Update your will

Good day,

Did you know that approximately 86% of South Africans haven’t made plans for their death? For some reason setting up our last will and testament makes us think about our own mortality, and so we tend to put it off.  All too often though, this is only attended to when we know that we are about to die from a life threatening disease. For example:

If you don’t have a Will in place when you pass away, you die ‘intestate’. What then happens is the courts take over and create a ‘Will’ on your behalf, according to the laws of the country, and divide the assets between the spouse and children. While all this is happening, funds for your burial and loved one’s day-to-day expenses can be frozen for months by the court if your bank accounts and policies and investments are in your name only. Apart from the time-consuming hassle and inconvenience you are going to put your loved one’s through, dying without a Will could also result in costing the Estate thousands in unnecessary expenses. And this is in addition to the standard Estate administration costs; up to 3.5% (plus VAT) of the total value of assets in the Estate.

Something else to be aware of is ‘slapping’ together a Will, and I’ll give you a true-life example of why you shouldn’t. Monty and Muriel got married and drew up their own Will in their study and appointed each other as Executors of their Estates. The marriage turned sour and Monty and Muriel divorced. Monty later remarried and had a child with his new wife, Magda. Sadly, Monty passed away shortly afterwards. Mary, as the Executor of the Will, turned down Magda’s claim against the Estate for monies to help support and raise the child. In this example, Magda eventually received her dues, but only after a very prolonged and painful battle.

Now here’s another scenario (a parent’s worst nightmare). John and Mary drafted their own Will and made their best friend Executor of their Estates. Not long after the birth of their second child, John, Mary and their best friend were on their way home one Saturday night from a rugby test match when they were tragically killed in a motor vehicle accident. Their two children, aged six months and two years old, were left in the care of no one, as the last time John and Mary had revised their Will was prior to the birth of their children and as such, no guardians had been appointed.

These two examples highlight one of the biggest flaws when drafting a Will; people don’t make use of qualified advisors or trust companies. Your financial advisor is one of the few people that will know when circumstances in your life change – or he should be – and will definitely remind you to update your Will if this was done by him in the first place.

Secondly, the execution of your Will should not depend on one person. By making use of a financial advisor or trust company, you are ensuring that your Will is backed up by an organisation.

So even if your advisor passes away, your Last Will and Testament will be finalised and carried out as per your instructions.

A key benefit of having your Will drawn up by a financial advisor is that they will expertly guide you into leaving a neat, practical and enforceable Will, and not a legacy of disaster. ‘Small’ little mistakes, like the one that took place in my first example, will also be avoided. There are also many other legalities to look out for that can have grave consequences, such as leaving cash to people in your Will. These amounts must be paid out in full first before the remainder can be inherited by your spouse or children. So your loving gesture of leaving R500 000 to your sister or favourite charity could result in assets (like a house) having to be sold if there isn’t enough cash available in your Estate, thus leaving your family without a home. Rather stick to percentages when allocating your fortune and ask for advice when tackling this issue.

Another thing you need to be very aware of is the witness signatures on your Will. As a broad guideline, it’s always good to have two witness signatures on each page of the document – and stay away from family members! Any family or guardians who could possibly inherit should not sign as a witness to your Will, to avoid any contest on the inheritance. Even your aunt’s little brother’s cousin is not a good idea as a witness.

Problems will be eliminated if you make use of a financial advisor or reputable trust company. I always like to start my financial planning with clients by reviewing their Will. It is the cornerstone of making sure that the amount of life cover needed will be sufficient for factors such as inheritance and Estate duties.

A last but very vital point is that once you have gone to all the trouble of drafting a Will with your advisor, please complete the process by signing the document and keeping it in a safe place.

Until next time, take care and enjoy life!

Jacques

Is gap cover vital in the current climate of medical aid providers?

Good day,

It is becoming increasingly apparent that a gap is growing between what medical aid providers cover for certain in-hospital procedures and the actual cost of these procedures and associated expenses. This emerging breach is responsible for moving gap cover from an optional extra to a vital insurance product.

Examining the gap

A simple look at medical aid providers will show you that in exchange for a monthly premium, they will provide benefits at scheme rates, and more recently, enforce sub-limits and co-payments for certain procedures.

These sub-limits and co-payments sound fair enough when you consider the fact that, generally speaking, medical inflation has always run at a higher rate than inflation, placing a certain amount of pressure on these factors which are required for various benefits payable by medical aids.

In the past, the shortfall that this created was manageable. It wasn’t pleasant, it caused a degree of unnecessary financial strain, but many a family was able to pull through and make payment plans and arrangements to satisfy these debts.

However, once practitioners were no longer bound by the NHRPL and medical aid scheme rates, they were in a position to charge the rates that they deemed appropriate. Often this led to rates higher than what a client’s medical aid benefits would cover. In addition to this, medical inflation is made up of a number of drivers, like specialist fees, private hospital costs, the cost of imported equipment, and the exchange rate have all greatly contributed to the rising cost of healthcare.

Added to this, in recent years medical inflation has been much higher which has served to increase the pressure on medical aids who have sought to maintain their benefit levels. This in turn, has lent itself towards even higher co-payments and sub-limits, thus creating a shortfall between what your medical aid would cover and what you actually owed widened.

Clearly, the climate of medical aid providers has worsened, leaving you open to a vast array of potential shortfalls in exorbitant medical costs.

Bridging the financial breach

While gap insurance doesn’t try to do the job of a medical aid, it does help you cover the stressful risk of costs which you may incur during a hospital event and is therefore seen as working with your medical aid. In fact, gap cover is very specific in terms of what is covered and when this is read in conjunction with your medical aid benefits it provides you with peace of mind should you or a member of your family need to be hospitalised.

Having started as cover that mainly dealt with the shortfall of specialist fees, gap insurance has since moved towards providing cover for sub-limits and co-payments once medical aids started restricting their benefits. Given the current climate and the current lack of regulation around specialists’ fees in particular, gap cover has become an integral part of the developing healthcare industry and will continue to provide this cover so long as its cost does not make the overall product cost too expensive for the market.

Not only is it an essential element when it comes to financial planning and helping individuals and families alike avoid the pressure of unforeseen medical expenses, it also has a flexible component. Gap insurance providers offer a range of gap cover products and is considered a portable product in that if you want to change to a new medical aid, you can do so with your gap product. You also have the freedom to make sure that your gap product benefits are aligned to your new medical aid benefits, and if necessary, you can change your gap cover to one that is better suited to your needs.

The truth is that the current climate of medical aid providers means that it is no longer enough to have a medical aid plan. More often than not, you discover that your medical aid has only covered a portion of your overall cost after a stay in hospital, leaving significant shortfalls to pay that you hadn’t budgeted for. This is precisely why gap cover has become a vital product and less of an add-on.

Do you have GAP cover in place? If not, contact us to add to your portfolio.

Please don’t hesitate to contact us should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Fresh approach for investing in the New Year

Good day,

The world is seeing a move away from “business as usual”, but ultimately, as much as things change, they have a way of staying the same.

Set those goals for 2017 and plan accordingly. Start with ensuring that you don’t overspend this festive season. Have a budgeted approach to tackling the holiday spend and try your best to apply your festive season bonus – if you are lucky enough to get one – effectively.

Cash is king and cash flow even more so. Paying off your debt sooner than later will allow you to establish that investment portfolio you’ve been putting off.

It is important to remember that investing is about time in the markets and not timing of the markets. Ultimately, long-run economic growth is the most important aspect of how the economy performs.

Key question

The key question is what returns different asset classes have delivered and what it means for you. Another key factor to consider is what expectations and risks are associated with each asset class over the medium term (five years) and how the uncertainty associated with recent events locally and globally might affect your investment. Similarly, after the Brexit vote, the UK market was under considerable pressure as global investors feared for the worse. Several weeks later, the market has stabilised and is testing the levels seen prior to the referendum.

SA cash

Year-to-date, before considering tax, cash has shown stellar returns given the limited risk associated with holding funds in a money market account. Cash will be affected by interest rate decisions taken by the Monetary Policy Committee (MPC). Given all the uncertainty surrounding the SA climate at present, the MPC will have a challenging time balancing interest rates and inflation. Over the long term, however, holding cash does not pay, as it is highly unlikely to maintain its purchasing power – that is combat against the effects of inflation.

Wealth creation should always be something we strive for. Let’s tackle 2017 head-on and make it the best financial year you have ever experienced!

Please allow me to take this opportunity to thank you for your loyalty and input throughout the year. Wishing you happiness, laughter, and fun… and a holiday season that’s a wonderful one! I look forward seeing you all again in the new year.

Happy Holidays!

Jacques

Your year-end bonus and how to spend it

Good day,

With the year-end fast approaching, many employees look forward not just to a lengthy break but also to their annual bonus or 13th cheque. The extra cash is a welcome boost as expenses typically ramp up during this time, notably for gifts, entertainment, vacations, bonuses for domestic employees and next year’s school fees.

If you are in line for a double pay cheque you will have your own ideas on what to do with the extra money, based on your individual needs and circumstances. However, you should prudently consider not just your immediate requirements, but also your long-time financial needs, just as you would do with your monthly income. In other words, you should find a fair balance between spending and saving.

As a general rule, you need to save at least 15% of your income over your entire working life, to secure your retirement. This also applies to your bonus or 13th cheque. Although the higher seasonal spending may appear discretionary, in practice it is not. Most of these expenses will repeat year after year, also in retirement. It therefore makes sense to provide for them specifically, out of your bonus, especially as they tend to be ignored in the monthly budget that a typical retirement plan will consider.

If your bonus or 13th cheque does not automatically fall within your pensionable income, you can still make an additional voluntary contribution to your employer’s pension or provident fund (rules permitting), or you can make a top-up contribution to your retirement annuity (RA).

In so doing, you not only save for retirement, you also pay less tax on your bonus. Your investment is tax-deductible, provided your total retirement fund contributions for the tax year are less than 27,5% of your gross remuneration or taxable income (whichever is the higher) and less than R350,000 in total.

Not only will you benefit from the immediate tax saving on your bonus, but your top-up contribution will also benefit from tax-free growth in your retirement fund (capital gains, dividends and interest earned on your investment are not taxed).  Over a working life, these tax benefits can boost your retirement saving by around 30%.

Adding to your retirement fund will magnify the value of your bonus. Realistically, your money stands to earn a long-term 4% per annum net real (after-inflation) return in a low cost high equity portfolio, which means that the purchasing power of your invested bonus will grow 4 to 5 times by the time your retire (assuming an investment term of between 30 and 40 years). That is a far more valuable gift to yourself, than say, the latest curve-shaped, ultra HD TV that will be outdated within a few years.

Beyond the ‘mandatory’ allocation to your retirement fund, the appropriate balance between saving and spending will depend on the size of your ‘windfall’. The higher your bonus relative to your monthly income, the more of it you should save. Ideally, you will view any excess above your retirement and seasonal spending needs as capital, not income, and treat it accordingly.

