ththeelighthouse - stone wealth management · from avior research believe that the coronavirus will...

thelighthousethelighthouseIssue 34 | January/February 2020

www.stonewealthmanagement.co.za | 1

H E L LO !

T h e I m p a c t o f t h e n o v e l c o r o n a v i r u s The new year is steaming

ahead at a great pace

and there is plenty to

keep us on our toes –

the Coronavirus and its

impact on world markets,

extreme weather

patterns in South Africa

and around the world,

with floods, droughts and

fires making headlines.

The end of the 2020 tax

year is almost upon us

too. What better time

than now to check in

with us to make sure you

have all of your financial

ducks in a row. We look

forward to connecting

with you during 2020.

Stone Wealth Management

A professional approach to preparing your future

68 Old Main Road, Kloof Tel 031 832 4555 [email protected]

Stone Wealth Management is

a licensed Financial Services

Provider FSP 29494

Amidst all the hype and noise around the new coronavirus, many have been struggling to gauge the longer-term

impact on their investments and whether the bigger picture perspective really is as bad as the headlines describe?

Let’s begin with some background context.

The World Health Organisation has declared the outbreak a global health emergency and has called for support to raise $675m for a “preparedness and response global plan”. Almost 30 000 cases have now been reported worldwide, of which approximately 99% of these have occurred in mainland China.

As a result, many Chinese cities have become ghost towns as government authorities have urged citizens to stay indoors since infections are rapid when compared to Middle EastRespiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). To illustrate this dynamic, the evolution of confirmed infections is charted and compared opposite.

by Nedgroup Investments

continued on page 2

Q U A L I F I E D C O N T R I B U T I O N S T O A N R A R E D U C E S Y O U R TA X A B L E I N C O M E

If you are wanting to make use of the tax concessions for this tax year, you will need to make sure that the funds and application forms are processed and allocated to your retirement fund and Tax-Free Investment by close of business on the 26th of February.

Fortunately, fatality rates thus far have been much lower (about 80% lower than SARS and 95% lower than MERS) and in the past few days, the People’s Bank of China (PBoC) has injected just over $240bn of liquidity into the financial system to help restore investor confidence.

Besides the recently announced tariff cuts, the Chinese government will probably also implement other measures to boost investor sentiment since the share prices of airlines, carmakers and other global companies in the luxury goods and commodities sectors have struggled. The table below summarises the impact to various “on the ground” metrics specific to mainland China:

Indicator Current status (after seasonal adjustments) Food Wholesale Price Index Small uptick in recent days due to constrained supplies Property Sales No activity after Lunar New Year Road congestion At multi-year lows (across 100 cities, peak vs non-peak) Passenger transport volumes Road, rail & air down by 35% to 55% y-o-y Source: Capital Economics

This table shows quite significant divergences to the norm in some cases and once the effect of higher order impacts is considered, many of the world’s largest companies with exposure to China will no doubt experience a shorter-term fall in revenues as shown in the charts opposite.

The good news is that after various discussions with selected corporates in China, analysts from Avior Research believe that the Coronavirus will peak over the coming weeks and could be resolved by next month.

Although we’ve seen the Rand and SA stocks weaken as EM risk appetite soured recently, fortunately due to buoyant global liquidity conditions and improving sentiment around resolving this situation we’re already finding positive reactions in financial markets to the various stimulus measures that have been implemented. Diversified portfolios with a focus on quality should weather the stormy global environment well.

Note: Statistics of fatalities and infection will have changed since this article was written as the outbreak continues to spread.

2 | our expertise, your financial future


Issue 34 | January/February 2020

What does the thought of retirement mean for you? A new routine with no early alarm

clocks, time to explore those amazing destinations you’ve had your eye on, focus

on improving your golf handicap... It’s probably all of these things and more,

but have you also thought about the impact it might have on your health?

Stopping work has many benefits, most notably fitting in more exercise and less stress, which means you’ll probably sleep better too. With all of these factors coming into play, there is usually an overall improvement in health too. On the flipside, for those who have failed to plan properly, stress caused by money worries may manifest in increased blood pressure, poor sleep and heart problems.

Work at it

The phrase ‘use it or lose it’ applies to both your brain and your muscles, so a retirement spent on the couch glued to a screen is not going to help you keep mentally and physically fit. Rather, being active and keeping your brain engaged is vital and both of these are easy to achieve when you are no longer desk bound or highly stressed.

Durban Biokineticist Debbie Wilson says that it’s never too late to start getting stronger, as muscles are more resilient than we realise. Plenty of her older clients, some well into their retirement, have started with biokinetics and Pilates to build muscle strength and manage pain. Those who are committed to doing their exercises and attending classes see great improvements in mobility and pain reduction. That’s definitely a bonus of retirement – time to spend on getting fit and strong.

