Avoid typical mistakes In times of stress, the human impulse is to take action. When investment returns start to sink, this instinct could drive investors to do something – anything – just for the sake of taking action. This is precisely the wrong reaction in challenging times. There are many knee-jerk responses to short-term underperformance – all of which will ultimately detract from long term returns Switching to cheaper products In a low-return environment, clients typically consider cheaper managers or passive products to save on fees. However, this is precisely the time that outperforming the market becomes even more important. In a high-return environment, alpha is nice to have. When the market delivers 15%, it’s nice to achieve an outperformance of 2% or 3%. But in a low-return environment, outperformance really starts to matter. Outperformance of 2% to 3% on a base of 9% is a must-have: The difference between 9% and 12%, compounded over years, can transform your retirement. Skill in delivering strong outperformance becomes more valuable (not less) in challenging times. Investing with managers that have a demonstrable track-record of successful asset allocation will become even more important. Cutting exposure to risk assets When the investment outlook and market sentiment are poor, stressed investors often lose their tolerance for volatility. However, it is crucial that investors maintain appropriate exposure to growth assets, which are the only investments that will provide the real long-term growth investors require. Shortening your time horizon The temptation is to shorten your investment horizon – instead, it should be lengthened. Identify long-term winning managers and asset classes, and back them for the long run. Don’t fidget or lose faith at precisely the wrong time. Retirement investing In a low-return environment, it is key that your clients exact strict discipline in their draw-downs. The gains from reducing annual drawdowns is non-linear. A small reduction in the drawdown rate can add years of additional retirement income. It is also important to understand the place of underwritten annuities in the market. In times of low returns, it is tempting to buy an underwritten annuity. But investors should be sure that the product is suitable to their needs. Be very careful of annuities that escalate by a rate below inflation. Currently, a 65-year-old investor typically gets a 4.7% yield in an underwritten annuity, which escalates at 5% a year. This may feel like a low-risk option, but in fact it is actually a proposition that holds a lot of risk. Over a 30-year time horizon, the power of compounding will not be on your side. In 30 years, something that costs R1 today will cost R4.3 at 5% inflation (compounded), compared to R5.70 at 6% and R10.10 at 8%. No-one knows the future; South Africa is a volatile and uncertain place, and inflation could just as easily average 8% as 5%. Inflation protection is crucial, and we do not believe investors should consider anything less than an inflationary escalation. Source: Coronation One has to appreciate that it had to be a hard-balancing act for the Minister, however, many are concerned that these higher taxes may hurt the already weak economic environment, which will directly impact households. Radical economic transformation, inclusive growth and equality were certainly an important feature of Minister Pravin Gordhan’s budget speech yesterday afternoon. The tone of the budget speech was very redistributive and echoed the President’s State of the Nation address a few weeks ago. It, therefore, came as no surprise that the Minister sidestepped the controversial issue of a VAT increase and opted to look to high-income earners to help raise an additional R28 billion. In terms of the progressive tax system, it makes sense to have those who earn more, pay more but there are some concerns that there could still be a risk to growth from the second-round of effects of these increased taxes. Revenue lagged behind the economy, which subsequently lead to an R30 billion shortfall by comparison with the budget estimate a year ago.The impact of a weak economic environment resulted in the shortfall experienced mainly in personal income tax, value-added tax and customs duties. Global growth prospects are looking better, which means that South Africa should benefit from the overall improved outlook, however, the 1.3% domestic growth expectation is still dependent on the implementation of reforms and barring any negative developments on the political front. From a revenue generation perspective, the usual suspects were targeted - being sin taxes and an increase in the fuel levy. Sugar tax does seem to be an inevitability but details need to be finalised. The implementation of the proposed carbon tax has also been kicked further down the road. From a rating agencies perspective, there were some positives and negatives. The Minister stayed on the fiscal consolidation course, as the pace of consolidation was unchanged. However, the budget did disappoint on the reform agenda especially regarding state-owned entities. Written: Tumisho Grater Source: Novare Few weeks ago, Kevin Yeh (Key Individual of Daberistic Financial Services) attended the Sanlam Individual Life's product workshop and this what he wrote after attending it. Last Tuesday I attended Sanlam Individual Life's product workshop, during which it launches a range of exciting critical illness benefits. But the highlight for me was its guest speaker, the renowned South Africa political analyst Justice Malala, in terms of his analysis of where is South Africa now, and where we are going in the future. ANC divided, with Zuma camp and Ramaphosa camp Unemployment: 8.9 million people, or 36.3% unemployed. The qualifications hierarchy: Only 4% of school starters eventually get a university degree. He expects minor cabinet reshuffle, probably Deputy Finance Minister being replaced by Brian Molefe. ANC NEC has 80 members, many depend on Zuma for ministerial jobs. Zuma will stay on as South Africa's president until 2019.No massive policy shift. Although Zuma talks about radical transformation, there will be no real change. However, a lot of talks will be on the land issue. He predicts if the voting for the next ANC President takes place today, Dlamini-Zuma will win against Cyril Ramaphosa. Malala predicts ANC will still win the 2019 national election, but EFF and DA will probably take control of Gauteng. In 2024 we are likely to see a coalition government, with EFF playing an increasingly important role. Source: Kevin Yeh |
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January 2025
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