This means that you should invest this money and only spend your investment return. Long-term, your life style is determined by your sustainable income. Spending your entire bonus may give you a temporary lift, but investing the ‘excess’ to earn future income (or save future expenses) will boost it permanently. You can do this, for example, by paying down on your home loan or credit card debt, thereby reducing your instalments. This will free up your monthly cash flow, and increase your spending power.

Alternatively, you can invest the money to meet a major future capital expense, such as your children’s tertiary education, and thereby lower the required contributions to an education policy (or the debt repayments at a future date, if you plan to take out a loan for that purpose). This too will unburden your monthly cash flow. Or, you can simply invest the money in a unit trust and spend the dividend income every year, while your underlying capital grows in value.

If you have competing needs and goals, you can either prioritise one, or you can weight them according to importance, and allocate your money accordingly. If you are looking for more immediate gratification, then paying down your credit card is probably your best bet, as this is most expensive form of debt. However, to maximize the long-term value of your bonus, you should really consider a top-up contribution to your retirement fund.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Protect yourself against next year’s tax hike

Good day,

As tax revenues fall and expenditure demands increase, including further subsidies for higher education, Finance Minister Pravin Gordhan will be looking for an additional R43 billion in taxes over the next two years. Of this amount, R28 billion will be raised next year.

While we’ll have to wait for the February 2017 Budget Review to find out exactly which taxes will rise, in the 2016 Budget Review the National Treasury gave some indication of where this money could come from, including: “providing limited relief for fiscal drag, increasing marginal personal income tax rates, introducing a new personal income tax bracket, and raising the VAT rate and/or increases in other taxes. These options will be the subject of further analysis, consultation and debate”.

The National Treasury will need to consider the various options to ensure that an unfair burden does not fall on lower-income earners or extract significant growth from the economy, but ultimately, we will all be paying more tax next year.

Value-Added Tax (VAT): R15 billion

The Davis Tax Committee’s research found that an increase of VAT from 14% to 15% would generate an additional R15 billion.

What you can do: Spend less. VAT is only charged when you spend money, so rather save it and pay less to the taxman. From a daily living perspective, note the staple items that are zero-rated for VAT purposes and buy more of them and less fast food/readymade foodstuffs. Examples of VAT-exempt foodstuffs include brown bread, eggs and milk.

Fiscal drag: R7,6 billion-R13,1 billion

The National Treasury adjusts the tax tables annually to allow for inflation-based salary increases. In the 2016 Budget, if Treasury had not adjusted the tax tables it could have raised an additional R13,1 billion. It did allow for some adjustment but not fully, resulting in a net tax increase of R7,6 billion.

What you can do: You can pay less income tax by increasing your contributions to a retirement fund, including a retirement annuity. Remember that you can invest up to 27,5% of your salary before tax.

Sugar tax: R11 billion

There’s still a great deal of debate about a possible sugar tax and also some disagreement around how much revenue it would actually raise. The figure of R11 billion currently on the table may be overstated, but even at half that amount, it would generate a significant boost to tax revenue.

What you can do: Adjust your diet. Sugar is not good for anyone and drinking fewer sugary drinks will improve your and your family’s health and help save money. Did you know that the average soft drink contains around nine teaspoons of sugar? Imagine eating that amount of sugar!

Levies: R9 billion

The usual increases to fuel levies and so-called ‘sin’ taxes would generate an additional R9 billion.

What you can do: We currently pay R4,43 per litre of petrol for the various levies, so finding ways to use fuel more efficiently or to car-pool will save on tax. Drinking and smoking less are other ways to lower your total tax bill, although in stressful economic times these are usually the sins we indulge in!

Wealth taxes: R3 billion-R5 billion

As discussed in previous newsletters, the Davis Tax Committee also made several recommendations to restructure tax policy around trusts, estate duty and donations between spouses. The aim is to increase tax collection on inter-generational wealth transfers. These taxes would increase tax revenue by between R3 billion and R5 billion per annum.

What you can do: First of all, don’t panic! There is no hard and fast legislation in place yet, only proposals, which may or may not become law. Adopt a sensible approach to estate planning and establish your actual needs. Ensure that those actual needs are reflected in the estate-planning tools you’ve used to meet them, and ensure that you have sufficient cash in your estate to provide for any taxes that may result. Consult with an appropriately qualified financial adviser to guide you in this process so that you have a flexible plan that can be adapted for the changing environment.

Personal income tax: R3,5 billion

The Davis Tax Committee showed that an increase in the marginal tax rate of individuals earning more than R1,2 million a year to 45% would generate an additional R3,5 billion.

What you can do: This tax increase would only affect the top income earners. High-income earners can increase contributions to retirement funds, but keep in mind that this is capped at R350 000. You can also consider making donations to public benefit organisations.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Pressure off with presents!

Good day,

The festive season is listed on the Holmes and Rahe Stress Scale among the 43 most stressful life events. It’s time to change our children’s expectations and take the pressure off us as parents.

Many families share the frustration that the festive season has become so commercialised that we’ve forgotten what this time is meant to represent. In fact, it’s become one of the most stressful times of the year. Did you know that the festive season is included in the Holmes and Rahe Stress Scale as one of the 43 most stressful life events?

One of the main stress points is financial: the cost of gifts, family meals and general increased spending over this time. Here’s how to use the festive season to teach your children the value of money.

Parents, in particular, can feel pressure from children whose idea of the festive season is all about receiving gifts. Often their gift ideas add to the feeling of financial pressure, but it is possible to use this as a teachable moment.

Have a family discussion about what the festive season really means to you and how you can celebrate this time within your budget. You may be surprised to find that for some family members just having time together is enough.

If you received a bonus, discuss it with the family and ask your children how they feel the money should be allocated. Use this opportunity to discuss the importance of using some to reduce debt or save, some to spend and some to share with those less fortunate. Discuss the principles of saving as an opportunity to provide for the future and the importance of reducing debt so you’re not paying interest to a bank.

Ask them what they feel is important with regards to spending: A holiday, an activity with the family or gifts? There’s no right or wrong answer. The process is about helping your children understand that if you discuss things, you can make better choices guided by what your family really values.

Then discuss helping those in need and how best to do that: with time or money? What causes touch your children’s hearts? You’ll be surprised by how overwhelmingly charitable children are.

While talking about the festive season as a family will teach your children valuable lessons, you may be the one who ends up learning the most.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Trump wins – But he is going to struggle to unite his party and the country

Good day,

The United States has elected a political outsider as President. Overall, the outcome was largely unexpected, leading to a high level of political and economic uncertainty.

Donald Trump has emerged victorious over Hillary Clinton in a Presidential election that has defied expectations. Every single election poll in the past four months predicted a Clinton victory. But not only did Trump win more than 270 of the electoral votes, over­ turning many states that were previously held by Democrats, he also won the popular vote. The Republicans also have control of the Senate and the House of Representatives, giving them control of the US Congress.

The outcome of the election is another clear indication of the rise of right­wing politics, in­ line with the Brexit vote. It will be seen as an anti­establishment vote, a vote for self­-determination, the protection of jobs and anger at how Washington has ignored the middle class American.

 US President has limited powers

 It is important to recognise that within the United States’ political system, a number of checks and balances exist to prevent the President from having free reign. In other words,  in contrast to the many powers it gives Congress, the US Constitution grants few specific powers to the President. The President has the authority to nominate people to serve the government in a wide range of offices; most important among them are ambassadors, members of the Supreme Court and federal courts and cabinet secretaries. However, more than 2 000 of these positions require approval by the Senate under the “advice and consent” provision of the Constitution. Congress holds the power to declare war but as Commander in Chief the President can send troops without declaration, or make an executive order, to undertake military action. Under executive privilege, the President decides whether or not information developed within the executive branch, may be released to Congress or the courts. The President is also authorised to propose new legislation, this however needs Congressional approval to become effective. Crucially, the President needs Congressional support to implement economic policies, and ultimately, the Supreme Court has the power to overrule any laws if they are deemed unconstitutional.

Very importantly, Trump will most likely have the support of a Republican Congress (Senate and House of Representatives). This does not mean that his political party fully supports his policy approach. Instead, he is going to have to work hard to unify his party,  and will have to accept some compromises in getting his policy approved. This is not a new thing – many previous presidents have faced some of the same constraints, although usually from the opposition political party and not their own party. This may force some compromises on how economic policies are shaped.

Practically, all of this means that Trump has the executive power to do things like withdraw from the Trans­Pacific Partnership trade policy negotiations, restart exploration of the Keystone pipeline, sign executive orders deregulating energy prices and open trade cases against China, and much  more.

Many of Trump’s major economic promises will however require cooperation with Congress and/or Supreme Court approval. So, for example, repealing Obamacare, cutting taxes and building the infamous wall on the Mexican border would all require approval from Congress. More positively, Trump could focus on establishing a bipartisan agreement on a comprehensive infrastructural development package. Nevertheless many of the policy ramifications are still largely unknown, which could encourage business to adopt a “wait­and­see” approach when contemplating new fixed investment initiatives.

What does the election mean for economic  policy?

 A number of key economic policy issues were vigorously debated during the tumultuous election campaign. These included proposed changes in taxes, the extent of government spending, the need for additional trade restrictions, and the appropriateness of current monetary policy. Aligned to these areas of contestation were the US’ policy on immigration and the government’s foreign policy approach to China and Russia.

Trump proposes significant tax changes and increased government spending on  infrastructure

 One of Trump’s main policy initiatives is to cut taxes, while simultaniously increasing government spending. He promised to ‘at least double’ Clinton’s infrastructure spending proposal, implying at least 0.6% of GDP. He also talked about a ‘trillion­dollar rebuilding programme’, implying an expansionary fiscal policy.

Trump’s original tax proposals were estimated to cost the government $10 trillion in lost revenue over 10 years, but later proposals suggested a much more modest and more realistic reduction, perhaps around $3 trillion or 1.6% of annual GDP. Strangely, Trump also talked about a balanced budget within eight years. According to his economic plan, this would come about as a result of a self­-reinforcing growth stimulus, but in reality, achieving this seems highly  doubtful.

Using a very simple debt model and assuming Trump got all his fiscal policy proposals approved (a somewhat unrealistic scenario); the US public net debt could increase to above 95% of GDP from about 75% currently. As a result, the US would probably lose the last two of its ‘AAA’ credit ratings.

In contrast, Clinton had focused on increasing middle­class incomes by cutting taxes within that income group. She proposed that these tax cuts could be partly funded by   hiking taxes on high income earners, lowering the threshold for inheritance tax, and reducing the number of allowable deductions for corporate income tax payers that make it less advantageous for businesses to relocate overseas. She estimated that these tax changes would raise federal tax revenues by an estimated $1.1 trillion over 10 years, or about 0.6% of GDP each year. This is relatively modest and would have had only a modest impact on economic  activity.

Given the backdrop of still relatively modest economic growth, it is possible that the government will look to fast ­track planned increases in expenditure in order to stimulate economic growth.

Trade policy likely to become much more protectionist under Trump

 One of Trump’s strongest arguments ahead of the election was that US jobs have been lost because of too generous trade deals with other countries, such as the North American Free Trade Agreement (NAFTA) and the TransPacific Partnership (TPP). He argued forcefully that unfair trade practices by other countries, especially China, are also harming US companies.