What if you don’t want to stop working?

For those who love their jobs though, life might

feel a little meaningless without work, which can lead to health issues such as depression or overeating out of boredom. However, there are options if you wish to continue working. Many retired people successfully continue their work in a consulting role, where they have control over their time and hours. Others choose to volunteer. According to a study done by the Corporation for National and Community Service, Americans over the age of 60 that volunteered reported lower disability and higher levels of well-being compared to those who did not volunteer1. It can help you to feel more capable, confident and useful, it’s good for your mental health because you’re keeping your brain active, it helps to prevent depression from social isolation for those who live alone.

Ken Dychtwald, founder of American think tank Age Wave, says that, these days, it’s less about retirement and more about reinvention. He tells the story of Don Mankin, who spent approximately 40 years as an author and teacher of organisational psychology. When he retired, he dived into his passion: travel writing. Writing his blog, magazine articles and his first book, “Riding the Hulahula to the Arctic Ocean”, a guide to adventure trips for older travellers, led to consulting opportunities and speaking engagements – an entirely new and exciting chapter in his life2.

Having your ducks in a row

Ensuring that you have your financial ducks in a row is the first vital step towards a healthy retirement. With a well-executed financial plan that takes your personal retirement needs into account, you are on your way to an exciting new chapter that may well be your healthiest yet.

1. https://seniorcommunity.org/five-benefits-volunteering-retirement/2. https://fortune.com/2017/12/13/working-retirement-consulting/

I S R E T I R E M E N T G O O D F O R Y O U R H E A LT H ? By Linda Stonier: Stone Wealth Management, CEO and Head of Advice


L A N D E X P R O P R I AT I O N

W I T H O U T C O M P E N S AT I O N

Current Position

Currently, expropriation is allowed and is

governed by both the Constitution and

the Expropriation Act. Section 25(2) of the

Constitution (the property clause) is quite

clear: expropriation is allowed subject to

compensation, which must be just and

equitable. Expropriation decisions are taken

by the Executive (government) and the

courts can review those decisions and make

a binding order. Considerable jurisprudence

has been developed on how expropriation

should be done, and compensation

calculated. These rules bind all parties,

including the Executive.

The decisions on expropriation are taken

by the Executive branch of government, in

practice mostly the Departments of Public

Works and Land Affairs. In the last few years,

a specialist agency, the Valuer General, was

developed inside the Department of Land

Affairs with the specific responsibility to advise

on the value of land. The Valuer General is

part of the Executive and is subject to the

authority of the Constitution, legislation and

the courts.

So, the current legal position is clear: The

Executive branch can expropriate, subject to

the criteria of the Constitution, legislation and

general jurisprudence; and the Court has the

final say on whether the Executive has met

those criteria or not.

Suggested Changes

What then has changed and why is the land

expropriation issue now so hot?

Expropriation without paying compensation

has become a policy plank of the ANC.

After the 2019 election, the new Parliament

appointed a committee to handle the

amendment of section 25. In assisting the

committee, Parliament’s legal services drafted

a short Bill that amends the Constitution in

three ways: It provides that ‘… a court may …

determine that the amount of compensation

is nil’; that the R nil compensation must (still) be

‘just and equitable’; and lastly that national

legislation must be enacted spelling out the

‘specific circumstances where a court may

determine the amount of compensation is nil’.

Political Differences

The Parliamentary Committee met on the 3rd

By JP Landman, Political & Trend Analyst

Changing the Constitution to allow for expropriation without compensation has certainly

ignited South African politics for 2020. It is worthwhile cutting through the noise.



of December to discuss this draft. According

to the minutes of the meeting, the honourable

members disagreed on, amongst others,

two issues.

Firstly, DA and Freedom Front Plus members

wanted the specific circumstances where

R nil compensation can be paid to be

spelt out in the Constitution itself and not

in accompanying national legislation.

Advocate Van der Merwe from Parliament’s

Legal Services argued for separate legislation.

The committee agreed to reflect on the issue

and then come back to it.

Secondly, members disagreed on the role

of the courts. DA and Freedom Front Plus

members felt the courts had to be involved

in the decision itself (not just the review

of a decision), particularly where R nil

compensation is payable as it is so serious.

ANC members agreed that ‘The courts had a

role to play as forums to mediate on disputes’,

however, they did not want to make the courts

responsible for deciding on expropriation.

That is a function of the Executive. The issue

was left there. The Draft Bill was published

on 6 December for public comment without

resolving the differences between the parties.

