will stay stuck at around 1% until politically difficult reforms are implemented, said Dawie Roodt, chief economist at Efficient Group.
National Treasury has proposed that the venture capital company (VCC) tax regime again be reviewed to prevent abuse.
The tax incentive was initially set up in 2009 to encourage job creation, small business development and economic growth.
In 2018, changes were made to the tax regime to prevent the abuse of some aspects of the system.
According to the 2019 Budget Review, it has come to government’s attention that some taxpayers are attempting to undermine other aspects of the regime to benefit from “excessive tax deductions”.
The tax incentive (Section 12J), which allows investors to deduct the full amount invested in VCCs approved by the South African Revenue Service (Sars) from their taxable income in the year they invest, has become increasingly popular following legislative amendments. Wasteful spending in government has also been a selling point for VCCs hoping to lure investors. VCCs use the money raised to invest in small and medium enterprises and junior mining companies.
Over 80% of the tax expenditure related to the incentive accrues to taxpayers who have a taxable income of more than R1 million (before the VCC deduction), the Budget Review states.
“There are a small number of taxpayers in these income brackets due to some very large single investments. The majority of taxpayers benefiting from the incentive are in the lower income tax brackets and they contribute modestly to overall tax expenditure.”
By August 2018, roughly R4 billion had been invested with VCCs and around R1.7 billion with qualifying companies. Treasury attributes the difference largely to the time it takes to identify the right investments. VCCs have a three-year window to employ the money.
Johan Lamprecht, director for financial sector and international taxation at National Treasury, says unlike the situation in the UK and the US, the Section 12J deduction is unlimited (the full amount invested in a venture capital company can be deducted from a taxpayer’s taxable income). Treasury has found that some taxpayers have benefited from “very, very high single deductions” running into “quite a few million”.
While this doesn’t necessarily mean that something untoward or illegal is happening, Treasury wants to ensure that the fiscus is getting value for the money it forgoes by supporting the incentive. (The cost to the fiscus is partially offset through the capital gains tax taxpayers incur upon exit.)
Evidence of outcomes
“We want to be sure that the tax expenditure that we are incurring – whether it is R10 million or R1 million or whatever the case may be – we want to make sure that it is resulting in job creation, small business development, all those objectives we have for the incentive.”
The proposed review is aimed at determining where the money is going, how many jobs are being created, whether it is diversified and which sectors are being supported.
The VCC regime is subject to a sunset clause that ends in mid-2021.
Lamprecht, who is also responsible for small business at Treasury, says the extension of the incentive will depend on its effectiveness.
“If we find it is very effective and it is meeting its objectives then there is no reason not to extend it, but we need to determine … to what extent is it effective, just like any other incentive.”
South Africa’s largest Section 12J asset manager, Westbrooke Alternative Asset Management, recently led the establishment of an industry body – The Section 12J Association of South Africa – to prove the viability of extending the incentive past June 2021.
“The body … aims to compile the relevant information that National Treasury can use to assist in understanding the success of the incentive and motivating to extend the legislation post the sunset clause,” the Association said in a statement.
Lamprecht says if there are organisations that do research, Treasury will consider it, but it wouldn’t only rely on that – it will gather its own data to do a proper analysis.
When British prime minister Margaret Thatcher came to power in the UK in the late 1970s, inflation had started rearing its ugly head.
The minister of finance, Geoffrey Howe, used the opportunity to balance his budget by offering limited relief for fiscal drag. Effectively, the government collected taxes by stealth, something that has become quite common in the tax world – and in South Africa.
When our finance minister Tito Mboweni took to the stage in Parliament for his first budget speech on Wednesday, it was widely expected that personal income tax rates would remain unchanged, but the announcement that tax brackets would not be adjusted for inflation at all came as a surprise. Treasury expects to raise R12.8 billion in tax revenue in this manner. Only marginal adjustments were made to rebates.
But what does this mean for taxpayers? While South Africa’s inflation rate is nowhere near that of the UK in the late 1970s (Treasury expects CPI of around 5.2% in 2019), government is raising money in a similar way. It means that even though the tax rate and brackets remain unchanged, an inflationary increase in your salary will increase your effective tax rate.
The impact is probably best explained by way of some examples. The table below follows three individuals below the age of 65 who earned R250 000, R500 000 and R1 million in 2014/15 respectively. We assume their income rose 6% every year. To keep the calculation simple, no tax deductions or credits were allowed. The numbers for 2015/16 are not displayed due to space constraints, but inflationary adjustments to salaries were considered during the year.
The tables below show how the government’s budget announcement would affect these fictitious individuals.
Person A: R250k in 2014/15
Tax per annum
Effective tax rate
Tax per month
Person B: R500k in 2014/15
Tax per annum
Effective tax rate
Tax per month
Person C: R1m in 2014/15
R1 123 600.00
R1 191 016.00
R1 262 476.96
R1 338 225.58
Tax per annum
Effective tax rate
Tax per month
All three taxpayers will see their effective tax rate rise between 2018/19 and 2019/20. However, the middle and upper-middle income earners (Person A & B) will see it rise more (0.77 and 0.72 percentage points respectively) than the high income earner (Person C), whose effective tax rate will rise 0.43 percentage points.
MBOWENI UNPLUGGED: WHAT YOU DIDN’T HEAR IN THE BUDGET 2019 SPEECH
CAPE TOWN – South Africa’s shoot-from-hip Finance Minister Tito Mboweni has delivered his maiden Budget address, complete with tough talk, biblical inspiration and a horticultural prop.
But it was a less curated version of the Budget that Mboweni explained at the traditional pre-Budget briefing to journalists in Treasury lock-up. He spoke frankly about the need for SOEs to fend for themselves, the difficult conversations that need to be had about the Public Sector Wage Bill, and his current state of personal financial unhappiness. He even had a little shade for his boss President Cyril Ramaphosa.
Just minutes into his maiden budget speech and finance minister Tito Mboweni looked to have sparked a market rout.
The eye-popping prediction that the proportion of government’s debt to gross domestic product would top 60% by 2024 sent the rand down as much as 2.3%, wiping out this year’s gains. The yield on the nation’s debt due 2026 briefly pierced past 9%.
But a rescue plan for foundering power utility Eskom calmed traders’ nerves as it appeared to avert a South African credit rating downgrade from Moody’s Investors Service, at least for now. The beleaguered power utility that supplies 95% of the country’s power will receive a R69 billion ($4.9 billion) cash injection over the next three years to help service its debt. Part of the utility’s transmission business will also be sold to private investors.
The rand was trading 0.2% higher as of 3.58pm in Johannesburg, and the yield on government debt due 2026 declined three basis points to 8.85%.
“The government isn’t shying away from confrontation with the unions and is seeking equity partners for the transmission unit,” said Henrik Gullberg, a Nomura International strategist in London. “This is the best that realistically could have been hoped for.”
Moody’s is scheduled to assess South Africa’s debt on March 29. A cut to South Africa’s credit rating would see government bonds ejected from the World Government Bond Index with outflows from the bond market of between $8 billion and $10 billion, according to Investec Bank.
Unless SA makes hard political and policy choices to relieve the build-up of fiscal risk, the country’s public finances will continue to deteriorate
Taking its cue from President Cyril Ramaphosa’s state of the nation address (Sona), the twin focuses of next week’s 2019 national budget will be on how the government plans to kick-start the economy and clean up state-owned enterprises (SOEs).
Though nothing matters more than getting growth going, the budget will be judged on how it deals with Eskom — a matter that has become symbolic of all government’s failures.
The government must reveal a credible plan to overhaul the utility’s business model to ensure it becomes financially self-sustaining. The goal is to relieve the fiscus from carrying the burden of perennial bailouts. This goes for the other loss-making SOEs too, including SAA, the SABC and the Post Office.
But all this will take some time. Ramaphosa made it clear in the Sona that the government will continue to support Eskom’s balance sheet for now, but “will do so without burdening the fiscus with unmanageable debt”.
Given that the fiscus is already burdened with unmanageable debt, the challenge for finance minister Tito Mboweni is to find a deficit-neutral way of continuing to bail out SOEs in the short term.
This suggests the government is likely exploring the sale of state assets (government’s vacant property portfolio is worth about R7.5bn), running down the contingency reserve of R27bn, and swapping equity stakes in struggling SOEs for more funding from development finance institutions.
What Mboweni cannot do is repeat the shock he gave to the markets in October, when his medium-term budget policy statement suggested that the National Treasury had abandoned its dependable fiscal conservatism and risk aversion. It charted a path that would allow the deficit to remain above 4% of GDP and the debt ratio to blow out from 55% to 60% of GDP over the next three years. SA’s annual debt-servicing costs would soar from R181bn to R247bn over this period.