He wants to bring manufacturing jobs back to the US by embarking on a seven ­point trade policy plan, namely:

• A withdrawal of the US from the  TPP
• The appointment of tough US  negotiators
• Identifying all trade agreement violations and seeking to end   them
• Renegotiating the NAFTA to get ‘a lot better terms’ and, if not feasible, withdrawing from it
• Labelling China as a currency  manipulator
• Bringing trade cases against China both in the US and the World Trade Organization
• If China does not cease these “unfair” trade practices, Trump would use clauses under various trade acts to remedy the  disputes

In comparison, Clinton had stressed that she will ‘stop any trade deal that kills jobs or holds down wages’. She indicated that her administration would also say no to trade deals such as the TPP, which did not ‘meet her high standard of raising wages, creating good­ paying jobs, and enhancing national security’. She also expressed scepticism about NAFTA, a trade deal negotiated by her husband when he was president.

Overall, it is clear that world trade has become much more protectionist since the Global Financial Market Crisis. This has led to a very noticeable slowdown in the growth of global trade, which has contributed to the current lacklustre economic growth. There is a significant risk that if the clamour for increased trade protection gains momentum in the world’s largest economy, the affected countries would most likely introduce retaliatory trade measures. This could set in motion a much more pronounced global trade war, which would be disastrous for South Africa given that more than 50% of South Africa’s GDP is either imported or exported.

Trump does not support the current US monetary policy regime

 The Trump victory is not good news for the US Federal Reserve. In particular, it now seems unlikely that Janet Yellen will be reappointed as Chairman of the Federal Reserve when her term ends in 2018 given Trump’s view that the Federal Reserve has created ‘a false stock market’ and that Yellen is ‘very political’. Initially, Trump supported the Federal Reserve’s low interest rates policy. More strangely, Trump has supported a proposal to allow congressional auditors to review the Federal Reserve’s decisions on interest rates. This would amount to extreme political interference.

It would be very unusual to replace the existing Chairman of the Federal Reserve during their term of office or even replace the Chairman when their term expires just because  they represent a different political party. In fact, Barack Obama (a Democrat) reappointed Ben Bernanke as Chairman of the Federal Reserve despite him being a Republican.

Equally, Bill Clinton (a Democrat) reappointed Alan Greenspan (a Republican) twice, while Republican Ronald Reagan kept Paul Volcker (a Democrat) as Chairman.

But Trump has excelled at doing the “unusual” and could certainly look to significantly change the composition of the Federal Reserve. Given Trump’s more hawkish stance on monetary policy, he is likely to nominate a more hawkish Chairman of the Federal  Reserve. Furthermore, he could also nominate more hawkish governors to the Federal Open Market Committee (FOMC). Not reappointing Yellen could create concerns that the Federal Reserve is no longer independent from Washington.

In contrast, it seems fair to argue that Clinton would, most likely, have re­appointed Yellen as the Chairman of the Federal Reserve in 2018, when her current term expires.

Trump offers a major shift in foreign policy, and will certainly tighten immigration  controls

 According to a wide variety of Trump’s statements, US foreign policy could see a  significant shift, creating a huge amount of political uncertainty around the world. There   are a number of key shifts in foreign policy that could manifest over the coming years. These include an escalation of rhetoric towards China and increasing geopolitical   pressure on North Korea (Trump has stated that China is the main enemy and not   Russia). NATO members could be asked to contribute more to NATO if their contributions are below the 2% of GDP threshold. This could create possible frictions within NATO, at a time when Russia is flexing its military strength. Trump may also look to improve dialogue with Russia and strengthen economic ties with Cuba. He might also try to play a negotiator role in the Israeli/Palestinian deal while avoiding taking sides. More broadly in the Middle­East, he could encourage the US military to retreat from active rebel training,  and look to act as a negotiator in the Syrian conflict, while letting Russia do the ground  work. Lastly, one could expect more sanctions on Iran, but not necessarily more support of Israel.

In terms of immigration, Trump has argued, fairly forcefully, for a much more invasive approach to immigration, proposing the careful screening of each individual entering the country and the extreme vetting of immigrants from troubled parts of the world. In addition, he wants the temporary suspension of immigration entirely from regions where safe and adequate screening cannot occur.

In opposition, Clinton did not propose any major shift in US foreign policy, with China remaining a key strategic trade partner and Russia continuing to attract sanctions. She did highlight the need to reform immigration controls. In particular, she argued that immigration enforcement must be humane, targeted and effective.

Immigrants account for nearly 17% of the US total labour force, while Mexican immigrants account for 28% of total foreign born population. Many immigrants to the US end up working in manufacturing, transportation, construction and home services. In general, immigration leads to higher potential GDP growth as the labour force grows, more investments and a more efficient economy in terms of job matching.

Implications for South Africa are somewhat negative

 The United States is one of South Africa’s largest trade partners (both in terms of imports and exports), and Trump made it clear in his campaign that he will look to review existing as well as proposed foreign trade agreements. The economic implications are potentially far ­reaching and could ultimately undermine South Africa’s ability to export to the United States. In particular, the Trump presidency could also lead to a review of the African Growth and Opportunity Act  (Agoa).

In terms of the direct foreign aid that South Africa receives form the United States; Trumps’ victory is likely to create some anxiety and uncertainty. According to the US  Global Development Policy, South Africa continues to be an important strategic partner of the United States receiving around $269 million in foreign aid from the United States each year. While Obama and Clinton have generally been sympathetic to Africa, this approach could be reviewed by the new US administration.

It is also worthwhile to note that, on average, US economic growth under a Democratic president has been significantly higher than under a Republican president. An analysis of US GDP growth since Harry Truman was elected president in 1945 shows that the US economy has grown at an average of 4.1% under Democratic leadership, compared with 2.5% under Republican leadership. Part of this difference in growth performance relates to use of government debt to bolster economic activity. Unfortunately, Trump’s victory will lead to heightened policy uncertainty and possibly a “wait­and­see” approach by US companies when contemplating additional fixed investment spending. Presumably, the contentious issue of the US Debt Ceiling can now be much better managed. In the recent past, US Debt Ceiling standstills have been highly disruptive to financial markets and economic performance.

Looking at the performance of global financial markets in recent days, it is clear that most equity markets initially rallied on the growing expectation that Clinton would become the next US president. Those gains were then reversed when it became clear that Trump would win. This largely reflects a “heightened uncertainty” trade, rather than a fundamental change in the economic outlook of the US.

Bond yields moved higher ahead of the election due to a growing expectation that the Federal Reserve will raise interest rates in December and that consumer inflation is showing signs of moving higher. However, the election of Trump has reduced the likelihood that the Federal Reserve will raise interest rates in December and consequently bond yields have compressed modestly.

The Presidential election has also impacted currency markets. In particular, the dollar has weakened somewhat along with a range of emerging market currencies, while the so­  called “safe­haven currencies” have benefited including the Euro and Swiss Franc.

Overall, though, it will take time for the markets to fully digest the impact of a Trump victory and to understand whether or not Trump’s extreme rhetoric will translate into actual economic and political policy or whether the institutional strength of the US will take the   best of Trump’s suggestions in order to meaningfully lift economic growth.

We recognise that we live in a world that is increasingly uncertain and understanding the connections leading to the volatility is crucial. Managing investments in this complex, connected world depends on being able to see and understand the bigger, interconnected picture.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

South Africans urged to use driver assistance services this silly season

Good day,

South Africa is ranked as one of the most dangerous countries in the world when it comes to road accidents, with 25 related deaths occurring per 100 000 people annually, according to the World Health Organisation’s Global Status Report for 2015. In addition 58% of road fatalities (58%) can be attributed to drunk driving. These alarming statistics highlight the important role driver assistance services play in saving lives, especially over the festive period.

This is according to Helen Szemerei, Chief Commercial Officer at Europ Assistance South Africa who says during the holiday season socialising events often involve the intake of alcohol. “Pair this with the increased volume of cars on the road due to holiday travellers and the likelihood of accidents occurring increases significantly, both during the lead up to and in the actual holiday season.”

She urges South Africans to practice responsible behaviour and make use of driver assistance services to avoid driving under the influence of alcohol. “As we are approaching the ‘silly season’ where year-end functions, Christmas parties and general get-togethers are more frequent – more people need to ensure that they have a Take Me Home service in place.”

According to Szemerei, it is positive to note that since stricter measures have been introduced by authorities to increase awareness around the risks associated with drunk driving, more people are opting to use driver assistance services. “These services provide motorists with the opportunity to be driven home in their own vehicle by a pre-approved driver.”

She says the benefits of having driver assistance in place includes personal safety and the significantly reduced risk of being involved in an accident due to driving under the influence of alcohol. “If a drunk driving accident occurs it does not only affect the person who caused the collision, but often innocent lives are affected too.”

“Most motor insurance companies could also reject an insurance claim as insurance policies do not cover drunk driving. Another risk associated with drunk driving is the major possibility of imprisonment and a conviction – as driving under the influence is against the law,” explains Szemerei.

It is important that people find out whether or not they have this service readily available to them through existing service providers, as most insurers or banks offer these services to their clients. She advises motorists to ascertain exactly how many times they can use the driver assistance service on a yearly basis to plan ahead for the upcoming festive season. “Those who do not have this in place through their product and service providers are also urged to ensure that they know how to get access to driver assistance for the end-of-year season.”

There is a drastic increase in the number of requests for these assisted driving services and it is encouraging to see this behavioural change in South African citizens. However, the statistics show that we still have a long way to go to eliminate drinking and driving on our roads.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

The future of crime

Good day,

We lock our doors at night and put alarm systems on our cars in an effort to protect our assets from criminal activity. While this was sufficient in the past, we need to ask what we are doing to protect our information from a new breed of criminal, one which is not seen.

Cyber crime has become a major issue globally. It is been reported that behind Russia and China, South Africa had the largest number of cyber-crime victims worldwide in 2015. Further – depending on which sources you believe – it is estimated that South Africa loses between R2 billion and R5 billion a year to cyber-crime alone.

The seriousness of the problem

Just how serious is the cyber-crime problem in South Africa? According to the Hawks, it is very serious.

Speaking at the recently held Cyber-Crime Conference, Captain Dudu Simelane – Cyber/Fraud and Anti-Corruption Investigator at the Hawks – said that we need to remain vigilant in the face of attacks. Most of these attacks come from what the Hawks refer to as High Technology Crimes.

“With High Technology Crime, we are referring to many diverse criminal activities such as hacking, digital child pornography, intellectual property theft, online gambling and online fraud. This has created jurisdictional problems; in some cases it is now very difficult to determine who has the authority to investigate these crimes,” said Captain Simelane.

She added that gaining a better understanding of the problem and the need to develop a strong response is very important. Working together as stakeholders is crucial since investigators are still not well equipped with resources and knowledge of how to adequately deal with these crimes.

The pressure on law enforcement

The escalating cases of these crimes are presenting a problem for law enforcement personnel because of the need for training and equipment. The national cyber or electronic crime unit based in Pretoria is the only office doing this kind of investigation for the whole country.