On 21 January, in his concluding remarks

after a four-day ANC National Executive

Committee (NEC) Lekgotla, President Ramaphosa said: ‘We are encouraged that the Lekgotla endorsed the recommendation that the power to determine the quantum of compensation for land expropriation should reside in the Executive.’

Then all hell broke loose.

So, What Has Changed?

The current position on expropriation is that the Executive decides and the courts review. Nothing in the Draft Bill, the president’s remarks, nor the comments of ANC members in the committee suggest that this will change. Any person who is not happy with any expropriation amount, including R nil, can still approach the courts and ask for relief based on the ‘just and equitable’ test of the Constitution, or any other legal prescripts in our law.

In that sense, the current hysteria over the ANC making a U-turn and changing its position is clearly overdone. It is clear from the committee minutes what the ANC’s position has been all along. The hysteria that the courts are being cut out is also wrong − they retain the right to review and can amend or set aside any Executive decision (including R nil decisions) that do not meet the requirements of our law.

Separation of Powers

What will be a change is if the courts are made responsible for administering R nil decisions, ie taking a decision on when an expropriation should be R nil. It all comes down to the doctrine of separation of powers.

The Constitution protects democracy by separating the power of the state into three parts or ‘arms’: The Legislature (Parliament,


the nine provincial legislatures and local

councils), the Executive (ministers and

government departments that run the

country from day to day), and the Judiciary

(the courts).

Constitutional lawyers like Professor Elmien du

Plessis from Potchefstroom argue that giving

that discretion to the courts ‘…is not without

problems. It is not for the courts to administer

the legislation. They should only mediate

disputes, and in doing so, they can lay down

principles and guidelines for decisionmakers.

The power to expropriate stems from

legislation …’ and ‘The Executive executes

the legislation’. In short, one does not want

judges acting as civil servants.

Under What Conditions Can R Nil Compensation Be Paid?

The answer lies in the new Expropriation Bill that

was published for comment in December.

The Bill lists five instances where land can be

expropriated without compensation (clause

12). These are:

1. land occupied or used by a labour

tenant (as defined in legislation);

2. land held for purely speculative purposes;

3. land owned by a state corporation or

state entity;

4. land that has been abandoned; and

5. land where the market value is equal to

or less than money the state has already

spent on it.

Clearly there are some major definitional

issues. When, for example, is land held for

purely speculative purposes? Patricia de Lille,

Minister of Public Works, will be responsible

for taking the Expropriation Bill through the

Parliamentary process.

Timeline

The one thing on which the Parliamentary

Committee agreed is that the process of

changing section 25 must be completed

by the end of March. That looks completely

unlikely as the deadline for submission has

already been extended to the end of

February. Allowing for the normal slippage,

we can only hope for closure and certainty

on this important matter in the second half of

the year.

So What?

• The current system of expropriation

where the Executive takes the decisions

and the courts can review them will

remain. Nothing has been proposed to

change that.

• Some political parties want a change that

will put that decision-making with the

courts. The ANC is unlikely to accept that.

• The separation of powers doctrine

requires that executive and judicial

decisions are taken by different arms of

government.

• The recent explosion of emotion around

this issue again underlined how important

it is that this matter is finalised, and

certainty created. The lingering of this

issue and constant emotional explosions

undermine confidence, investment and

economic growth. It is lingering too long.



The tables below provide a review of key local and international investment indicators for the past quarter, as well as over longer periods.

Performance over periods to 31 December 2019

South African Asset Classes (ZAR)

Asset class Indicator 3 months 1 year 3 years 5 years LT-average*

Equities All Share Index 4.6% 12.1% 7.4% 6.0% 12.3%

Shareholder Weighted Index 4.8% 9.3% 5.4% 4.8%

Property Listed Property Index 0.6% 1.9% -3.7% 1.2% 11.7%

Bonds All Bond Index 1.7% 10.3% 9.4% 7.7% 7.0%

Cash STeFI Call 1.6% 6.6% 6.7% 6.5% 5.9%

Inflation CPI (one month in arrears) 0.4% 3.6% 4.5% 4.9% 5.7%

Source: Morningstar

Global Asset Classes ($)