To put that in perspective, in February 2015 SA was budgeting for a deficit of about 2.5%, net debt of 43% and debt-servicing costs of R141bn. Like a slow-moving train, the repeated fiscal slippage each year since then has driven SA to the point where its public finances look exceedingly vulnerable.
SA’s fiscal deterioration has been caused mostly by the economy’s failure to grow. This has been compounded by the problems in the SOE sector, where entities supposed to support growth have become a drag on it instead.
“The more you don’t take the hard choices and solve problems through conscious action, the more they build up under the bonnet — and that’s where the public finances are,” says Michael Sachs, the former head of the Treasury’s budget office, and now a professor in the Southern Centre for Inequality Studies at Wits University.
Those hard choices, he explains, include detailed policy decisions on how to change the business models of SOEs to reflect the fact that SA doesn’t have the resources to sustain the sector in the way it is currently structured, with the state as the sole shareholder.
“There has to be some change in direction. We’ve got to solve these institutional problems,” he says. “All over the public service there are agencies, like the SABC and Stats SA, that are genuinely incapable of adapting and reorganising to the financial constraints SA faces.”
In addition to SOEs, the pressure on SA’s public finances comes mainly from providing free higher education and funding a bloated wage bill.
There is also intense pressure bubbling up from a range of government services, including health care, after years of underfunding. The public health crisis means, for instance, that the state has accumulated more than R80bn in medical malpractice claims — and this liability is growing by 32% a year.
Repairing the fiscus all depends on the political decisions taken by the president and the cabinet to revive growth, address SOEs’ finances and restrain public sector wages, says Sachs. “As long as action isn’t taken, the public finances will deteriorate.”
This is not to say that the 2019 budget will be a train smash.
There might even be a small positive surprise in store, given the slow pace of government spending over the first nine months of 2018/2019.
Expenditure growth has been running at 4.6% year on year (y/y), against the Treasury’s target of 7.7%.
Granted, revenue growth has also lagged, but not by much. The Treasury was wise to have budgeted conservatively for GDP growth and revenue collection, and to have lowered its tax buoyancy and tax base growth estimates in October.
Total tax growth has been 7.6% y/y against a target of 8.3%. VAT receipts are running ahead of the Treasury’s 10.1% target, at 12.4% y/y, but weak corporate profitability means corporate income tax collection is growing at just 1.1% y/y against a target of 3.6%. Personal income tax growth has also been softer than expected, at 7.6% y/y against a target of 9.4%. But it is still growing by more than 2% above inflation.
This patchy revenue performance, taken together with slow expenditure growth, suggests SA should meet its 2018/2019 consolidated budget deficit target of 4% of GDP. However, Sachs doesn’t expect a return to the high tax buoyancy rates that allowed revenue to repeatedly surprise on the upside after 2011, even though the economy was slowing.
He thinks this phenomenon was driven by structural factors — including deep rand depreciation, above-inflation wage increases and booming asset prices — that have since unwound.
Moreover, SA has raised taxes quite significantly over the past few years and might be reaching that point where further tax hikes depress economic activity and are self-defeating. The Treasury certainly seems to think so. In October, it said it won’t raise VAT, corporate or personal income tax significantly in 2019 unless economic conditions improve.
Many are hopeful that the rehabilitation of the SA Revenue Service (Sars) will boost tax collection significantly, but Sachs is sceptical.
WHAT IT MEANS
To fix the fiscus SA must revive growth and address SOEs’ finances
“I always thought Sars’s administrative challenges were a secondary issue,” he says.
“When you’re missing your revenue target by R50bn that’s not administration, that’s economic weakness.”
Could further expenditure cuts help balance the books? Probably not in an election year, says BNP Paribas economist Jeff Schultz. Anyway, the state has already cut noninterest spending by R50bn since 2014. (This figure would have been R70bn had the government last year not agreed to above-inflation wage increases for public servants for the next three years.)
So, if SOEs are to continue receiving bailouts for the foreseeable future, and big tax hikes and expenditure cuts are off the table, how is SA going to repair the hole in the fiscus?
There are only two alternatives: a reduction in the real interest paid on debt (as this makes up the bulk of the deficit), or raising the growth rate.
BNP estimates SA’s debt-service burden has grown by R50bn since 2014, offsetting the spending cuts made over this period.
In the absence of a meaningful growth bounce, Schultz thinks the Treasury will have to change its liability management strategy to rein in the deficit more convincingly. He estimates that moving the maturity focus of bond issuance (now between 25 and 30 years) closer to 10 years could shave up to R30bn off interest costs in the medium term.
Of course, if SA could change the narrative on SOEs by implementing a credible turnaround plan it would also relieve the ratings pressure on the country and so reduce the interest rate on government debt.
Ultimately, there’s no escaping the imperative of fixing the SOE sector.
It is both the biggest risk to the fiscus and the biggest opportunity for improving SA’s fiscal fortunes.
South Africa’s offshore has just yielded a massive natural gas and condensate find that could open a new exploration province for oil majors and change the energy fortunes of the country.
France’s major Total said that it had made a significant discovery on the Brulpadda prospects off the southern coast of South Africa.
“With this discovery, Total has opened a new world-class gas and oil play and is well positioned to test several follow-on prospects on the same block,” said Kevin McLachlan, Senior Vice President Exploration at Total.
According to Total’s chief executive Patrick Pouyanne, the discovery could hold 1 billion barrels of oil equivalent of gas and condensate resources.
The operator of the license, Total, and its partners Qatar Petroleum, CNR International, and South African consortium Main Street, now plan to acquire 3D seismic data this year, followed by up to four exploration wells on the license.
“It is exciting for our country that this discovery has been made. It is potentially a major boost for the economy, and we welcome it as we continue to seek investment to grow our economy,” South Africa’s Mineral Resources Minister Gwede Mantashe said, commenting on the major gas discovery.
The African Energy Chamber (AEC) also hailed the first major deepwater discovery off South Africa, saying, “This is a great first step for the country which still relies on imports of oil and gas despite the great reserves believed to be in its soil and waters.”
According to AEC, the discovery could change the course of South Africa’s economy and help to reduce the country’s dependence on oil and natural gas imports.
“The oil industry hopes this will be a catalyst and encouragement for all policy makers to work on an enabling business environment for exploration and drilling activities in South Africa,” NJ Ayuk, Executive Chairman at the Chamber, said.
South Africa is currently working on new legislation that would separate the conditions for exploring and exploiting oil and gas resources from those for traditional minerals.
Commenting on Total’s discovery, Andrew Latham, vice president, global exploration at natural resources consultancy Wood Mackenzie, said:
“Even though the well isn’t an oil discovery, if Brulpadda proves to be anywhere near as big as the estimates of up to 1 billion barrels of oil equivalent resources, it will still be a game-changer for South Africa.”
Although the difficult deepwater environment could pose a challenge, the difficulties may be similar to those present in the West of Shetland in the UK North Sea—a region that Total knows well and in which it has experience, Latham noted.
In terms of the discovery’s potential to meet South Africa’s gas demand, WoodMac’s Akif Chaudhry, principal analyst, commodity analytics, said:
“While a strong case can be made for the development of the gas economy, long-term growth requires a clear plan from government.”
While South Africa is currently drafting new legislation on oil and gas resource development, the offshore regions around the whole African continent has recently seen growing interest from oil and gas majors willing to explore what they believe is the next exploration hotspot in the world. BP and Shell are expanding their African presence, while ExxonMobil is focusing on western and southern Africa, amassing stakes in prospects in Ghana, Mauritania, Namibia, and South Africa, hoping to strike a discovery containing no less than a billion barrels of crude, also known as an elephant.
South Africa was one of the hotspots of promising exploration drilling that WoodMac had identified for this year, alongside Guyana, Brazil, Mexico, the U.S. Gulf of Mexico, Cyprus, and the Barents Sea in Norway.
Total’s major deepwater discovery offshore South Africa is now opening a potential new wave of majors drilling in the area, hoping to find the next billion-barrel discovery.
There’s a big difference between saying ‘I’m going to save up R1 million’ vs ‘I’m going to put aside R5 000 a month for nine years’. The first option immediately seems rather overwhelming. The other, although a significant amount, seems more doable. The lesson? Be realistic.
The bottom-line is that 92% of us struggle to achieve the New Year’s resolutions we set. Setting attainable goals and making sure we are thorough in listing the plan to achieving them will determine our level of success.
Setting financial goals at the beginning of the year is incredibly important. While many people may be tempted to take 2019 as it comes, without a proper financial plan you’ll likely spend money on things that don’t actually matter and miss your goals.
Financial goals, backed by a plan, give you a road map to follow. It also allows you to select the best financial tools to use when achieving your goals. For instance, keeping your money in a cheque account will earn you no interest. Placing your money in a savings plan will on the other hand put the power of compound interest in your corner.
Here are some approaches and tips to achieving your financial goals for 2019.