According to Simelane, some police stations do not even know that there is such a unit within the Hawks, so these cases do not get the necessary attention and are not handled properly.

A culture of crime

The National Police Commissioner recently released the 2015 crime statistics which showed that there were 69 917 cases of commercial crime committed in 2015. The majority of this is fraud which is committed by organised crime syndicates who are highly educated and very resourceful.

“Organised criminal organizations operate at both the micro and macro economic levels. Most financial crimes are more organised because, usually they operate as formal organizations recruiting staff members from inside companies and organizations,” said Captain Simelane.

She added that these examples make it clear that financial investigations can be a successful investigation method.

Digging deeper

Now that we are aware of the nature of the threat and the organised nature of the companies that carry out these attacks, we need to know which are the sectors that are most affected by this type of crime.

Also speaking at the cyber crime conference, Elsa Jordaan, a Director at legal firm Norton Rose Fulbright, reported that according to the NetDiligence 2015 Cyber Claims Study, the majority of claims affected smaller organisations. Sectors that were the hardest hit include healthcare, financial and retail.

Hackers most frequent cause of loss accounting for 31% of claims. Malware and viruses came in second at 14% of claims while staff mistakes and rogue employees tied at third with 11% of claims.

According to the NetDiligence 2015 Cyber Claims Study, the average amount of records lost in the industry as a result of cyber-crime during the period of 2012 to 2015 is 3,2 million records. The average cost per record lost amounted to $964,31.

Are we pushing back?

We are all aware of the threat of cyber crime and have come in contact with it, either as a victim or as a person receiving a suspicious email or text, at some point. The question is, are we sitting back waiting to be another statistic? Is there work being done, no matter how difficult it is, to bring criminals to book?

Michael Salant, Head of Legal at Southern Cross Risk Management, reported at the conference that through international cooperation, 244 cases have been finalised which have resulted in 232 convictions. This is a conviction rate of 95.1% against a 74% target, which is a 16% improvement from previous years. This has all been achieved due to a special focus placed on the skills development of prosecutors. It remains our responsibility to remain vigilant and to report any suspicious cases of cyber activity. Through silence, we become victims.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Saving vs investing: why they are two very different things

Good day,

South Africans are among the world’s worst savers. Globally, savings are measured as a percentage of GDP in order to determine the health of a nation’s savings culture. Including pension contributions and all forms of investments, South Africans save a pretty unhealthy 15,4% of our GDP . By comparison, Brazil, for instance, saves around 25%; India 30%; and China more than 50%.

Household savings are even more bleak : looking back as far as 1960, we see that while our high was an impressive 23,8% (Q2, 1972), our low was a toe-clenching -2,7% (Q4, 2013). We’ve improved marginally since then: but we are still at a negative figure of -0,8%. In other words, instead of a slow building of wealth, we’re getting poorer.

We have multiple explanations for this, of course: we don’t earn enough, or upwards inflationary pressure has made savings a pipe dream, or we’ll never be able to afford to retire anyway so we might as well enjoy life now. However Head of Absa’s Fund Managers Sylvester Kgatla is firm that while these might be valid they are not good excuses. “Saving is not necessarily related to income,” he says. “It’s a behavioural issue. In most cases it’s a decision that one makes.”

The result of not saving is constant financial stress. The result of good savings behaviour is the comfort that comes from the growth of wealth. All of us know which we’d prefer. But how to go about it?

We need to save, and we need to invest; and we need to know the difference between the two, and work them both to our own best advantage.

The difference comes down to two things: time frames, and an outcome that beats inflation:

What are savings?

Savings tend to be short-term, up to 24 months; usually put into a low-risk product like a fixed-deposit or call account held at a bank, explains Kgatla. More sophisticated investors might go for low-risk market-related products such as money market unit trusts, interest-bearing unit trusts, money market funds, income funds or Exchange-traded funds.

We tend to save for a specific goal, such as the December holidays, or a car or home deposit; or to have a slush fund for a rainy day. A slush fund is invaluable. For instance, imagine you have your eye on a new desk for your home office, which costs R6 500. Paying cash for it is easy: the ticket price is the price you pay. But if you don’t have the cash, and instead choose to buy it on terms, this is an example of what you might pay:

36 months x R315/month = R11 340.

It’s that kind of thing – paying around 40% more for things – that keeps us in the debt cycle. Far better to save up for it.

…and what is an investment?

The primary criterion is that real return must beat inflation. Although time is a factor, it’s really the equation of risk x time that qualifies money saved as an investment.

Take, for instance, money invested in a call account for five years – a very safe savings vehicle, which would tend to offer what seems a generous interest rate. However, depending on inflation over those five years, and the costs associated with the product, you may actually lose money over the period as the real return is likely to be negative, meaning that the income or growth from the investment was less than the rate of inflation over the period.

While definitions vary, for purposes of discussion Kgatla tends to define a medium-term investment as one which would have a two- to five-year life; and a long-term investment as one which would exceed five years. Sophisticated – and confident – investors might prefer to self-manage their investments, using share portfolios and other growth assets such as or commercial or residential properties. For the rest of us who trust the experts more than our own knowledge or attention to the market, “unit trusts and exchange-traded funds (ETFs) provide highly effective ways of accessing the market, achieving diversity and getting the benefit of blue-chip investments that might otherwise be out of reach”, says Kgatla.

The central tension around investment is that there is a correlation between risk and return. In order to be in the running to achieve an inflation-beating return, you inevitably will need to invest in instruments that also carry some level of risk. A balance needs to be achieved between the risk for which you have an appetite, and the risk you need to take in order to achieve your investment goals.

“Most of us are risk-averse,” says Kgatla. “So this is what investors need to focus on: if we discover that there is a gap between our present level of investment and our expectations for the outcomes, we have two options: to increase contributions, which for many people is out of reach; or to increase risk exposure.”

The best thing any of us could do is to stick to our financial plan and meet on at least an annual basis with a trusted financial advisor to get a clear picture of where we are, where we are going, and whether the roadmap between the two is well-drawn.

Feeling the pinch is no excuse: It’s not how much you earn, it’s how you spend, and how you save, that is the determinant of wealth.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Tax revolt on the cards?

Good day,

South Africans have been through a lot and still go through a lot on a daily basis when it comes to the appropriation of tax payers money. Whether it be Nkandla or the e-tolling system, South Africans generally feel that there is no fair indication that their taxes are used in the correct manner. The number of service delivery protests in the country is an indication of this.

Tax season closes at the end of November, and we have once again been urged by the South African Revenue Services to be open and honest when it comes to filing our taxes. While there shouldn’t be a need for this reminder, we can see it as government’s duty of reminding us that Big Brother is watching.

The key role player

At the recent Fiduciary Institute of Southern Africa Conference, Judge Bernard Ngoepe – the Tax Ombudsman – said that ethics is as essential in tax collection as it is in everyday life as ethics is central to everything that we do. “The country, and the whole world, turns upon good ethics,” said Judge Ngoepe.

The fact of the matter is that government wants to extract the greatest amount of tax revenue that it can within legal limits, and the public has a civil duty to pay what it owes in the form of taxes.

But how can we achieve this? We know that only 5% of the population is responsible for bearing the tax burden of the whole country, and government is not performing as it should be when it comes to the collection of corporate taxes. So how does government go about this important task?

Entering the mine field

It seems funny to me that Judge Ngoepe had to point out that the public needs to be motivated to pay taxes, you will never find this in rule bound countries such as Germany, Switzerland and Sweden where there is no question that taxes need to be paid. However, Ngoepe made this point for a reason.

The public needs to be motivated because, as Judge Ngoepe points out, there is a woeful amount of unethical behaviour in the industry when it comes to the issue of taxes.  This is both true for the public and for companies.

“While there is a duty imposed upon the public and companies to be open and honest with regards to tax issues, there is also a greater responsibility on higher powers to appropriate taxes in the correct manner. There needs to be fair and equitable treatment across the value chain. This is very important,” said Judge Ngoepe.

First strike: speaking frankly

During his time as the Judge President of the North Gauteng High Court and as an Acting Judge in the Constitutional Court, Judge Ngoepe has had to deal with his fair share of cases where fraud/misappropriation of funds was a central theme. It is no wonder that he has very strong views on this topic.

“It is no surprise that the more corrupt a government is, the fewer taxes it will collect. This is a sure fire recipe for disaster. If the public gets good services, they won’t mind paying taxes. That is why ethics is vitally important,” said Judge Ngoepe.

The pushback

It is no surprise that where there is a lack of ethical behaviour, the people will get disgruntled. According to Ngoepe, this is why we are seeing issues such as the Fees Must Fall campaign and the spate of service delivery protests.

There is also another side to the problem, the side of the internal conflict within each of us. Judge Ngoepe says that people want to pay taxes, but will not pay if the money is not used properly, if there is corruption and if the tax revenue will be funding an institution which is not doing its job properly.

There have been a few rumours that the country is facing a possible tax revolt. While this is an extreme situation, and Judge Ngoepe agrees that this is an extreme situation, he pointed out that one foot in the wrong direction will put government on the slippery slope towards this situation. “it may take a long time for this situation to arise, but we need to take care now to make sure that it doesn’t,” said Judge Ngoepe.

Judge Ngoepe ended off by saying that it is not merely a moral obligation to pay taxes, but also a legal one. He added that we need to sit with our feet towards the fire. Civil society needs to stand up and articulate what is foremost on our minds: what are our taxes being used for.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Are you saving enough for your child’s future?

Good day,

Saving for your children’s future is a financial gift every parent would like to provide, especially if it can shape their lives in a meaningful way.

According to Hartley at 10X Investments, many South African parents place significant importance on ensuring that their children receive a good education. “The challenge however, is that all too often, parents have simply not saved up enough to be able to comfortably fund their children’s tertiary studies. To prevent this from happening, parents should prioritise long-term financial savings plans that will enable them to send their children to a reputable tertiary institution.”

Hartley provides some saving tips that can help you prepare for your child’s future financially:

Know your goal

Before you consider saving for anything, set a goal. Knowing what you’re saving for not only makes the task tangible, but automatically gives greater meaning to your saving – for example saving for your child’s tertiary education.

When you set your goal, it should also be financially realistic. Luckily, if you’re looking to start saving for your child’s education early, you should be able to keep your monthly contributions relatively low and avoid a heavy financial burden later in life. The magic of compound interest will allow you to put away a small amount each month and still be able to afford the yearly tuition fees.

For example: A student starting a BA degree at the University of Cape Town would have to pay R46, 000 in tuition per year, for at least 3 years. An extra year could be added on for post-graduate studies.

Taking the example further: a forward-thinking couple, expecting their child to be born early in 2017, might want to save for their child’s university degree 18 years on. Assuming fees go up around 10% each year (inflation plus 4% pa), they need to save R1, 100 a month in a High Equity unit trust, with 1% per annum in fees, for all 18 years to have saved enough money to cover four years of tuition.

This total equates to R400, 000 in today’s money, without the effects of inflation, which is a serious sum of money.