Asset class Indicator 3 months 1 year 3 years 5 years LT-average*

Equities MSCI AC World Index 9.1% 27.3% 13.1% 9.0% 8.4%

Property FTSE EPRA/NAREIT Developed Property Index 2.0% 23.1% 9.3% 6.5% 7.2%

Bonds Barclays Global Bond Index 0.5% 6.8% 4.3% 2.3% 4.5%

Cash US 3-month deposits 0.5% 2.6% 1.9% 1.3% 4.3%

Inflation US CPI (one month in arrears) 0.1% 2.3% 2.1% 1.8% 3.0%

Source: Morningstar

Currencies


Currency Value at month-end 3 months 1 year 3 years 5 years LT-average*

Rand / Dollar 13.98 8.4% 2.9% -0.7% -3.7% -5.5%

Rand / Sterling 18.52 0.9% -1.1% -3.0% -0.5% -4.1%

Rand / Euro 15.70 5.3% 4.8% -2.8% -2.3% -5.5%

Source: Morningstar

* Updated annually from 1900, or longest available period Returns for periods longer than 12 months are annualised.

M A R K E T O V E R V I E WQ U A RT E R 4 , 2 0 1 9


For the period ended December 2019

The following market review looks at the

performance over the past quarter of local

and global asset classes and currencies, and

puts this into perspective relative to longer-

term performance. The purpose of this

review is to provide a context in which the

performance of the investment solutions in

which you are invested can be assessed.

International

The final quarter of 2019 saw investor risk

appetite rise sharply with economically

sensitive asset prices, providing the perfect

cap to what has proved to be a terrific year

for returns across most asset classes. The

dominant news items over the period mostly

related to the US-China trade talks, the UK’s

Brexit/general election, central bank policy

and US economic data.

Throughout the period, optimism that the

US and China could seal “phase one” of

a trade deal grew. Success was all but

confirmed in late December when Donald

Trump announced he would sign-off the

first phase on January 15th. Investors are

now hoping that this will pave the way for

a de-escalation (or at least a truce) of the

tariff war between the world’s two biggest

economies, and in so doing, provide a

meaningful boost to global trade and

economic activity.

In the UK, the Conservative landslide

election victory was also taken positively as

it dealt a fatal blow to the Labour Party’s

far left “Corbynistas”, whilst also providing

greater clarity over the next stage of Brexit

(ie withdrawal with a deal on January

31st). Once the withdrawal stage has been

completed, the UK and EU will then start

the really tricky negotiations on their future

trading and security relationship. This will

need to be completed by the end of 2020

in order to avoid having to either extend the

transition period, or stumble towards a cliff-

edge “hard Brexit”.

Central banks spent the quarter easing

forward guidance and monetary policy,

with several notable interest rate cuts from

the US Federal Reserve and ECB. Although

there was a change in leadership at the ECB,

Christine Lagarde demonstrated a clear

E C O N O M I C & M A R K E T O V E R V I E WQ U A RT E R 4 , 2 0 1 9



intention to carry on exactly where Mario

Draghi left off. Turning to the US Federal

Reserve, Chairman Jerome Powell also sent

strong signals that the US Federal Reserve is

in no rush to reverse recent interest rate cuts.

So for the foreseeable future, it seems the

central banks will continue to pursue market

friendly/asset price boosting policies.

Finally, having wobbled in the mid-part of

2019, investor confidence in next year’s

global and US economic outlook stabilised,

and then started to improve, helped in part

by growing optimism over a trade deal, but

also strong US job and wage data, which of

course underpins the largest part of the US

economy (household consumption).

As risk appetite returned to the market, the

MSCI AC World Index rose an astonishing

+9.0% when measured in US dollar terms. The

step change in investor sentiment was the

main driver, although currency gains from a

weaker US dollar also provided a tailwind.

The best performing major regions / countries

were the Emerging Markets (+11.8%) and

Asia ex Japan (+11.8%), whilst the laggards

were Japan (+7.6%) and Europe ex UK

(+8.5%). Return dispersion was quite wide

at the sector level, with economically

sensitive areas generally outperforming

defensive sectors. The standout gains were

made in Information Technology (+14.6%)

and Healthcare (+13.8%), with both sectors

reporting very strong Q3 profits in October.

Finally, in terms of style, Growth (+10.3%)

outpaced Value (+7.8%), whilst Smaller

Companies (+9.8%) marginally outperformed

Larger Companies (+9.0%).

The steepening of yield curves saw safe-

haven sovereign bonds under pressure,

and the JP Morgan Global Government

Bond Index duly declined -1.5%. Riskier

bond sectors tended to do better as they

benefited from an improvement in economic

confidence, along with a narrowing of

credit spreads. Over the month, the ICE

Merrill Lynch Global Corporate Investment

Grade and High Yield Bond Indices were

up +0.8% and +2.9% respectively. Finally,

the JP Morgan Emerging Market Bond

Index (+2.1%) also performed well, with the

weakening dollar providing a helpful tailwind

(all hedged to US dollars). With expectations

for the global economy improving, the

Bloomberg Commodities Index rose +4.4%

in US dollar terms. Most of the sub-sectors

delivered positive gains, but Crude Oil’s

+13.9% advance was particularly impressive

as it benefitted from OPEC production cuts

and stronger than expected global demand.