Goal 1: I’m going to save more
How to make it work: Pay yourself first. Many people save by placing the money they have left over at the end of the month into a savings plan. You’re likely to save very little this way. Rather setup a recurring monthly payment and transfer the amount you’d like to save into your savings plan before spending any discretionary income.
Personalise your savings plans and name them after the goals you are saving towards. This way when you log onto your banking app you have a bird’s eye view of your progress.
Not all savings plans are created equal. Compare interest rates offered by banks. Capitec’s savings plans earn from 5.1 to 9.25% depending on the amount and period.
Goal 2: I’ll cut down on my spending
How to make it work: Get up close and personal with your bank statement. Firstly, interrogate your monthly debit orders. Do you really need all the subscriptions you have? You may not be using those video or audio streaming services as much as you think. It’s also possible to cut back on the cost of some debit orders. For instance, if you feel you have managed your insurance policy well, call your insurer and see if they are willing to offer you a better rate.
Secondly, take a look at your disposable income. Where does your money go exactly? And how can you cut back on non-essential spending? For instance, a trip to the movies could set you back almost R140, while renting a movie at home and making your own snacks could lead to a R70 saving.
When cutting back on spending most people overlook the cost of their bank fees. Check your bank statement to see what you are paying. Most bundle accounts cost from R100 per month. Do you really need all the services offered in the bundle?
Digital banking transactions are often more affordable than those involving cash or branch visits. Make sure you are making full use of your bank’s app. Not only will it save you money but time too.
Goal 3: I’m going to make more money
How to make it work: Have a side hustle. Your corporate 8am to 5pm salary does not need to be your only source of income. Technology is making it easier to earn an income from the additional resources you have. For instance, Airbnb lets you rent out an unused bedroom in your house and many apps exist that allow you to rent out excess storage space.
Have a look at the things you own and then ask yourself, “Could these earn me extra money?”
Place the money you make from your side hustle into a savings plan rather than using it for everyday items such as clothing or movie tickets. The money will then earn interest and you’ll have additional money to grow your side hustle, increasing your earning ability.
Goal 4: I’m going to pay off all my debt
How to make it work: Not all credit costs the same. Store and credit cards often have higher interest rates than other credit. Use extra money to pay off these loans first. Consolidating your debt into a single loan with a lower interest rate is also a good way to save money.
Shop around to see which bank gives you a better interest rate on your loans and credit cards.
Remember your financial behaviour affects your credit score, which determines the interest rate you will pay. Make sure you always pay accounts on time and review your credit score each year.
Goal 5: I’ll do better with managing my finances
How to make it work: Tech! There are amazing apps for all aspects of personal finance these days. Whether it’s making good use of your banking app to track spending or downloading a household budgeting app, introducing a new, clever tool or two into your personal money management is likely to bring bigger success than just resolving to “do better”.
The Capitec app saves you money, as many transactions are free or priced at a lower cost than at a branch. The app also uses zero-rated data, which means you won’t be billed for the data used.
The South African Revenue Service (Sars) is likely to come under increasing pressure to improve efficiency and up its enforcement efforts in the year ahead.
Further tax hikes may not deliver meaningful additional revenue and may weigh on an already paltry economic growth situation. The World Bank recently cut its growth forecast for South Africa for 2019 from 1.8% to 1.3%, less than Treasury’s expectation of 1.7%.
While there is a realisation that the country’s finances are moving in the wrong direction (South Africa is spending an increasing proportion on wages and servicing debt), accountability around expenditure is a challenge, as accounting officers of government departments are not necessarily held responsible for spending decisions.
With the election around the corner, finance minister Tito Mboweni will be under pressure to come up with a budget speech that has popular appeal while striving to increase inclusive economic growth and reduce unemployment, says Delia Ndlovu, tax and legal managing director at Deloitte Africa. Eskom, which has already approached government for more support, is likely to take centre stage.
For taxpayers, the good news is that tax practitioners do not expect to see any increases in personal income tax, corporate income tax or Vat rates when Mboweni provides an update on the country’s financial health on February 20. These taxes account for roughly 80% of tax revenue.
From a personal income tax perspective, tax brackets will likely be widened to benefit low income earners.
“We think the emphasis will be on increasing efficiency when it comes to tax collections,” Ndlovu says.
Treasury’s numbers suggest that revenue from personal income taxes will rise by roughly 9% between 2018/19 and 2019/20. The increase will likely be made up by providing limited fiscal drag relief for higher income earners and through enforcement efforts.
Mike Teuchert, national head of taxation at Mazars, says there is a possibility that Treasury is looking at processes and procedures related to trying to raise the level of enforcement or that Sars will add penalties.
This has already been happening on the corporate side, with administrative penalties being levied where tax affairs aren’t up to date and letters of demand are being issued, he says.
The monthly penalty is determined based on a sliding scale that is linked to the firm’s taxable income and can be quite significant.
In the medium-term budget policy statement, Treasury acknowledged that there were serious governance failures at Sars and that enforcement capacity would have to be addressed. This came after testimony before the Nugent Commission sketched a picture of a revenue authority hollowed out by mismanagement and corruption. Mboweni allocated R1.4 billion from existing budgets towards rebuilding capacity at Sars.
Ndlovu says some of the money allocated for rebuilding capacity will likely be used to recruit some of the staff who previously left Sars.
“Our assessment is that Sars used to have about 14 000 employees and based on the conversations we’ve had with Sars officials, they seem to be hovering around 12 000, so they are incapacitated at the moment.”
We may also hear announcements around how Sars intends to continue its technology evolution and upgrade its eFiling infrastructure, which is out of date.
“My hope is that we will see Sars starting to embrace the new technologies, including possibilities of using blockchain, robotics and artificial intelligence to help them to streamline their processes as well as to combat fraud in the areas of Vat and customs,” Ndlovu says.
Teuchert says Sars has lost a lot of good people and to get their enforcement to previous levels will take a lot of effort. Attracting former key staff will go a long way to assist.
Acting commissioner Mark Kingon’s current 90-day term will come to an end in March and president Cyril Ramaphosa may want to appoint a permanent chief for Sars before the start of the new financial year.
Teuchert says once a permanent commissioner is appointed, processes and procedures can be implemented to establish a new intelligence unit that can assist with enforcement.
At the moment, Sars is trying its best, but it doesn’t quite have the necessary capability and capacity, he adds.
The rand firmed on Tuesday, gaining with other emerging market currencies on hopes of a pause to increases to US interest rates, while stocks also climbed.
At 1520 GMT the rand was up 0.3% at R13.62 against the dollar, having closed at R13.66 overnight in New York.
The currency has traded in a narrow range in the past two sessions, with moves largely driven by offshore events, especially the direction of lending rates in the United States and the continuing trade dispute between Washington and Beijing.
Investors expect the US Federal Reserve to adopt a more cautious policy stance than in 2018, pressured by signs of a peak in US corporate earnings and the threat of economic slowdown both at home and globally.
Locally, investors are holding off big bets on the rand ahead of the annual budget next month, leaving the currency in a range between R13.30 and R13.80.
Bonds weakened slightly, with the yield on benchmark paper due in 2026 up 0.5 basis points to 8.765%.
Stocks were on a high, however, with the Johannesburg Stock Exchange’s top 40 index rising 1.3% to 48,208 points and the broader all-share index up 1.2%.
Absa, one of South Africa’s big four lenders, led the way with a 6.2% advance to R186.50 per share after the company announced the departure of Chief Executive Maria Ramos.
The shares were buoyed by analyst and investor hopes that a new CEO, who will be recruited from outside the bank, will bring fresh perspective and deliver growth after years of declining market share.
With the tax year end just more than a month away, there has been a growing marketing effort aimed at luring investors to Section 12J venture capital and private equity investments.
The Section 12J tax incentive is a government initiative aimed at assisting small and medium-sized businesses to access equity finance in the hope of creating jobs and boosting economic activity.
Investors can write off 100% of an investment into an approved 12J vehicle against their taxable income. Against the background of meaningful tax hikes and growing concerns about wastage of taxpayer money, this may seem like a no-brainer – effectively it means that investors can get ‘up to 45% immediate tax relief’.
And with the JSE moving sideways for more than four years, investors may easily be swayed by targeted returns of ‘40% per year or more’ in some of these funds.
But while some of these investments may be suitable for a specific type of investor, interested parties should make sure they understand the risks, tax benefit and liquidity constraints involved. There are now more than 100 registered Section 12J companies in South Africa, which have attracted more than R3.6 billion in total.
Dino Zuccollo, fund manager at Westbrooke Alternative Asset Management and founder member of the Section 12J Association of South Africa, says there is a spectrum of different quality asset managers and investments in the market.