Use the tools on offer

Luckily we live in an age where you are spoilt for choice when it comes to choosing how you want to save. There are shorter-term saving options (less than five years) like fixed deposits, money market accounts and 32-day accounts. All these short-term savings vehicles will help you save without exposing you to the potential volatility of the market. However, keeping your money in these “safer” options for a long period of time means you barely keep up with inflation.

If you’re looking to save long-term, maybe 15-20 years for your child’s tuition costs, then you need your money to do more than just keep up with inflation. This means investing in equities on the stock market as a reliable way to create long-term wealth.

This might sound like a “riskier” strategy but for the long-term investor, a high equity portfolio actually presents less risk than a low equity portfolio. Research shows for every five-year period since 1900, a high equity fund has the same risk factor as a low equity fund, but also offers the possibility of earning almost double the return.

This is where a product like a unit trust becomes viable. Buying stocks and shares yourself is often too expensive and complicated, but with a unit trust you get the benefit of owning shares that you might not have access to.

If you’re looking to invest for a long period, consider choosing a unit trust that has a low fee structure. Fees can eat away at your returns, so picking a low cost option will be beneficial in the long run. Index tracking unit trusts are often the most affordable as they remove cumbersome management costs and performance fees. They are also proving to be a more reliable investment as only 1 in 5 active managers beats the average market return.

Stay calm and do nothing

Having decided to set up your unit trust, with your monthly contributions invested each month, you can sit back and relax. All you need to do now is let your investment grow with time – and don’t touch it.

Unfortunately, that’s easier said than done. Emergencies happen and you might have no choice but to dip into these investments. One of the advantages of a unit trust is the access you have to your money, but it also increases the temptation to do so.

The way to get around this is to have a contingency amount ‘banked’. Look at your monthly salary and try to put away enough money each month until you have between three and six months’ worth of salary saved. Open a separate account that you can access easily in the case of an emergency, and store that money for the proverbial rainy day. Now that you have that buffer, you shouldn’t need to dip into your long-term investment.

“In the end, long-term savings are much like raising a child. They start off small and quite vulnerable to the outside world. However, with time, patience and quite a bit of perseverance your savings should mature into something you can be proud of,” concludes Hartley.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Don’t let you finances be your downfall

Good day,

With tomorrow being National Women’s Day, our NewsBrief today is specifically aimed at the ladies.

Women play many different roles throughout their lives and have many unique needs compared to men, this includes financial needs. As a woman you need a unique financial plan that is specifically suited to you and much like the perfect pair of shoes, the perfect financial plan will have you standing tall and confident.

A healthy lifestyle has many benefits, from an improved mood to combatting diseases, not to mention potentially extending your lifespan and saving you loads of money on medical bills and out-of-pocket expenses. The cost of being a woman is significantly higher than being a man, especially when we consider medical costs. Understanding the different ways to support your health from a financial point of view becomes more relevant.

According to a recent report by the World Health Organisation, women face a range of health challenges that include growing risks for chronic non-communicable diseases as they age. The 2015 Claim Statistics Report by Liberty shows that 28.5% of claims paid to women were for cancer, and additional claims were made for cardiovascular, respiratory and musculoskeletal disorders.

“The cost of quality healthcare has increased significantly in the recent years and making provision for healthcare insurance is an essential part of your financial planning,” says Dr Philippa Peil, Chief Medical Officer, Liberty.

Whether you are a career woman or stay at home mom, critical illness cover is vital for any woman. . Often stay at home moms don’t realise the impact that being diagnosed with a critical illness could have on their family, especially from a financial perspective. Who would step into your shoes if you were not able to do the school run, the homework and manage the day to day activities and your home? Recruiting someone to assist can relieve the burden, but it comes at a price. One that needs to be paid on top of increased medical bills. Knowing that you have cover that will ease the financial implications of a critical illness could go a long way to peace of mind in such circumstances.

Studies have shown that married people accumulate about four times more savings and assets than single people and that divorced people have 77% less assets than singles. These stats tell us that divorce can clearly take a toll on your finances and that you need to be prepared for this. When you get married, consult your financial adviser and ensure that both names are on all assets so that in the case of a divorce, you can get at least half of these assets. Geraldine Macpherson, Legal Marketing Specialist at Liberty, advises that “Involve your financial adviser to ensure that the fund is correctly named in the divorce order as well as the percentage of the fund (referred to as pension interest) that you are entitled to. Not wording your divorce order correctly could result in costly delays”.

Financial planning is vital in securing you and your family’s future. Through consultation with an accredited financial adviser you can ensure that you are ready for every possible financial situation, from loss of income, to death of a partner, getting a sudden windfall, and everything in between. Having a solid financial plan allows you to see the bigger picture for you and your family and make decisions in both the short and long-term.

Women face many different factors affecting their financial wellbeing. Without a solid financial plan in place, the path to financial security will be very bumpy. It’s extremely important to ensure that you don’t follow anyone else’s plan for financial success but your own unique plan.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Currency weakness driving vehicle prices up

Good day,

TransUnion’s Vehicle Pricing Index for the second quarter of 2016 also reveals drop in new vehicle financing deals which are at their lowest since May 2009.

The South African motoring industry faced a highly challenging second quarter this year, according to the latest TransUnion SA Vehicle Pricing Index (VPI) for new and used vehicle sales. The Q2 2016 VPI found that the rate of new vehicle pricing increased by 8.4% while used vehicle prices rose by 2.7%.

The drastic price surge of new vehicles can be attributed to a delayed reaction to the rand weakness and ongoing poor economic conditions, according to Derick de Vries, CEO: Auto Information Solutions at TransUnion.

“The combined effect of the negative GDP growth rate, the increase in interest rates, higher inflation, the increase in unemployment, lower consumer confidence and economic instability have all played a role in the increase of new and used vehicle pricing,” said de Vries. “These combined factors are slowing down sales volumes substantially. The demand for used vehicles is also increasing considering the affordability challenges in the new vehicle market”.

The TransUnion SA Vehicle Pricing Index (VPI) for new and used vehicle prices increased substantially to 8.4% and 2.7% in Q2 2016 from 6.6% and 2.2% in Q1 2016 respectively. The index measures the relationship between the increase in vehicle pricing for new and used vehicles from a basket of passenger vehicles which incorporates 15 top volume manufacturers. Vehicle sales data collated from across the industry was used to create the index.

“The index indicates that consumers are enduring substantial increases in the basket of high volume passenger vehicles and this will slow the new and used car market,” said de Vries. “Consumers tend to look for cheaper cars or hold on to their existing vehicles for longer than normal.” According to NAAMSA, new car sales have dropped 22% year-to-date.

TransUnion data also show that there have been fewer deals financed in Q2 this year compared to last year. “TransUnion’s financial registrations data indicates a drop of around 48% and 24% on new and used financed deals respectively in Q2 2016 compared to Q2 2015,” said de Vries. “The drop in new vehicle financial deals is the lowest it’s been since May 2009, due to the highest percentage change in the VPI since 2009 Q4.”

The percentage of new and used cars being financed below R200 000 remained constant from the last quarter, indicating that the trend will follow the next quarter. “Consumers are either financing cheaper new vehicles or more expensive used vehicles. This is shown by the increase in used car loans which has increased to R189 000 from R136 000. There is therefore a shifting emphasis on the value proposition that consumers place on their vehicles as they look for the maximum amount of value from a car,” said de Vries.

Data from vehicle finance market leader WesBank echoes this. In June the average deal values for both new and used cars reached record levels. Based on the average financed amount consumers spent 10.4% more, on average. Amid slow growth and high new car price inflation, the average new car deal grew 11.9%.

“Pricing in the used market is being driven by supply-demand market dynamics as more buyers shift away from the new car market,” said Rudolf Mahoney, Head of Brand and Communication at WesBank . “We predict that the market will start shifting back to new within the next 12 – 18 months, as the supply of quality used models dries up. Buyers re-entering the market are also more likely to shop in lower segments – again, affected by affordability.”

“A depressed car market highlights the need for manufacturers to slow down production or cut margins to create more demand. Dealerships will need to implement targeted marketing strategies to match supply to demand and implement more incentives,” explained de Vries.

In terms of volume of sales, Toyota, VW, Ford and BMW are the only manufacturers which appear in the top 5 for both new and used passenger car volumes from all sectors.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Taking action to make ends meet

Good day,

South African households are increasingly cutting back on living expenses as they grapple with their stressful financial positions. This is one of the findings from the 2016 Old Mutual Savings & Investment Monitor, which tracks the shifts in the financial attitudes and behaviour of South Africa’s working metropolitan population.

“The findings also reveal that confidence in the South African economy has plummeted to an all-time low of 31% – a considerable decrease from 55% in 2015 – with two thirds of respondents describing their level of financial stress as overwhelming or high,” says Lynette Nicholson, research manager at Old Mutual.

Nicholson says that these findings reflect the dire state of the broader economy, with GDP growth forecasts now around 0.5% for 2016.

Relying on debt

Nicholson points out that this widespread sense of financial distress is further highlighted by the number of individuals relying on loans, especially from friends and family, with a noticeable increase in the proportion of household income spent on servicing debt – jumping from 12% in 2015 to 16% in 2016.

“The 2016 research shows a spike in personal loans across all income groups, with the number of loans taken from financial institutions (21%), friends or relatives (15%) and micro lenders (8%) all on the increase since 2015 when levels were 16%, 10% and 4% respectively.”

Further worries

Another worrying indicator is the finding that fewer homeowners are paying additional lump sums into their bonds.

“Individuals are instead sticking to the minimum payments each month, essentially maximising their future interest owed. When it comes to servicing credit card debt, only 13% of South Africans pay their credit card off in full at the end of the month, with an increasing number of card holders only paying the minimum instalments,” said Nicholson.

The messages of savings past

With all of these troubling indicators in the market, Rian le Roux – Chief Economist at Old Mutual – says that it is worthwhile to revisit some past messages regarding the savings situation in the country.

“South Africa, as a nation, saves too little. This will eventually cause pain somewhere, and this pain is likely to be severe. It leads to weak economic growth which will in turn force companies to externalise their savings and look for investment in other markets that are seen as key growth areas,” says Le Roux. Further, South Africa’s poor saving rate is pressurising government’s fiscal situation and it is worsening the country’s socio-economic unrest.

Rebuilding the bridge

Le Roux adds that while there are a lot of challenges in the South African market that are beyond our control, there are things that we can do that will make a meaningful, positive difference. Failing to make the correct policy interventions will make matters worse, making the wrong policy interventions will risk a full blown crisis.

“What needs to be done? There needs to be major strides made towards addressing the deep distrust that exists between government, labour and business. Government needs to create greater policy certainty, both on a macro and sectorial level. Additionally, the policy makers need to speed up infrastructure investment and aggressively address underperforming public institutions. Government needs to finish the power stations!” exclaimed Le Roux.

Take control

While there are many in the country who simply cannot save, for various reasons, there are people in the country who can save. Le Roux says that these people need to take control of their future.