In the foreign exchange markets, the most

notable feature was the broad weakness

of the US dollar. The partial recoveries of

the pound and the rand were also worthy

of mention, having hitherto been under

significant pressure. Whilst it’s hard to pinpoint

a specific catalyst, some of the dollar’s

weakness can perhaps be accounted for

by the general rise in risk appetite squeezing

demand for safe-haven US dollars. As for

sterling’s jump, the utter defeat of hard left

politics in December’s UK general election

and a greater degree of certainty over the

next step for Brexit appear to have helped

boost the beleaguered currency. Finally,


sentiment towards the South African rand

also improved on hopes for economic

reform, as well as the short-term tailwind

provided by a weaker dollar and stronger

commodity prices. Examples of currencies

that advanced against the dollar included

the euro (+2.8%), the UK pound (+7.3%), the

Mexican peso (+4.3%) and the South African

rand (+7.9%).

Note: All quarterly data is quoted in

US dollar terms unless otherwise stated.

Domestic

It was ironic that after months of steady

energy supply, the country faced another

round of load shedding in October, the same

month the Integrated Resource Plan (SA’s

future energy mix to 2030) and the much-

anticipated Eskom Special Paper was to

be released. The policy document outlined

a role for existing sources such as coal

and nuclear, but also emphasised a larger

role for renewable energy in the future, in

line with the progression of technology,

environmental focus and least cost principle.

Although the IRP did not satisfy everyone, it

was broadly accepted and welcomed as a

step forward.

The Medium-Term Budget Policy Statement

(MTBPS) a day later highlighted how

interwoven Eskom’s travails are with the

fortunes of the economy and the fiscus. In

line with expectations, revenues came in

weaker than expected with expenditure

greater than targeted due to financial

support for Eskom.

While the MTBPS can be commended for

more realistic economic growth and revenue

assumptions, the path for all fiscal metrics

and lack of debt consolidation shocked

the market. Shortly after month end, credit

ratings agency Moody’s downgraded

the outlook for the sovereign to negative.

S&P also downgraded the outlook for the

sovereign to negative in November.

In line with expectations, the SA Reserve

Bank kept interest rates unchanged in

November. Two of the five members voted

in favour of a cut, acknowledging the

latest inflation print at 3.7% and a lacklustre

economy that would benefit from any

marginal support.

Strikes at national carrier South African

Airways saw flights delayed and grounded,

as staff and unions sought higher wages.



Already facing financial difficulty and with

government reaffirming that there were no

funds for bailouts, this pushed the state entity

further along the path of financial ruin, with

travel agents and insurance companies

withdrawing further business from SAA until

certainty was restored. By early December

it was announced that SAA would go into

voluntary business rescue. At this juncture,

arguably the best possible option.

After a fairly lacklustre first half of 2019,

the economy failed to leave the runway,

contracting by 0.6% (q/q, annualised) in the

third quarter and leaving the year on year

GDP print at a mere 0.1%.

The intermittent load shedding, at the end

of the fourth quarter, increased the risk

that economic growth would disappoint

again. With the impact of operational and

financial difficulties agonisingly evident,

incoming Eskom CEO Andre de Ruyter, had

been asked to start earlier than planned to

progress the urgent work of steadying the

state-owned utility.

In the background, the work to bring justice

to bear continues. Four individuals, including

two former Eskom executives were arrested

in late December on charges of corruption,

fraud and money laundering. South Africans

will be hopeful that this will only be the start.

Domestic bond markets benefitted from

improved sentiment towards emerging

markets as well as a robust Rand, with the All

Bond Index gaining +1.9% in December.

Looking back over 2019, bond markets

delivered +10.3% over the year despite

heightened volatility and concerns over the

state of the economy, government finances

and credit rating downgrades. All eyes will

be on the 2020 Budget in February which will

be a deciding driver for action at the next

scheduled credit ratings review by Moody’s

in March.

The property sector ended the year in the

red, losing -2.1% over the month, bringing

the performance over the year to a paltry

+1.9%. On the other side of the spectrum,

preference share investors experienced

another strong year, with the index returning

+18.6%. Domestic equities were lifted

alongside international markets with the

FTSE/JSE All Share gaining +3.3% in December

to conclude the year up +12.1%.

ththeelighthouse - stone wealth management · from avior research believe that the coronavirus will...

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