While Section 12J offers a fantastic tax break, it is not good enough to just invest for the tax, he says. Investors should invest with an experienced manager with a track record of success, and need to do a due diligence on the manager to get comfort around their ability to deliver.
Craig Gradidge, investment and retirement planning specialist at Gradidge-Mahura Investments, says the firm does make use of the incentive for clients, but is very careful to ensure that clients understand the risk, tax benefit and liquidity constraints.
Higher risk profile
These investments have a much higher risk profile than traditional equity investments. There is usually very little diversification (unless it is a fund-of-fund) and investors must stay invested for a minimum of five years. If there isn’t a successful exit strategy in place, they may be locked in for longer, he adds.
While offers largely focus on the immediate tax relief of up to 45%, investors also need to realise that all the capital returned on exit will be subject to capital gains tax (CGT), even if this is less than the amount that was initially invested. The base cost is deemed to be zero.
“If you put in R1 million and it is a bad investment and you get R500 000 out, that [full] R500 000 is subject to capital gains tax.”
Importantly, investors should note that the targeted investment returns quoted on 12J brochures are based on the capital at risk and not the capital invested. They generally also assume that individuals pay tax at the highest marginal income tax rate of 45%.
In other words, if an investor invests R1 million in a 12J vehicle and gets a tax break of R450 000 from Sars in that tax year, the investment return quoted will be calculated on R550 000, not R1 million. Where a manager is quoting a targeted return of 18%, roughly 8% will be the result of the tax benefit. Moreover, someone who is paying income tax at a marginal rate of 30% won’t get the same type of return as someone paying at 45%.
Zuccollo says investors must ensure that if the manager is basing the returns on the net risk capital (thus accounting for the upfront tax deduction in their return calculation) they are also accounting for the CGT at exit.
He concedes that the way returns are calculated is complicated, but says it is necessary as the tax break is such a significant element of the return profile.
If someone invested in student accommodation and ordinarily received a 10% return per annum, a 12J investment in a similar venture would be done with the same amount of risk, but at almost double the return due to the tax break, he argues.
“I think you need to show that to an investor.”
Impact on retirement deduction
Investors should also consider how their retirement funding may impact their situation, Peter Hewett, managing director of Hewett Wealth, notes. An investor who earned R1 million during the tax year and who contributed R275 000 to a retirement annuity (the full 27.5% deductible contribution allowed) as well as R1 million to a 12J vehicle, will see their RA deduction being disallowed in that tax year.
“It will be carried forward to future years – you won’t be allowed to use it in that year because you didn’t earn taxable income. So you’ve got to be careful when you do your tax planning to make sure that you take into account what your true taxable income will be after you’ve made provision for your retirement funding contributions,” Hewett explains.
Other considerations include how long the fund manager and the projects have been around, what the projects entail, the audited financials of the entities and how the capital will be deployed.
Investors should also understand the costs involved. In line with other alternative investments, fees are generally higher than traditional unit trust-type investments and investors should get this set out in writing. Aggressive commissions should be cause for concern.
Hewett says the tax break is quite nice and that these may be suitable investments for certain clients, but they have to understand that this is effectively a private equity type of investment where they have very limited control of the risks they are exposed to.
Adds Gradidge: “It’s not for everybody. You’ve got to have that long-term view and you must be prepared to be invested for seven years at the minimum in case there are issues at exit. It is for someone with risk tolerance.”
Given that these are alternative assets, investors really shouldn’t have more than 5% to 10% of their portfolios invested in these assets, he adds.
NOMPU SIZIBA: It’s day three [Thursday] of the World Economic Forum meeting in Davos, Switzerland, and of course we’ve been tracking developments in the key issues being discussed there.
Earlier my colleague and Moneyweb editor Ryk van Niekerk caught up with Bonang Mohale, the CEO of Business Leadership South Africa.
RYK VAN NIEKERK: The annual general meeting of the World Economic Forum in Davos is drawing to a close. South Africa has sent a big delegation to Davos, headed by President Cyril Ramaphosa, and its main objective is to market South Africa as an investment destination.
On the line from a freezing Davos is Bonang Mohale, the CEO of Business Leadership South Africa. Bonang, thank you for speaking to us. Do you think Team South Africa will bring back more money than you left with?
BONANG MOHALE: There is absolutely no doubt [of that], because we have a good story to tell. In fact, we’ve got five bold messages we are sharing with this 48th summit, with 3 500 delegates occupying all 39 hotels, and more than 15 000 people.
The first message has to do with this notion of inclusive social economic growth. The second one has to do with Eskom, because of the size of its debt. The third is government institutions that need to be fixed, especially because the debt has become inordinate. So, for instance, about 700 state-owned enterprises and companies that have traded recklessly; a lot of this liability is much greater than indeed their assets. The last two are investment. The president has set up a target of US$100 billion for for five years, R20 billion per year on average, we are creating ahead of that.
In fact, the investment summit not only had R296 billion placed and committed and approved by the board, but that number continues to grow and we have implored our 86 CEOs to front and match that, dollar for dollar. So we have another US$100 billion domestic direct investment that will be driven by a South African company.
The last one is the independence of the South African Reserve Bank, because it derives its mandate from the Constitution. Our Constitution is quite explicit, because it talks about balance and sustainable growth.
RYK VAN NIEKERK: I just want to come back to the messages put on the table for the potential investors in Davos. Can you maybe elaborate on the message you have regarding the Eskom situation, because it seems to be a significant threat to the way and ability for businesses to actually grow in South Africa?
BONANG MOHALE: Our message around Eskom is very simple. We are saying it is a state-owned enterprise, it’s the biggest of the state-owned enterprises, the fourth-largest utility in the world, the only one that is still doing generation, distribution and transmission all rolled into one entity, when most similar entities in the world have broken up into three separately-listed entities. Its debt now, at R471 billion, has probably consumed the majority of the more than R760 billion government guarantees. So simply the debt of Eskom has now become permanent. It has absolutely no way of trading itself out of this debt in this lifetime. That’s why it behoves all of us as social partners to ensure that Eskom keeps the lights on because for every day that the lights are off it costs the South African economy R50 billion. Therefore there is no way that the South African government would let Eskom go under. That’s the message we are sending, and it will be fixed.
We have a new board, new executives. All the executives that were even remotely implicated in the State of Capture report have been fired and [there’s] a new turnaround strategy. And, as you saw, the president over and above that has also appointed a sustainability task team that advises him about its current plan, about the possibility of there being a default, but also lastly to ensure that the president is absolutely appraised and he provides the necessary sponsorship to ensure that the tough decisions that must be taken and the pain that must be taken by government, by labour, by business, is indeed well considered and worth the effort.
RYK VAN NIEKERK: What has been the attitude from potential investors?
BONANG MOHALE: In fact, we are pleasantly surprised that we have been so well received. Everywhere that South Africa has called a meeting we are over-subscribed. Last night was the grand SA-hosted dinner, which we normally have. This one was a breakfast hosted by Absa’s Maria Ramos. Again, every solitary one of the foreign direct investors, the analysts, so desperately want South Africa to succeed. They are betting with us. In fact, they are trading with us in the fire. They understand that the past nine years has been an absolute, total catastrophe, that in fact had we continued on the growth trajectory, the shape of that curve of the Nelson Mandela administration, Thabo Mbeki, 43 consecutive quarters of positive GDP growth would have meant an extra trillion South African rand, would have doubled our GDP growth, and would have halved our unemployment. Imagine 16% unemployment, when at the moment it’s [above] 27 percentage points.
RYK VAN NIEKERK: There was a big delegation from the private sector – of course, including you. Are the government and the private sector on the same hymn sheet when investors are being approached?
BONANG MOHALE: We have been on the same hymn sheet for some time now, and I must tell you that the business delegation is unbelievable. The government, all the cabinet ministers, the senior ones, even the Minister of Health Dr Aaron Motsoaledi, is here. The Minister of Labour, Mildred Oliphant, the Minister of Finance – naturally because this is his perch, as it were. President Cyril Ramaphosa is ably leading us, and we are really confronting some of the things that are being spoken about honestly, openly and transparently.
RYK VAN NIEKERK: While Davos was happening we’ve had some startling revelations before the Zondo Commission into state capture. Was corruption and state capture a thing at Davos?
BONANG MOHALE: Yes, it was. But I must tell you that the messages we are getting from the global leaders is that South Africa is talking honestly and openly about its challenges of state capture, which has been siphoning off, on average, a R100 billion out of the economy. Imagine how many people’s [abhorrent] toilets would have eliminated in rural schools, how many indigent students would have been educated in institutions of higher learning, how many new schools would have been built, how many hospitals would have been built, how much service delivery could have been afforded, especially in the township economies, but also how many RDP houses would have been built.