People should start saving as early as possible when it comes to investments; time and discipline are investor’s best friends.  If one is saving for children, it should be done as early as from the birth of the child and it should be contractual with annual increases.

“The value of the investment is the only variable that an investor can potentially control. For most people, this is very hard as it requires spending discipline. Despite this, investors need to draw up a budget and stick to it,” says Le Roux.

He adds that children learn spending habits from their parents. Parents need to teach their children about the advantages of compounded returns and the value of proper budgeting.

This comes down to the important need to increase financial education in the country, a need that associations and product providers have been promoting for a long time. Above all of the measures discussed above perhaps the greatest step forward to include financial education in school curriculums. Benjamin Franklin once said that an investment in knowledge always pays the best interest. How appropriate are these words in South Africa today.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Funeral Cover Explained

Good day,

The response last week after our NewsBrief on funeral cover (see below) was overwhelming. I always urge clients to add funeral cover which includes cover for the spouse and children.

As I received quite a few queries on this, I will in short explain the benefit. At any stage (new policy inception or added to an existing policy) can the benefit be added.

It will cover the principal life assured on the policy, as well as his/her spouse, and any children (the definition of a child includes a stillborn baby of 28 weeks and older, and will end on the earliest of the Policy Anniversary preceding the child’s 18^th birthday or the marriage of the child). In the event of death before the minor attains the age of six years, the amount is limited to R10 000 (or any such other amount as determined by the Long-term Insurance Act, 1998); and in the event of death where the minor is six years or older the amount is limited to R30 000 (or any such other amount as determined by the Long-term Insurance Act, 1998).

The funeral cover will cease when the policy is cancelled or terminated or after the payment of five Funeral Benefit claims in respect of any one policy. If the benefit is added after the start date of the policy, no claim will be accepted within 12 months of the commencement of the benefit unless death is as a result of an accident or other unnatural cause.

The benefit can be added for as little as R50 per month, dependent on the sum assured and principal life’s age, income and qualifications.

Our previous NewsBrief put emphasis on the exorbitant costs of funerals. Make sure this benefit is added on your policy and always take cover where underwriting is done upfront.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

South Africans could pay more to bury loved ones

Good day,

With food prices continuing to increase, rising fuel prices and high electricity tariffs – South Africans could see the average cost of burying a loved one rising significantly in the short-term.

Lee Bromfield, CEO of FNB Life says, on average, the cost of a burial is estimated to range between R30 000 and R40 000, but cautions that along with the rising cost of living, burial expenses could increase substantially.

“The average cost of a burial takes into account standard expenses such as buying a coffin, catering, hiring a tent, buying a headstone, fuel or travel expenses for the family and the amount of electricity consumed when preparing for a funeral. Other expenses that are not always considered include the printing of a programme or an obituary, and even the airtime used to stay in touch with key suppliers such as undertakers or caters.”

If unplanned for, all these expenses could easily overwhelm families and negatively impact the hopes of providing a decent burial. While some families may be fortunate enough to have members who could contribute towards funeral expenses, such goodwill cannot be guaranteed, especially in these tough economic times.

Bromfield says there are a number of options that people should consider, to cope with high funeral expenses:

• Consider taking up funeral cover for your loved ones

  • Review your funeral cover to align with your family needs

  • Be disciplined about paying your monthly premiums

  • Ensure that your cover provides great value at a relative price

  • Select a trustworthy provider to avoid being let down when it’s time to claim

“In most cases, people tend to ignore the responsibility of taking up a funeral plan until they are confronted with a situation that requires it. You’ll be very surprised how many people find themselves in excessive debt simply because they neglected to make the necessary arrangements to provide a decent burial for their loved-ones.

South Africans are fortunate because funeral plans are easily accessible but consumers still need to exercise caution because of the vast amount of unscrupulous providers in the market. This is why your decision to take up funeral cover is as important as the provider you chose to be insured with.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Get a head start in life with the right risk cover

Good day,

Financial planning is a creative process. A successful financial plan relies on team work and requires both the adviser and the client to form a partnership for each party to understand one another’s role in the process. More importantly, a financial adviser needs to look beyond being a purveyor of products and endeavour to understand the unique needs of his or her clients.

Financial planning, especially when adopted early in a client’s working life makes a massive difference to the level of wealth and security that clients will enjoy. With regards to life, critical illness, income protection and disability cover, the best time to consult with a financial adviser is when a client starts their first full-time job.

What are the advantages of taking out a policy early on in life?

Critical illness cover

Statistics tell us that people are commonly getting Dementia 10 years earlier than they were two decades ago. In fact, people are more and more diagnosed with the disease in their late 40s compared with their early 60s, two decades ago and the trend is continuing. Along with this, there is a steady increase in the number of claims for critical illnesses with specific reference to cancer which affects 100 000 people on an annual basis. During 2014, Momentum’s critical illness claim statistics clearly indicated that the average 30 year old has a 25 per cent chance of contracting a critical illness before the age of 65.

This is why it is crucial to secure comprehensive critical illness cover early on in life and quite frankly we are all at risk of contracting a critical illness at any time during our lifetimes. No one can with certainty assume that it will never happen to them. In fact, during 2015 cancer accounted for 34 per cent of all critical illness claims followed by claims for cardiovascular and nervous system related diseases.

Equally important is the fact that if a person has already being diagnosed with a critical illness before he or she opted for critical illness cover, they will not qualify for critical illness cover for that existing condition which is even more reason to opt for this as early as possible.

Last but certainly not least, a number of people are living with the misconception that a medical aid will cover all costs relating to a critical illness. Medical schemes generally cover in-hospital costs adequately but long-term expenses linked to critical illnesses, including any “new generation drugs” often have to be funded by the patient out of their own pocket. For example, the cost associated with advanced cancer treatments such as Immunotherapy, which basically uses the body’s own immune system to fight cancers, makes use of newly developed drugs that could easily cost in the region of $130,000 for a 12-week course, and some patients need more than one course of treatment.

Income protection and disability cover

With regards to protecting one’s ability to earn an income, statistics indicate that just over one in four of today’s 20 year olds will become disabled before they retire. Research also shows that there are approximately 12.4 million working South Africans and about 52 000 of these are likely to become permanently disabled in the next year. According to claim statistics, 25 per cent of all claims linked to disability were paid to the age group ranging from ? 30 to 40 years. In that same age band, during 2015, 36 per cent of claims were paid towards income protection.

Especially with regards to income protection and young lives, younger people simply have more to lose. Not only are they more prone to accidents and injuries that could leave them disabled for life, but they also face a much greater loss in terms of future income. An injury at a young age would inhibit a person’s entire future and therefore affect their income earning potential for the rest of their lives. This should provide ample motivation for young clients to include income protection and disability cover in their financial portfolio.

Also, young or old, should one instantly lose a regular stream of income, basic things like school fees and monthly groceries etc. will become unaffordable. Not to even mention the larger expenses including bond payments, car payments etc. Even though a spouse or partner might also earn a monthly salary, not all expenses can be covered by a single salary. Without the protection of one’s income in this instance, loss sets in immediately and the blow-back could last for many years to come.

Life cover

Although, in many instances, having life cover in place is not a priority for many young people, there are enormous advantages to securing this early on in life. In most cases, young clients’ life insurance premiums will be a lot less than older clients who apply for life insurance and may already have existing health conditions. This could be deemed more of a risk and will influence premiums.

Conclusion

With the understanding that each client has unique risk needs, critical illness, income, disability and life cover each has a different role to play in a client’s lifetime. Therefore, young or old, critical illness cover provides protection against the major financial loss of suffering a serious illness and offers more treatment choices. Income protection on the other hand secures an uninterrupted stream of income for a specific period of time. The cover can also provide a lump sum pay-out should a client become disabled and cannot continue to work. This could fund a number of unforeseen expenses linked to a disability for example adjusting one’s vehicle to accommodate a disability or structural changes to one’s house that will enable free movement.

Life cover also has an important role to play because it pays a benefit in the event of the insured life’s death that can help provide financial security to a client’s family if the worst were to happen.

Therefore, all of the mentioned benefits are designed to cover different needs linked to risk events in a client’s life. One benefit might feature more prominently than the other, depending on the need at the time.

With the one denominator across all these benefits being financial security to oneself and one’s family, it is never too early to secure comprehensive risk cover that will enable a client to make decisions based on preferences rather than affordability.

Have a great week!

Jacques

Is Brexit all bad for South Africa?

Good day,

After being a member for 43 years, the United Kingdom (UK) last week voted by 51.7% to 48.3% to leave the European Union (EU).

However, the Brexit vote has clearly drained risk appetite from global markets as it introduces a lot of uncertainty. As expected, the pound took the brunt of the pressure, falling to below US$1.35/£, the lowest level against the US dollar in more than 30 years. The safe-haven yen surged to ¥100 per US dollar, while the rand fell from R14.40 to as low as R15.40 against the US dollar. Equity markets in Asia closed sharply lower, while markets elsewhere opened deep in the red.

“The fundamental purposes of the European Union are to promote greater social, political and economic harmony among the nations of Western Europe. The EU reasons that nations whose economies are interdependent are less likely to engage in conflict. These goals are pursued through the unification of European markets under a single currency, the Euro, and through sets of legal standards to which all prospective and member nations, are held. Supranational institutions work with national governments to govern the implementation of these standards and help the EU to act as a unified body on the world stage.”

The effect of the ‘Brexit’ decision will be monumental, as we are currently seeing with Pound going into a tailspin. The most significant of these probably being that new trade deals will have to be negotiated.

Angela Merkel, the German Chancellor, had the following to say: “If Britain votes to leave the EU, it will no longer be able to benefit from the advantages of the European common market. And any negotiation will involve the 27 remaining EU members with someone who would then be a third party.”

Negotiations of such a magnitude will take considerable time. With the EU members being some of the UK’s biggest trading partners, this would definitely have a negative influence on their economic growth.

So how this will affect South Africa’s exports?

This factor is especially of interest for a country such as South Africa. As per the Department of International Relations and Cooperation, the UK is South Africa’s most important export market.

Currently all exported goods have to comply with the requirements set out by the EU. Normally these requirements are very strict, as to ensure that the quality of goods imported by the EU are of the highest possible standard.

These demanding requirements can sometimes have a demotivating effect on the South African export market. Consequently, we are not exporting as many goods, especially fresh fruit and vegetables, as we are able to or as we would like to, to countries such as the UK.

Due to the lengthy period of negotiations for new trade agreements it is however very likely that the UK will opt for less strict importation policies, thus giving South Africa the opportunity to increase its export market in the UK.

With the Pound being stronger than the Euro, export revenue would therefore be able to increase significantly. This could, therefore, be just what South Africa needs to stabilise our economy after the recent drought.

Have a great week!

Jacques

Treading fine line of modern terrorism

Good day,

In an age where we live with shifting political ideals and policies, we have to come to terms with the fact that we are living within a new reality when it comes to terrorism. The US, UK and Australia all recently released terrorism alerts for residents living in and travelling to South Africa. The Insurance Institute of Southern Africa (IISA) recently held a forum on terrorism and political violence where a number of industry professionals gave key insights into the times we are living in. When we look at the actions that lead to terrorism properly, we see a bit more truth about South Africa than we care to admit.