So honestly, in simple English, the past immediate administration has taken us back at least 20 years. You know, it takes three hours to break a house; it takes 20 years to build it. But fortunately we are eager, able and willing to address it very seriously and make sure that South Africa occupies its rightful place among a community of nations. So, if anything, they are absolutely bewildered that we are indeed debating this, we are talking about it.
We have instituted an independent judicial commission of inquiry into state capture, chaired by Deputy Chief Justice Raymond Zondo. The hawks are now acting, the South African police service is taking action against bribery, stealing and cheating. Corruption has robbed the poor disproportionately. The Hawks had to be taken to court to do their job. Now it seems like the new dawn has arrived and indeed there is a new mood, a new energy. And South Africans for the second successive year are now walking tall, proud to be South Africans confronting our challenges head-on with absolute singularity of purpose. We are having critical, crucial but nonetheless courageous conversations that we must have as a people with great natural endowments.
RYK VAN NIEKERK: Just lastly, I see the temperatures in Davos are pretty low. They are going to peak at -9° Celsius tonight. How is the weather there? I just want to tell you that it’s an absolutely perfect day in Johannesburg today.
BONANG MOHALE: I understand you guys are suffering somewhat of a heat wave. Here it’s really cold. The snow is about 1.7 metres high in some places. We don’t go anywhere without a thick jacket to make sure that we ward off the cold.
Outside it is magnificently beautiful, it is truly the Swiss Alps at its absolute best, and the sun is shining and there’s a bit of snow beginning to come down. But the Swiss are organised. They are systematic and we feel absolutely cared for, safe, and people everywhere we go are just eager to hear the South Africa story.
While South African citizens temporarily working overseas are still subject to South African tax laws, individuals who wish to permanently emigrate to a new country need to ensure that they follow the correct steps to enable them to take their savings with them and avoid running up against unnecessary tax problems down the line.
This is according to Daniel Baines, tax consultant at Mazars, who said that individuals who emigrate to new tax jurisdictions could face problems in withdrawing their retirement annuities (RA) if they wait too long before getting their tax affairs in order.
“One of the main problems is that withdrawing your RA requires up-to-date tax returns to be submitted,” he said.
“If you have not applied to the South African Reserve Bank to no longer be considered as a South African resident for exchange control purposes prior to emigration, and you subsequently do not file South African tax returns for a number of years after emigrating, gaining access to your South African RA may prove difficult.”
Baines said that it is therefore vital for all South African citizens thinking about emigrating, to get all of their tax affairs in order as quickly and efficiently as possible.
To formally emigrate, Baines says that the following steps are crucial:
Ensure that your South African tax returns are up to date;
Apply to SARS for an emigration tax clearance certificate; and
Apply to the South African Reserve Bank to formally emigrate.
Baines notes that the first two steps can be carried out by a tax advisor, but the third step must be handled by a South African bank.
He states that individuals who choose to not leave the country permanently, need to still make it a priority to file their tax returns.
“If tax returns are not filed while you live and work abroad, it may prove to be very difficult to get your South African tax affairs in order when you do decide to become a permanent resident in a foreign country.”
Another important point to note, according to Baines, is that South Africans under the age of 55 (unless the RA is worth R7,000 or less) will not be able to withdraw funds from their RA unless they formally emigrate.
“If you do not formally emigrate and leave your RA in South Africa, by only bringing it to your new country when you retire, there is a good chance that this asset would also have devalued significantly due to a potentially weaker rand in the future.
“Another common reason for South African citizens to consider formally emigrating is when they have received a large inheritance in South Africa, as they may have issues getting the inheritance out of the country unless they formally emigrate.
“To avoid any issues or delays when you plan to formally emigrate, it is advisable to get your tax affairs in order sooner rather than later,” Baines said.
In the previous note, I summarised our view of the world economy. If you missed it, read it here. In this note, I comment on expectations for South Africa.
There are many negatives locally. The state-owned enterprises (SOE) have been run into the ground by the cadres and gutted financially in recent years. The same goes for the state’s finances. Debt has become unsustainable and I can’t see how we are going to avoid a further downgrade.
Additionally, this is an election year and politicians will turn up the populist rhetoric. So, I reckon we won’t see strong investment commitments until at least after the elections. I know that the popular theory is that we must wait until after the elections for the “good” guys to strengthen their power base, then all will be well. I am afraid I do not ascribe to this theory.
The “good” guys were mostly part of the previous regime that caused immense damage to the SA economy. I did not hear them speaking out then. Also, during the past year, the “good” guys have mostly been in charge anyway and I am not particularly impressed with their performance so far! Will this suddenly change after the elections?
Having said that, let’s be fair and give credit where it is due. Boards have been changed, inquiries have been instituted and a few (not all) of the compromised “leaders” have been removed one way or the other. At least it seems, we are still in a hole but we are digging slower…
A few other positives remain. An independent judiciary, press and hopefully the new leadership at the National Prosecuting Authority (NPA) will prove to be competent. But the reality is that a destructive government has caused immense damage to the SA economy and that the same political force is likely to prevail after the election. If the “good” guys really want to prove that they do want the best for the country, they will risk a confrontation with their political allies and a break with Cosatu must be at the top of the agenda. Anyway, I foresee a momentous labour confrontation looming.
All these things and the planned confiscation of private property is, of course, not good for the economy. Expect another year of weak growth, a volatile currency and frail confidence. The really good news, from the perspective of a saver/investor, is that the valuations of our companies are at present so attractive that the JSE must be on the shopping list of local and international investors.
So, in a nutshell, internationally there are a few potential risks but at the same time there are some exciting things happening that may propel future global growth to unprecedented levels. Watch out for the world’s big central banks overdoing monetary tightening!
Locally, expect more of the same — destructive policies, weak service delivery and ideological foolishness, and weak economic growth. At the same time, however, look around for promising investment opportunities and a good asset manager to run your portfolio.
And that is the result of our crystal ball gazing. A final word to our clients: It is impossible to know what the future holds. We cannot, and we do not, change the composition of portfolios because of the length of the bull market, or because of a looming recession, or because it is “time” for a correction. Nevertheless, rest assured that we continue to manage our clients’ portfolios according to our proven investment processes and have used recent volatility to appropriately position our portfolios for a more “dangerous” world.
New default regulations to the Pension Funds Act will be implemented from 1 March 2019.
This is according to Carlyle Field, a partner at law firm Shepstone Wylie, who notes that retirement funds are scrambling to ensure that they will be compliant by that date.
Field states that the new regulations will effectively introduce ‘three key pillars’ to the Act.
The default investment portfolio;
Default preservation and portability;
An annuity strategy.
Below, Field outlined what the changes will mean and how they will impact members of these funds.
The default investment portfolio(s)
When a member joins a defined contribution pension or provident fund, their savings will be automatically invested in a default portfolio that is designed to be cost-effective and appropriate, unless and until the member opts out and chooses a different portfolio.
“Many funds already offer a default investment portfolio or only have one portfolio (and so this change will not affect too many members) however this will now be a legislative requirement for all defined contribution pension and provident funds,” said Field.
The default preservation and portability
When a member leaves employment before retirement, the fund must automatically preserve the member’s benefit in the fund and convert the member to a “paid-up” member.
The benefit will only be paid out to the member or transferred to another fund selected by the member when the fund has been specifically instructed to do so by the member (so the member can still chose to receive payment of their benefit).
“The purpose of this regulation is to encourage the preservation of the benefits payable to a member on leaving a fund in a cost-effective and tax neutral manner, rather than those benefits being withdrawn (and spent) by the member,” said Field.
“Preservation in the fund is designed to be more cost-effective than traditional preservation funds have offered. It should be noted that this regulation will not prevent members from accessing their benefits on leaving service prior to retirement if they are adamant that they would like to do so.”
The annuity strategy
When a member reaches retirement, he or she will be offered the option to secure an annuity (regular monthly pension income) in terms of the annuity strategy that the board of trustees has determined to be the most cost-effective and appropriate.
The choice of annuity (or annuities) remains that of the retiring member.
“The fund’s annuity strategy is designed to assist members who lack expertise, are unsure what to do with their money on retirement and/or cannot access suitable financial advisors regarding an appropriate retirement savings vehicle,” said Field.
The tail end of 2018 was inundated with various news cycles, both domestic and international, which eventually overshadowed a major policy pronouncement – the United States (US)-Africa strategy. After two years without much clarity on the Trump Administration’s stance on Africa, it seemed ironic that the Africa strategy almost went unnoticed, given that it was announced well into the festive season, with many institutions either wrapping up or closed for the holidays. Given the significance of the strategy, it is necessary to unpack it and discuss its implications for the continent.
The actual strategy and how it differs from that of the previous administration
At the core, there is not much that has shifted from a policy perspective. The US still places emphasis on conditional support for Africa – punctuated by phrases such as “aid with effect”, “assistance with accountability” and “relief with reform”. The US also maintains its vision of reciprocity – underlined by a desire to terminate preference programmes such as the Africa Growth Opportunity Act (Agoa) and the Generalised System of Preferences (GSP) towards what they call “modern and comprehensive bilateral trade agreements”.
My interpretation of the US’s take of “modern and comprehensive bilateral trade agreements” includes a number of “new generation” issues such as Trade in Services, Trade in Environmental Goods, aspects of the Agreement on Government Procurement, and immediate (tariff) liberalisation of almost all forms of trade.
While the Obama administration pushed these issues through mega-regional and plurilateral trade agreements, the Trump administration has adopted a more selective approach, opting for bilateral agreements with specific countries.
We foresee the Trump administration’s stance being implemented throughout the continent with the Africa strategy. This will see the US dealing with specific African countries, rather than the entire continent, neither through Regional Economic Communities (RECs) nor the African Continental Free Trade Agreement (Af-CFTA).
The differences between the Obama and Trump administrations is nuanced, and it is not in policy content but more in the approach. The latter is adopting a more overtly aggressive approach, while the former pursued more diplomatic ways of conveying US interests in the continent.
The aggressive approach can be seen in the speech by National Security Advisor to President Trump – Ambassador John R. Bolton – where he lamented the Chinese and Russian approach in Africa. For instance, Ambassador Bolton noted that the “predatory practices pursued by China and Russia stunt economic growth in Africa; [which] threaten the financial independence of African nations; inhibits opportunities for US investment; interferes with US military operations, and poses a significant threat to US national security interests”.
A new addition in the US Africa strategy is the “Prosper Africa” initiative and the objectives are “to support open markets for American businesses, grow Africa’s middle class, promote youth employment opportunities, and improve the business climate”. Prosper Africa is almost an extension to Agoa in terms of its goals and ambitions, which seek to support sound and transparent governance and improve the “ease of doing business environments” across the continent.
What is clear is that the US-Africa strategy seeks to reposition the US and bring it to par with China and Russia. What seems to set the US apart from China and Russia is the aspect of “conditional support”, and the question then is, will a more aggressive US approach change the balance of power or even its influence on the African continent?
What will be interesting to see is how the Africa strategy translates into policy action, and how the US uses its leverage (through Agoa) to implement the vision of the Trump administration for Africa.
This ties in with the pursuit of “modern and comprehensive bilateral trade agreements”, which the US might seek to have with specific African countries. My view is that the US could potentially target key markets like Kenya, South Africa, Nigeria and Egypt (as well as some others), which are core economic and socio-political power hubs in Eastern, Western, Southern, and Northern Africa, respectively.
Key issues that arise from Trump’s Africa strategy
Firstly, bilateral agreements with specific countries, rather than with RECs could run against the regional integration agenda. In other words, the US runs the risk of being seen to favour larger economies at the expense of smaller ones. Working outside of RECs could thus be seen to be disruptive to the functioning of regional trade agreements.
The counter-narrative to this argument is that working with specific economic hubs (i.e. country markets) will promote sourcing of raw materials from neighbouring, smaller economies which, ideally, could lead to deeper regional integration. However, there remains little evidence to suggest that this could actually happen. Alternative efforts of trade integration outside of existing trade agreements might be worth testing, given that the power and influence (both political and economic) of RECs has been arguably limited.
Secondly, the notion of a modern and comprehensive trade agreement (assuming that these will be done with specific strong African economies) needs to be interrogated from the standpoint of whether these African economies are actually ready to liberalise domestic markets to the same standards as the US.
Lastly, and more importantly, it seems that the Africa strategy – through the “Prosper Africa” programme – reflects a new shift in emphasis from trade to an investment-led approach, which will situate US firms in the African continent as key drivers of economic integration.
Prosper Africa is at the centre of the US-Africa strategy, not only because it’s uniquely a signature Trump initiative (unlike other legacy programmes such as Power Africa, Trade Africa which were inherited from the previous administration) but also due to the view that the penetration of US technology and expertise in Africa can create the largest impact on policy, as well as shift the balance of power away from Russian and Chinese hegemony in the continent.
Powerful US multinationals have a clear comparative advantage from a technology standpoint, and unlocking more business opportunities at a much larger scale – through influencing broad and sweeping policy reforms in Africa – could become a game-changer in placing US at the forefront of investment in the continent.
The rand firmed to a two-week best on Friday as emerging markets were boosted by increased expectations of the US central bank cutting lending rates this year.
At 1430 GMT the rand was 0.84% firmer at 14.15 after an overnight close of 14.30.
“What we’re seeing is how a recalibration in the Fed’s policy guidance is going to affect emerging market currencies going forward,” said Halen Bothma of ETM Analytics.
Traders of contracts tied to the Federal Reserve’s policy rate kept bets the US central bank will not deliver a single rate hike this year and will begin cutting rates next year.
With little on the local data front in the first week of the new year, the rand has looked to offshore events for direction, and has seen volatile trade with swings in the dollar setting the tone.
The rand reached a session best of 14.09 soon after trading in London kicked off before some of the momentum after a surge in US job growth helped steady the greenback, which traded 0.15% higher after a rocky start.
Survey data on Thursday showed US factory activity slowed more than expected, the latest sign the world’s largest economy was losing steam, igniting bets the Federal Reserve could switch from raising to cutting rates.
That aided the rand recovery from Wednesday’s “flash crash” that saw the unit plunge to a three-month low in a global selloff.
“Events in the US will remain a determining factor for the rand, contributing to the ongoing capriciousness of the local exchange rate,” said Annabel Bishop, senior economist at Investec.
Bonds were firmer, with yield on the benchmark paper due in 2026 down 5 basis points to 8.8%, its lowest since mid-August.
Stocks also continued to regain some of the losses they had endured in the first few days of the new year, with the Johannesburg Stock Exchange’s top-40 index up 0.96% to 46 059 points and the broader all-share index up 0.82% to 52 093 by 1511 GMT.
Consumer-focused sectors, namely retailers and banks, led the top-40 index upwards, with Truworths, The Foschini Group and Mr Price at the top, as well as bourse heavyweight Naspers, which was up 2.3%.
AngloGold Ashanti, meanwhile, was the worst performer on the index, down 4%, after benefiting from rising gold prices as investors retreated to safer assets earlier in the week.
One of the most popular Dilbert comic strips in the cartoon’s history begins with Dilbert’s boss relaying senior leadership’s explanation for the company’s low profits. In response to his boss, Dilbert asks incredulously, “So they’re saying that profits went up because of great leadership and down because of a weak economy?” To which Dilbert’s boss replies, “These meetings will go faster if you stop putting things in context.”
Great leadership is indeed a difficult thing to pin down and understand. You know a great leader when you’re working for one, but even they can have a hard time explaining the specifics of what they do that makes their leadership so effective.
Great leaders change us for the better. They see more in us than we see in ourselves, and they help us learn to see it too. They dream big and show us all the great things we can accomplish.
Great leadership is dynamic; it melds a variety of unique skills into an integrated whole. Great leadership is also founded in good habits. What follows are the essential habits that exceptional leaders rely on every day. Give them a try and see where they take your leadership skills.
“The more elaborate our means of communication, the less we communicate.”—Joseph Priestley
Communication is the real work of leadership. It’s a fundamental element of how leaders accomplish their goals each and every day. You simply can’t become a great leader until you are a great communicator.
Great communicators inspire people. They create a connection with their followers that is real, emotional, and personal, regardless of any physical distance between them. Great communicators forge this connection through an understanding of people and an ability to speak directly to their needs.
“Courage is the first virtue that makes all other virtues possible.” —Aristotle
People will wait to see if a leader is courageous before they’re willing to follow his or her lead. People need courage in their leaders. They need someone who can make difficult decisions and watch over the good of the group. They need a leader who will stay the course when things get tough. People are far more likely to show courage themselves when their leaders do the same.
For the courageous leader, adversity is a welcome test. Like a blacksmith’s molding of a red-hot iron, adversity is a trial by fire that refines leaders and sharpens their game. Adversity emboldens courageous leaders and leaves them more committed to their strategic direction.
Leaders who lack courage simply tow the company line. They follow the safest path—the path of least resistance—because they’d rather cover their backside than lead.
Adherence to the Golden Rule +1
“The way you see people is the way you treat them, and the way you treat them is what they become.” – Jon Wolfgang von Goethe
The Golden Rule – treat others as you want to be treated – assumes that all people are the same. It assumes that, if you treat your followers the way you would want a leader to treat you, they’ll be happy. It ignores that people are motivated by vastly different things. One person loves public recognition, while another loathes being the center of attention.
Great leaders don’t treat people how they themselves want to be treated. Instead, they take the Golden Rule a step further and treat each person as he or she would like to be treated. Great leaders learn what makes people tick, recognize their needs in the moment, and adapt their leadership style accordingly.