The local landscape

Since the release of the terror alerts all of the countries have revised their positions to travel advisories. When the alerts were released, we conjured images in our minds of incidents similar to 9/11 where public property was damaged. But the reality in South Africa is more personal in nature and is aimed at government.

We have, over the past few months, seen that South Africa does have an undercurrent of political violence that often flares up and rears its ugly head. Recent reports by the Department of Higher Education shows that costs of damage to property at universities nationwide during the Fees Must Fall Campaign had increased by more than R100 million, putting the overall cost since October 2015 at R459 million. More recently, service delivery protests in Vuwani and Hammanskraal turned extremely violent.

Thokozile Ntshiqa, Executive Manager: Stakeholder Management at Sasria, gave insight into how such events escalate into serious acts of violence.

A history of violence

Political violence can be seen as terrorism. Think of the actions of the Irish Republican Army during the 70s and the political violence experienced in South Africa during the 80s. Many people around the world saw it as terrorism but the perpetrators of the violence did so to achieve political reformation or emancipation from a system that they felt was inefficient or unjust.

If we think of South Africa’s recent socio political landscape, we see that we are facing a similar problem now. Think of the Fees Must Fall Campaign, the Vuwani and Hammanskraal protests. The people were pushing back against government because their voices opposing governments lack of services, or in the case of the Fees Must Fall Campaign governments stance on free education.

“South Africa can be seen as a hotbed for acts of political violence. Factors which breed this include social inequality, differing levels of governance within society, poverty and joblessness as well as a deteriorating economic outlook for the country,” said Ntshiqa.

Who pays the claim?

We also need to be aware that a fine line exists between politically motivated violence and acts of terror; and it is a line that is often blurred. This was the message presented by Piers Gregory, Global Product Head: Terrorism and Political Violence at Chubb.

There are also different questions that need to be asked when insurance policies react to cases of terrorism/political violence.

He pointed out that when it comes to riots and civil commotion; in practical terms, they can be both political and non-political in nature. So then which policy is responsible for a claim? Is it a Sasria policy (special risks) or is it a conventional policy? An example of this was recently experienced when the auditorium at the University of Johannesburg was burned down.

“Instances of revolution, rebellion and insurrection are conventionally covered under a standard war policy exclusion. However, this can often be an advanced form of civil commotion. Where does one draw the line?” he asked. One only needs to think of the Egypt revolution and Libyan Civil War of 2011 to find truth in this.

“The world has changed a lot in 15 years. Pre 9/11, terrorism extensions were included in property policies by insurers, but it was a very small offering which was offered by only five insurers. Post 9/11 the stand alone market has grown to about 50 insurers and continues to attract more capacity. Pre 9/11 a single peril was typically insured for $2 million; this has now increased to approximately $3 billion per peril,” said Gregory.

He added that global risks are increasing, which leads to an increased demand for products that cover these risks.

From hotbed to breeding ground

Combatting terrorism is becoming a tough task. Perpetrators of political violence are technologically connected and are using platforms such as Facebook and Whatsapp to mobilize combatants to areas of political significance and to areas where there is a small police presence. This was a feature of the Egyptian revolution where the government actually shut down the internet in certain areas in an effort to curtail such organisation.

Because of South Africa’s connectivity and the strength of our telecommunications infrastructure relative to other African countries, Ntshiqa pointed out that South Africa is being seen as a hotbed for terrorism.

While political violence is always regrettable and is never the answer, business owners need to be aware of the risks they face and that policies may not respond in the way that they expect. Underinsurance in this area could be a major issue.

Please don’t hesitate to contact me should you require any additional information on any of our NewsBriefs or if you need to discuss anything pertaining to your current portfolio.

Have a great week!

Jacques

Avoiding Junk Status

Good day,

The 2016 National Budget was presented against a backdrop of continued social unrest and the treats to downgrade South Africa to junk status. Both of these events have had a significant toll on the country in the past, and threaten to have a future impact if no resolution can be found.

With these events in mind, an under pressure Finance Minister Pravin Gordhan delivered what many regard as a surprising budget. But how was it received by economists?

The ace up our sleeves

One of the major acknowledgements by economists is that Gordhan made some significant promises in his speech, and his ability to deliver on these promises is what will determine the economic welfare of the country during the year.

“South Africa has seen significantly low growth, but so has the rest of the world,” reports Stanlib Chief Economist Kevin Lings. “However, developing markets sold the world a promise that going forward, they would immeasurably outstrip expected growth. This has not materialised since the global financial crisis.”

While we are considered a developing market, South Africans are generally not satisfied to be compared with the rest of the world and we expect a lot out of our leaders. But Lings says that it is worthwhile to compare our story with that of Brazil.

“Over the past eight years, Brazil has been seen as the poster child for developing market growth. Their economy was boosted by positive sentiment surrounding the 2014 FIFA World Cup and the 2016 Rio Olympics. Now they are in a recession and face corruption. Why? Because their government is viewed as anti-business,” says Lings.

During Gordhans speech, Brazil was downgraded to junk status. This could have been avoided if Brazil followed a simple formula.

“It’s not about what you do when you are downgraded. It’s how you react after a downgrade. South Africa was recently downgraded and we are implementing measures to avoid a further downgrade. Brazil did nothing.”

Corrective actions

Gordhan has not been short of advice on how he must go about saving the country. Many have called on him to slash the public sector wage bill as it is too high. Lings points out that the problem with that is that there is a cost involved in this process; this cost will be added on at the end of the process, which is working against the very goals that the public wants.

“There needs to be infrastructure investment. If we focus on fixed investment spending, we will create jobs and can decrease our spending on social protection. Without jobs, social protection will have to grow, and this will become problematic in years to come as we teeter on the edge of becoming a nanny state,” said Lings.

Taxes fill the coffers

Tax revenue collection has always been government’s main source of income. However, there have been recent concerns that South Africans are getting taxed to the limit and that something will eventually have to give. “There is legitimacy for South Africans to step back and ask what they are receiving for the tax that they are paying. The answer to this is currently they are receiving very little when one considers that they have to pay for their own security, own medical aids and own pensions,” says Lings.

As a result of this, Gordhan bit the bullet and didn’t increase personal income tax or VAT. Lesiba Mothata, Chief Economist at Investment Solutions, points out that this does not mean that government won’t collect tax revenue from other places.

Capital gains taxes have effectively been increased by three percentage points (from 14% to 16%) for individuals, four percentage points (from 19% to 22%) for companies while trusts will also see an increase.

In the real estate sector, transfer duty for home sales more than R10 million have been increased by two percentage points (from 11% to 13%). In addition to these, the fuel levy has been increased by 30 cents a litre.

There were significant rumours in the lead up to the budget that Gordhan would definitely increase VAT. However, this was never going to happen in an election year. “VAT is a bazooka,” says Independent Political Analyst JP Landman, “it needs to be used effectively and may be used in the future to fund the roll out of the National Health Insurance Programme. The Finance Minister is well aware of the effectiveness of VAT as a bargaining chip and will not use it to balance the budget. We have also seen the significant opposition to raising VAT, this opposition can never be underestimated.”

If Gordhan does what he has promised and decreases government spending, we can avoid junk status. However, this will be an uphill battle and will largely be driven by infrastructure investment which would create jobs.

Have a great week!

Jacques

Be proactive to avoid a downgrade warns S&P

Good day,

On 3 June, ratings agency S&P announced that it would not be changing its investment grade outlook for South Africa. This is a major boost for the country as we face tough economic challenges and disappointing GDP growth. But does this mean that we are out of the woods and that we can return to business as usual? With another ratings assessment looming towards the end of the year, economists are full of advice on how to toe the line.

Watch the blind spot

One thing that is certain is that government, and the public, cannot carry on with their everyday lives thinking that the rating agencies are not monitoring the market. While South Africa retrained its BBB+ rating for local denominated debt and BBB- rating for foreign denominated debt, S&P warned that the outlook for the market remains negative.

In a release to the media, Lesiba Mothata, Chief Economist at Investment Solutions, pointed out that in its assessment, S&P took note of the progress the country has made in turning around the local electricity supply situation where  there has been a hiatus on load shedding and none is scheduled for the winter months.

The ratings agency also noted the functionality of South Africa’s institutions and National Treasury’s commitment to maintaining low fiscal deficits and implementing sustainable debt management strategies.

South Africa’s renewable energy programme, which has demonstrated strong partnerships between government, labour and business, has made a positive contribution to the assessment on electricity supply.

Strong institutions – including the independent judiciary, the South African Reserve Bank and National Treasury (despite the political machinations amongst its leadership) – all remain world class and have solidified an investment-grade rating.

However, S&P warned that in its December review, given the weak growth profile for South Africa, it could downgrade South Africa  to sub-investment grade should the proposed policy measures fail to ignite growth. It has highlighted the need for legislative clarity in the mining sector and labour relations as key economic areas, which, if reformed, could make a positive contribution to growth.

Implications for investors

Mothata added that it must be noted that 90% of debt issued by National Treasury is in Rands. South Africa’s inclusion in the global bond benchmark, Citi WGBI, was based on the rating of local-currency denominated debt.

On this measure, South Africa is unlikely to be downgraded to junk status – it would take an Arab Spring-type event to induce such a rating. Although there could be volatility around a rating decision on the 10% of the debt issued in foreign currency, it would not be too dramatic.

“In general, we believe that the investment risk-reward ratio is currently skewed towards risk, so sound risk-management principles will serve investors well. We have seen good active asset managers positioning themselves more conservatively, with lower equity exposure – on those mandates that permit – as well as maximum offshore exposure. Within local equities, asset managers have favoured the rand hedge companies which derive their income from offshore sources,” said Mothata.

What can the Rand expect?

It is clear that any avoidance of a ratings downgrade is heavily dependent on economic growth and the reduction of fiscal debt. But with the growth outlook pinned at 0.6% for the year, we need to seriously ask what S&P means when it says that it needs to see examples of growth.

In a release to the media, Dr Adrian Saville, Chief Strategist at Citadel, points out that South Africa is a small, open economy. Export industries, including agriculture and resources, make up the economic bedrock, which makes the country reliant on the world economy.

“About a third of GDP is made up of imported goods and services, making South Africa vulnerable to imported inflation; about two-thirds of JSE earnings are influenced by currency conversion. Other economic elements, such as foreign capital and foreign tourism, highlight the importance of international exposure to the South African economy. As such, the economy is influenced by currency fluctuations and is vulnerable to sudden or sharp price moves away from fair value,” says Saville

Facing risk

Saville adds that this context helps underscore the point that all business face three types of risk, namely:

– Macroeconomic risk or country risk;

– Mesoeconomic risk or industry risk, which references elements such as technologies that transform the way in which companies do business; and

– Microeconomic risk or business risk, which refers to company-specific risk.

“Rather than being seduced by emotion which clouds judgement, it befits us to interrogate from an objective stance the status, stature and strength of South Africa’s primary business risk: the Rand. In short, while emotion and popular sentiment suggest the rand is a fractured currency, is this the case, or is the rand simply fragile, and in need of time – or some other catalyst – to allow the currency to recover?”