“It is absurd that a man should rule others, who cannot rule himself.” —Latin Proverb
Contrary to what Dilbert might have us believe, leaders’ gaps in self-awareness are rarely due to deceitful, Machiavellian motives, or severe character deficits. In most cases, leaders—like everyone else—view themselves in a more favorable light than other people do.
Self-awareness is the foundation of emotional intelligence, a skill that 90% of top performing leaders possess in abundance. Great leaders’ high self-awareness means they have a clear and accurate image not just of their leadership style, but also of their own strengths and weaknesses. They know where they shine and where they’re weak, and they have effective strategies for leaning into their strengths and compensating for their weaknesses.
“If you just work on stuff that you like and are passionate about, you don’t have to have a master plan with how things will play out.” – Mark Zuckerberg
Passion and enthusiasm are contagious. So are boredom and apathy. No one wants to work for a boss that’s unexcited about his or her job, or even one who’s just going through the motions. Great leaders are passionate about what they do, and they strive to share that passion with everyone around them.
“Humility is not thinking less of yourself, it’s thinking of yourself less.” – C.S. Lewis
Great leaders are humble. They don’t allow their position of authority to make them feel that they are better than anyone else. As such, they don’t hesitate to jump in and do the dirty work when needed, and they won’t ask their followers to do anything they wouldn’t be willing to do themselves.
“A good leader is a person who takes a little more than his share of the blame and a little less than his share of the credit.” —John Maxwell
Great leaders are generous. They share credit and offer enthusiastic praise. They’re as committed to their followers’ success as they are to their own. They want to inspire all of their employees to achieve their personal best – not just because it will make the team more successful, but because they care about each person as an individual.
“The very essence of leadership is that you have to have a vision. It’s got to be a vision you articulate clearly and forcefully on every occasion. You can’t blow an uncertain trumpet.” —Reverend Theodore Hesburgh
Great leaders know that having a clear vision isn’t enough. You have to make that vision come alive so that your followers can see it just as clearly as you do. Great leaders do that by telling stories and painting verbal pictures so that everyone can understand not just where they’re going, but what it will look and feel like when they get there. This inspires others to internalize the vision and make it their own.
“Just be who you are and speak from your guts and heart – it’s all a man has.” – Hubert Humphrey
Authenticity refers to being honest in all things – not just what you say and do, but who you are. When you’re authentic, your words and actions align with who you claim to be. Your followers shouldn’t be compelled to spend time trying to figure out if you have ulterior motives. Any time they spend doing so erodes their confidence in you and in their ability to execute.
Leaders who are authentic are transparent and forthcoming. They aren’t perfect, but they earn people’s respect by walking their talk.
“Management is like holding a dove in your hand. Squeeze too hard and you kill it, not hard enough and it flies away.” – Tommy Lasorda
Great leaders make it clear that they welcome challenges, criticism, and viewpoints other than their own. They know that an environment where people are afraid to speak up, offer insight, and ask good questions is destined for failure. By ensuring that they are approachable, great leaders facilitate the flow of great ideas throughout the organization.
“The ancient Romans had a tradition: Whenever one of their engineers constructed an arch, as the capstone was hoisted into place, the engineer assumed accountability for his work in the most profound way possible: He stood under the arch.” – Michael Armstrong
Great leaders have their followers’ backs. They don’t try to shift blame, and they don’t avoid shame when they fail. They’re never afraid to say, “The buck stops here,” and they earn people’s trust by backing them up.
A Sense Of Purpose
“You don’t lead by pointing and telling people some place to go. You lead by going to that place and making a case.” – Ken Kesey
Whereas vision is a clear idea of where you’re going, a sense of purpose refers to an understanding of why you’re going there. People like to feel like they’re part of something bigger than themselves. Great leaders give people that feeling.
Bringing It All Together
Becoming a great leader doesn’t mean that you have to incorporate all of these traits at once. Focus on one or two at a time; each incremental improvement will make you more effective. It’s okay if you “act” some of these qualities at first. The more you practice, the more instinctive it will become, and the more you’ll internalize your new leadership style.
I like to take some time to reassess my yearly outcomes. I also do this with all my coaching clients because it helps them see the progress they’ve made and how they can adjust their expectations.
This year, I decided to bring all my clients together for a two-day event to do their assessments in a group setting. This is going to be the main theme at this year’s Next Level Leadership Summit: “How to Finish Strong.”
I’ve been privileged to coach, consult and interview some of the most productive entrepreneurs I know, and I have learned as much from them as they have from me. The principles they have shared with me are timeless and easy to follow. I have used them time and time again to reset my goals to make sure I set myself up for a great closing to the year instead of being disappointed by what I didn’t accomplish.
Don’t let attachment to the outcome rob you of victory
Most entrepreneurs are very competitive. We have a vision and goals, and we want things to look a certain way. The truth is that things don’t happen the way we want them to most of the time. To keep the momentum, sometimes you have to adjust your vision.
Currently, I’m working with a real estate developer who is working on several projects. At the beginning of the year, he set a goal to close a deal that would net him $20 million. He found one and started working it. It looked like he was on his way to achieving his goal, but he later received news from his architect that he had miscalculated some numbers and that they would be making $5 million less than originally projected. Upset, he called me to tell me the news.
All I heard in his voice was how disappointed he was that he was not going to hit his goal. I reminded him of where he was three years ago when he joined my programme. He was burned out, had lost his purpose and didn’t have any deals to count on. And now, this is one of the many deals he has in the pipeline. Maybe he won’t get what he was aiming for, but this is still a victory.
This is what we do all the time. We beat ourselves up because we are attached to the way things should be. A high-performing entrepreneur looks at their life as a game. To finish the year strong, he must appreciate how far he has come and reset his outcomes according to his current situation.
At the first of the year, you create a list of things you want to accomplish. You then wait and wait for the perfect timing. After nine months go by, you look at the list and you feel disappointed you didn’t get everything done.
I know a guy who is developing a productivity app. He has interviewed developers, created the overall design and is constantly asking for feedback from people on how the app should look. He has been working on this for years but he is always waiting for the perfect time to execute.
One of my other clients has just launched his first app, and he is getting rave reviews. What’s the difference between these two men? One is waiting for the perfect time and is paralysed by the illusion of perfection while the other one was focused on creating progress.
Each week I asked my client how his app was going, and he shared his progress. Was it perfect? No. Did he experience challenges to make it work? Yes. But he knew the first steps – finding the money, reviewing the design and creating the user experience – were going to be the hardest. Now he is working on improving it based on all the feedback he has gotten from users.
High performers know perfection is the lowest standard. To finish the year strong, take inventory of all the progress you’ve made and focus on making things better.
You are the product of your environment
We’ve been taught that mindset and positive thinking are the keys to success. But that’s only part of the equation. For the last decade, I’ve focused on being in an environment that supports my growth. It doesn’t matter how strong your mindset is. It doesn’t matter how positive you are. If you are around negative people or in a negative environment, you will lose.
I’ve helped one of my clients get clear on how he wanted to take his business to the next level. We created a plan and a timeline with clear outcomes. Then I asked him, What is one thing that can mess this plan up? He said if he continued to hang out with his drinking buddies and give in to his old habits, it could distract him from his plan. So I told him to change his environment for the next 100 days to see if that would make a difference.
Now, at day 110, everything – his business, life, and relationship – are on fire. I not only asked him to change his environment, I also replaced it with a group of high-level performers who hold him accountable for his commitments. That group is on fire, and they are going to be recognised for their amazing shift at my Next Level Leadership event.
High performers evaluate their environment and make changes to align it with their vision. They eliminate any possible scenario that can prevent them from getting what they want.
As entrepreneurs, we must watch the bottom line at all times. Every move we make has to bring us a return on our investment. Lately, I’ve seen a big shift in the market. The “cut through to the bottom line” mindset can only take you so far. I’ve been able to grow my business faster by focusing on the impact rather than the income. Don’t get me wrong. I charge for my services, and I’m not running a non-profit, but income is not my main focus.
I recently helped a client create a framework in his business that gave him a sense of purpose. He was ready to sell all his assets and move to an island with his wife and kids because his idea of success was being met by his expectations in his business. I helped him see that he simply needed to focus less on the transactions and more on the transcendence his business could provide. He owns multiple businesses, so it took him some time to figure out how he could help his clients have a better experience rather than treating them as singular transactions.
When he came back to me, he had a list of things where he had made an impact. All of a sudden, his passion for running a business had returned. He had a new sense of purpose seeing how much impact he could make in he lives of others.
A high-performing entrepreneur measures his success on the amount of impact he has on people’s lives.
Reset, recharge and recommit
We all want to have more time. We are running 100 mph, and we don’t want to slow down. That’s the life of any entrepreneur who wants to succeed in this competitive market. But, if a car is running that fast every day, it will eventually crash. And that’s what happens to us. We crash and sometimes burn things down.