We can see Saville’s case, but need to question what this catalyst will be. Commodity demand is low and has never recovered from the hey-day’s when China was a major trading partner. Coupled with this is the drought South Africa is currently facing which means that agriculture won’t be a major catalyst.

For a long time, the South African economy has been described as a one-trick-pony that is too reliant on the mining sector for growth to be sustainable over the long term. Looking beyond political stability, government needs to find a new sector which will accelerate growth in the economy.

Have a great week!

Jacques

Your Midyear Financial Checkup

Good day,

It is hard to believe, but we are nearing the half-year mark already, and for many of us, it went really fast. But don’t let the time fly by without doing a half-year check-in on your personal finance goals.

Life events, taxes and market conditions can all dramatically affect your financial security. A review of your personal finances is a wise investment in your financial wellbeing. Think about your personal situation over the past six months. How has it changed? Has there been a marriage, a new baby, divorce, changes in wages, capital gain transactions, refinancing of a mortgage, or the sale or purchase of a home?

Here are 7 things to check on your mid-year to-do list:

1. 1. Review investing decisions. Make sure your mix of investments, in all of your accounts, fits your risk toleranceand not your emotions. Did you get a little overly enthusiastic with a particular fund or type of investment? Did you get cold feet when the volatility hit? It’s easy to let emotions guide your investing decisions. Instead, create an investment mix, or allocation, for each account based on your risk tolerance, expected length of time invested and financial goals.
2. Rebalance your portfolio. Even if you do have a well-planned mix of investments, midyear is a good time to see if the allocations are in line with what you originally set. Over time, fund performance can shift your portfolio as some funds may do better than others. Regular rebalancing helps keep your portfolio at the appropriate risk level.
3. Increase your savings plan contribution amount by a notch. A good way to reduce the impact of making regular contribution increases is to up the ante twice yearly – at the beginning of the year and again at midyear. You might tolerate larger savings contributions by hiking them gradually. Even a half-percentage or one-percentage point increase, if added regularly, will make a difference down the road.
4. Make sure your will is on order.  Don’t forget to consider establishing or altering your will and estate plan if there have been changes in your situation. Reviewing your insurance coverage now will also help you protect your assets. A disability or untimely death can cause financial hardship for your family.
5. Start saving for the holidays. Yes — already!  If you put money aside now, you’ll be better positioned to prevent a huge dent in your budget (or being tempted to dip into your retirement savings) during November and December.
6. 6. Speaking of budget … Reassess your budget. Compare your actual expenditures with the amount you had planned to spend each month. If the two don’t align, then either make changes to your budget or adjust your spending habits. It’s not too late to get on track for 2016.
7. Check in on your medical spendingand medical Savings Account, if you have one. Do you have a medical insurance deductible to meet, and if so, where do you stand? If you have a medical savings account, how much of that money have you used? Have you submitted all receipts for reimbursement?

Bottom line: Taking a midyear break to review your finances gives you a thoughtful opportunity to spot errors, adjust your budget and save on taxes. To request your mid-year portfolio review, contact me to set up a meeting.

Have a great week!

Jacques

Huge hike in petrol, diesel prices

Good day,

Tomorrow the pump price of petrol will rise by 52 cents a litre (c/l) for all grades, while diesel will increase by a whopping 76c/l.

The main reasons for the spike are the continued upward march of international petroleum prices and the weakening rand/US dollar exchange rate.

Last month, petrol 95 (both ULP & LRP) went up by 88c/l and 93 (both ULP & LRP) increased by 86c/l.

The wholesale price of illuminating paraffin will increase by 62c/l, while the single maximum national retail price will increase by 83c/l.

The maximum retail price of LP gas will also go up by 98 cents per kilogram.

The Automobile Association (AA) warned on Friday that motorists should brace themselves for further spikes in the coming months.

The combination of firmer oil prices and a weaker rand has exposed the consumer to the full force of oil’s strength, the AA said.

On Monday the rand was trading lower at R15.76 against the greenback and Brent crude oil was flirting with the $50 mark, selling for $49.74 a barrel. On Thursday, world oil prices breached the $50/barrel mark for the first time in over six months on signs that the surplus is coming to an end.

The Department of Energy (DoE) said in a statement on Monday that the weakening of the rand against the US dollar increased the contribution to the Basic Fuels Price on petrol, diesel and illuminating paraffin by 22.1c/l, 20.65c/l and 20.39c/l respectively.

“The average rand/US dollar exchange rate for the period 29 April 2016 to 26 May 2016 was 15.2048 compared to 14.6477 during the previous period,” the DoE said.

The AA expressed concern over the steady rise in oil prices in the current weak rand environment, notwithstanding international opinion that global oversupply could see prices pull back.

“With South Africa’s weak economy, our concern is that even if oil prices moderate, further declines in the rand will mask the benefit. It is possible that fuel prices will test new highs in the coming months, placing yet more stress on consumers,” the AA said.

Not good news for the consumer. Remember to fill up today, get rid of those credit cards and start saving for the tough times ahead.

Have a great week!

Jacques

South Africans underestimate the need for disability cover

Good day,

Serious illnesses like diabetes cause the majority of permanent disabilities – and are becoming more and more common in people younger than 50 according to Hollard Life.

We as South Africans tend to give little thought to the financial implications of living with a temporary or permanent disability. Many of us will only find out the real cost of living with a disability when it’s too late.

A 2013 study by True South Actuaries and Consultants found that South Africans are seriously underinsured when it comes to both permanent and temporary disability. The study showed that South Africans were underinsured for permanent disability by as much as 60% in 2013 and a whopping 73 – 88% for temporary disability.

According to Hollard Life, there are a number of reasons why disability products are less popular than other kinds of life insurance. One of the main reasons is that people have the wrong idea about the leading causes of disability. They also underestimate the long term financial implications of living with a disability and believe that it will never happen to them.

“The need for life cover to take care of your family when you’re no longer around are more readily understood. The concept of living through a serious illness or an accident that leaves you unable to earn an income is something few people ever consider. So when it comes to finding a balance between affordability and insurance needs, people tend to choose a product that deals with the inevitability of death rather than the possibility of disability,” explains Ryan Chegwidden, Head of Product & Technical at Hollard Life.

Hollard adds that many people think that the most common causes of disability are freak accidents and injuries at work. This allows them to believe that it’s less likely to happen to them, but that’s a myth. While the likes of arthritis, back pain, and joint disorders are the leading causes of disability, most are shocked to find out that serious illnesses such as cancer, heart attacks and diabetes actually cause the majority of long-term or permanent disabilities – the kind that prevent you from being able to work again. Serious illness like these are becoming more and more common in people younger than 50.

After serious illnesses, motor vehicle accidents are a significant cause of temporary and permanent disability – and the most common cause in young males under the age of 30 according to Hollard’s claims statistics. Estimates from the Road Traffic Management Corporation also suggest that there are around 20 accidents that leave people disabled on our roads every day. For anyone who commutes on South Africa’s roads whether by car, bike, foot or public transport, the possibility of being involved in an accident like this is an ever-present reality.

The bottom line is that South Africans are not taking the risk of living with a disability seriously enough to take out cover, despite the fact that the causes of temporary or permanent disability are far more common than we realise.

Getting to grips with disability cover

Many people have difficulty in understanding the importance of having both disability and impairment cover. Although they seem similar, they have very different – yet equally valuable – roles to play when it comes to financial planning.

“Before you go into what disability and impairment cover are, it’s important to understand the difference between a disability and an impairment. A disability leaves you unable to do your specific job and earn an income, while an impairment is a physical or functional disorder that doesn’t affect your ability to keep working. Typical examples of impairment may be losing a leg or injuring a leg so badly that you can no longer use it. Disability benefits aim to compensate for the future loss of income that comes with being unable to do your specific job, while impairment benefits provide cover for the unexpected expenses that come with an impairment,” explains Ryan.

Those who do take out disability cover tend to opt for a single comprehensive policy that includes cover for impairment. Liberty Life’s Absolute Protector Plus, for example, covers permanent and temporary disability as well as total and partial impairment. “Disability and impairment cover are an essential part of a good financial plan, and not just for people who have dependants. In fact if you have no dependents it is equally as important because cover like this allows you to remain financially independent of others, maintaining your dignity and self-sufficiency.

Disability and impairment products vary greatly between insurers.

Never underestimate the importance of insurance cover for your living years. Life cover is important and usually the cornerstone of most financial plans in ensuring that you can maintain your standard of living and dignity if you survive a life threatening illness or disability.

Have a great week!

Jacques

Time to review your financial resolutions

Good day,

The steep increase in the cost of living should prompt consumers to review their financial resolutions. In the first quarter on this year, consumers had to deal with back-to-back interest rates increases, which were quickly followed by electricity and fuels price hikes.

To add to the financial pressure, food prices are expected to continue rising for the remainder of this year and further rate hikes have not been ruled out.

Channel Head at FNB, Ester Ochse says the sharp increase in the cost of living is likely to have caught many people by surprise. She says people who had set financial resolutions before the beginning of this year should reassess their financial position and adjust to the current conditions.

“At the moment, there’s no indication that consumers will get financial reprieve any time soon.  In fact, most financial indicators point to an even tougher outlook.

“People need to be realistic about the financial resolutions they can achieve during the course of this year. For instance, if you were looking to buy a new car using a linked interest rate, consider the fact that your instalments could go up once or twice before year end, and adjust your plans accordingly.”

Ochse provides important things to consider when reviewing your financial resolutions for this year:

•        Separate ‘needs’ from ‘wants’ in your resolutions;
•        Isolate short-term from long-term resolutions;
•        Match your needs to available financial resources;
•        Set a timeline to achieve each resolution;
•        Keep track of your progress.

It’s important to remember that reaching financial resolutions requires a lot of discipline. Once you’ve set yourself targets, try to avoid impulsive decisions that could delay the realisation of your resolutions. People need to be willing to sacrifice and compromise along the way.

Have a great week!

Jacques

Retirement Annuities

Good day,

Retirement Annuities are financial tools that can be used for receiving potential guaranteed income in retirement. Various types of annuities let you choose which benefits matter most and how often you are paid. All are tax-friendly, meaning you don’t pay taxes on them until you receive your annuity or income payments, which are usually when you’re in retirement and could be taxed at a lower rate. Allstate offers a variety of solutions from leading financial service providers, so you have many options when deciding what type of annuity is right for you.

How Annuities Work:

• Learning more about annuities can help you understand what options are available to you. We can answer questions you have about the following features:
• Lasting income: An annuity is a contract between you and an insurance company. They invest your money and provide a regular source of income that you can receive a paycheck for life, depending on the contract selections you make.
• Tax advantages: Your earnings are not taxed until withdrawn. This means that when you typically start receiving your annuity or income payments, they could be taxed at a lower rate, making annuities an attractive savings option for retirement.1
• Variable payment periods: You can structure your annuity so that you can get a paycheck for life or for a set period of time. With some annuities, income can be extended to your spouse after you die.