To avoid this, I meet with my clients several times throughout the year to reset our goals, recharge our batteries and recommit to the process. Nothing is better than iron sharpening iron. It doesn’t have to be a long period of time. We actually discovered that all we need is one day per quarter, and we can compound time. When you’re busy, quality is better than quantity.
Each quarter, people travel from all over the country to our meetings so they can share their progress and see how they can help one another. The key here is to Reset your goals, recharge your mindset and recommit to your outcomes.
High performers know that proximity is power. They also know you need to recharge your batteries in order to get back into the game – especially if you want to finish strong.
Overall, 2018 has been a very poor year for investment returns. The MSCI World Index is down almost 13.0%, the S&P 500 has fallen 9.6%, and the FTSE/JSE All Share Index is off 13.6%.
Where does that leave investors heading into 2019? Moneyweb collected views from a number of analysts:
T. Rowe Price on global markets:
“With the US moving into the later stages of the business cycle, the US Federal Reserve raising interest rates, and monetary and credit conditions diverging widely across the other major global economies, the potential for renewed volatility in both equity and fixed income markets remains high,” argue David Giroux, T. Rowe Price’s head of investment strategy; Justin Thomson, chief investment officer for equity; and Andy McCormick, head of U.S. taxable fixed income. “Political risks are adding to the uncertainty. These include the trade dispute between the U.S. and China, the possibility of a disorderly Brexit in March, and renewed fiscal conflict between Italy’s populist government and European Union (EU) officials.”
Global growth momentum appears to be slowing, while inflation is rising. Investors therefore need to pay close attention to valuations.
“Relative to their own history, U.S. equity valuations do not appear excessively rich,” Giroux says. “As of mid-November 2018, the S&P 500 Index was trading at roughly 15.5 times expected forward earnings, within range of the 20-year historical average of 15.9. However, with the U.S. moving into the later stages of the business cycle, that multiple might be less attractive than the long-term average would suggest.
“What we’ve typically seen is that once you hit an earnings peak, it can take between three and five years to get back to that peak,” he explains. “So, the S&P 500 might actually be selling at 15.5 times 2024 earnings, which is saying something very different.”
Undervalued emerging market currencies may however be creating an opportunity.
“History suggests that you want to buy EM equity and debt when EM currencies are cheap, and we’re certainly seeing that at the moment,” Giroux says.
Northstar Asset Management on the local market
“The long-term average price-to-earnings (P/E) of the JSE is 12.7 times,” point out Northstar’s chief investment officer Adrian Clayton and analyst Rachel Finlayson. “Over this past five year cycle, the peak JSE P/E was 23.5 times at 31 July 2017. The current P/E of the market is 16.8 times, but if we adjust for different company year-ends, the actual P/E on the market is 13.7 times including Naspers and Quilter, and 12.1 times excluding these stocks. This is closer to the long-term average.”
Taking this view, the JSE is no longer expensive. Given that earnings are forecast to be robust over the next 12 months, cash flows from companies are rising and debt levels are relatively low, there are reasons for optimism. There are also historical reasons to believe that the weak returns over the last five years are unlikely to persist.
“Historically, the prospective (forward looking) five year annualised real return that follows a -2.4% annualised real return period, is 16.7%,” Clayton and Finlayson note. “So future returns tend to be very good after bouts of poor returns.
“Less than 20% of the time does a negative real return period follow a previous negative real return period,” they add. “In other words, if returns have been below inflation over a five year period, it seldom repeats itself for the next five years.”
Sharenet Analytics on investor behaviour:
“People are turning their backs on the JSE in their droves and fund redemptions are sky-rocketing,” notes Dwaine van Vuuren from Sharenet Analytics. “There’s blood in the streets despite the relatively mild 20% drop in the headline index. We may not have the intensity of a 40% crash but we certainly had a bear market duration almost triple the duration of the normal one.”
At the same time, investors are rushing into cash deposits.
“Fixed interest products are now all the rage,” Van Vuuren points out. “Just about every website you visit throws up tempting fixed deposit adverts and all you hear on the golf course and braais is who has what fixed interest product with whom.”
When this happens, it’s time to start thinking outside of the conventional wisdom, even though it’s uncomfortable and it’s still possible that the market may yet drop further.
“Another 10-15% drop in the markets from now would not be at all surprising,” Van Vuuren says. “All you need to know is an opportunity is building, around the time people are the most pessimistic about the markets – and you at least need your stockbroking account charged with some gunpowder when the time arrives, or risk being Joe Public that is always entering en-masse into the next asset class at exactly the wrong time. The right time to be getting into an asset class is when it feels wrong!”
Schroders on sustainability:
“Environmental and social change is accelerating, generating an ever-stronger headwind for companies to navigate,” says Jessica Ground, global head of stewardship at Schroders. “2018 has provided ample evidence of this, with populism continuing to rise alongside global temperatures. Increasingly, there is nowhere to hide for companies who don’t operate in a sustainable way.”
Investors therefore have a lot to think about when it comes to environmental, social and governance (ESG) issues.
“Rapid and large-scale environmental and social change is likely to see companies across the board come under increasing pressure from a variety of sources, whether environmental-, social-or governance-related,” Ground argues. “In light of this, we think ESG analysis and forecasting will continue to rise in importance for investors the world over.”
While bears are in agreement that EMs will remain under pressure in 2019, they’re split on what will be the primary source of pain.
An employee holds a wad of 200 Turkish lira banknotes in a currency exchange in Istanbul, Turkey. Picture: Kostas Tsironis/Bloomberg
If Jason Daw is right, some of the world’s biggest investors are setting themselves up for a major disappointment.
The Singapore-based strategist at Societe Generale, one of the few to anticipate the slump in emerging markets beginning in January, sees no imminent turnaround for the asset class. He said the modest rally in currencies since September, led by Turkey’s lira, Brazil’s real and South Africa’s rand, is temporary and that slower global growth and additional tightening by the Federal Reserve will continue to weaken developing-nation currencies.
“It will be a multi-year process for investment behavior to adapt to less generous dollar liquidity conditions after a decade of easy money,” he said. “The hurdle for capital to flow back into emerging markets is high and a significant macro catalyst is required to turn the narrative around.”
Daw is among a cadre of contrarians including Man GLG money manager Lisa Chua, Bank of America strategist David Woo and Harvard economist Carmen Reinhart warning of additional risks for emerging markets, even after eight consecutive weeks of inflows into the asset class. They point to a gloomier growth outlook amid an escalating trade war, the prospect of further dollar strength as well as pockets of fragility in China, Brazil and India.
That would compound the pain from an already tumultuous 2018 in which emerging-market equities slid into a bear market and every major currency in the developing world declined against the dollar.
Some combination of Chinese stimulus, an end to the US-China trade war, a pause in Fed tightening due to inflation and higher oil prices could help spur a rebound within the asset class, according to Daw.
While bears are in agreement that emerging markets will remain under pressure in 2019, they’re split on what will be the primary source of pain.
Waiting out The Fed
Daw said the time to dive in to emerging-market assets would be when the Fed starts to cut rates, and that could be 18 months away.
“I get the feeling consensus is on the more optimistic side,” he said. “We have believed that EM FX could weaken since the end of last year.”
He sees some value in Argentina, which led emerging-market currency declines this year. The South American country is also looking more attractive to Chua.
The Societe Generale strategist also recommends shorting the Brazilian real against Mexico’s peso as the initial market euphoria following Jair Bolsonaro’s election wanes.
Woo’s biggest concern is that Xi Jinping’s government has no incentive to make concessions on trade, especially with Donald Trump hobbled by congressional gridlock. Domestically, Chinese authorities must juggle the need for stimulus with the desire to rein in runaway home prices. Woo recommends shorting the Indian rupee and Mexican peso as the slowdown in China weighs on assets across the developing world.
“You want to buy EM?” he said. “I wouldn’t touch EM with a 10-foot pole until there’s a resolution between the US and China.”
Another China bear, John-Paul Smith, founder of Ecstrat in London, said he’s steadfast in warning that a slowdown will hurt emerging-market equities. He recommends being underweight or zero-weight Chinese shares, Russian stocks and South Korea’s won, given their sensitivity to trade and commodities.
“I expect all three to have significant downside in dollar terms between now and the end of 2019,” Smith said.
It’s best to remain underweight emerging-market bonds as spreads potentially widen to 450 basis points over US Treasuries, according to Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. in New York. She expects the US dollar to remain firm near term, while additional Fed tightening, slowing Chinese growth and lower commodity prices also prevent a big rally.
“There is a case for a rebound in EM sometime in 2019 once the peak in tightening financial conditions has been reached,” Jones said. “We just aren’t seeing it in the near term.”