SWM Newsletter22 2 - Stone Wealth Management...end of the US multi-national company earnings recession, which had been largely brought about by falling oil prices and a rising US dollar

Issue 22 | January/February 2017

www.stonewealthmanagement.co.za | 1

welcome2017 looks set to beanother 'interesting'

year! Global politics arenot for the faint

hearted, and in SouthAfrica, our drought

woes continue - theimpact on our

agricultural sector andmany other businesses

is severe.

Our message for thisyear ahead remains

consistent then:Stick to your

investment strategy.Ignore the noise and

distractions from themedia and stay focused

on building yourpersonal economic

foundations so that youcan enjoy life.

thelighthousethelighthouse

A new year it might be, but it seems that the uncertainty

being experienced, both at home and abroad, is showing

little sign of abating. Brexit and Trump still seem to be leading

the international headlines and of course, locally, we never

seem to be able to get away from the Zuma, Gupta and now

ABSA shenanigans.

'Financial pornography' (a topic we have visited before, see

Lighthouse 11, May 2014) is also alive and well, with the

media doing their usual job of providing sensationalist

coverage of financial and political news, to arouse an emotional

reaction in readers and viewers. This can be detrimental to

investors who let their emotions get the better of them and

make potentially poor decisions to buy or sell.

At a recent dinner party with friends, the conversation once

again turned to the obligatory 'state of the nation, state of

the world / global economics' topic, which usually ends with

the same questions: “What do we do about our investment?”;

“Should we be selling out of equity and converting to cash?”;

continued on page 2

By Linda Stonier, CEO & Head of Advice, SWM

Stick to your guns

2 | our expertise, your financial future

continued from page 1

“At these currency rates, shouldn't we be

buying cheap sterling or maybe property in

the UK?”; “With the election of Trump, should

we be selling our dollars?”

The questions continued to flow and, at

some point (being the only advisor at many

of our social get togethers), all eyes turned

to me. Time and time again, I am struck by

just how detrimental the human psyche can

be to one's financial health. Add the element

of 'financial pornography' to the mix and it

is no wonder people make the wrong

decisions. When you let your emotions get

involved, you make investment mistakes.

Allan Gray's Andrew Lapping recently wrote

a commentary on the rand, which really

drove home the message about emotional

decisions. He mentions that a year ago,

people were desperately seeking ways to

take money offshore, with the rand trading

at R15.60/US$. The rand is now trading at

approximately R 13.65/US$ and demand has

dropped. This is counterintuitive! Surely a

dollar at R13.60 is a better investment than

a dollar at R15.50, if the fundamentals are

the same? The deficit on the current account

is similar to a year ago, the fiscal position

unchanged and, if anything, the probability

of President Jacob Zuma leaving office early

has lessened, despite ever-more damning

evidence of corruption and mismanagement

in the ruling party.

Choices

American financial adviser and top-selling

author, Bill Bachrach, has an interesting way

of positioning this. He says that financial

success is never a function of what is out of

our control: “Success is always the result of

making good fundamental choices, in order

to be financially successful in any market,

economic, political or world-event climate.

For all the anxiety and stress experienced

during the 2008-2009 crises, for those who

simply ignored the noise (media hype,

political posturing, etc) and stuck to their

plan, it was uneventful.”

In South Africa, investors have become

accustomed to excellent returns over the

past 20 years. These returns were largely

driven by earnings growth and of course re-

rating. For some time now, the Stone Wealth

Management team has been cautioning

investors to adjust their return outlooks, as

we are expecting more muted returns going

forward. What this means is that now, more

than ever, investors need to stick to their

investment strategy. Why? One cannot make

up losses resulting from irrational behaviour

with easy returns like one could in the past.

To conclude, Bacharach puts it in a nutshell:

“No external event is the determining factor

of financial success or failure. The

determining factor, was, is today, and always

will be, the personal choices made before,

during and after these events.”



Retirement planning needs to be a thoroughprocess and it requires one vital element tobe taken into account - life expectancy.

When figuring out how much to save foryour retirement, or how to withdraw assetsduring retirement, you have to take intoaccount that you may well live longer thanyou expect to, so how will you make yourmoney last for the additional years? Whatabout other costs such as long-term care orunexpected medical expenses?

According to Forbes magazine, a report bythe Social Security Commission shows thatin America, one in four people alive at theage of 65 will live past the age of 90, whileone in ten will live past 95. In South Africa,our statistics are different due to ourdemographics: our diverse society meansthat the national average life expectancy of61, as provided by a Statistics SA report in2016, doesn't actually apply to many of thepeople who are in a position to plan for theirretirement. Rather, factors such as access tomedical care and leading a healthier lifestyledue to the higher standard of living,contribute to a much longer lifespan. Formany South Africans then, living into their80's and 90's is to be expected.

Live longer, work longer

With a longer lifespan, people are beingencouraged to work longer too, althoughnot necessarily full time. In America, this isknown as the 'greying workforce'. Workingpast the usual retirement age provides youwith an income for longer, but it has a hostof other positive benefits too: It can delaythe onset of age-related diseases likedementia, it keeps you socially active,prevents isolation and can provide you witha sense of purpose. Plus, many people derivegreat enjoyment and personal satisfactionfrom their work.

The Stone Wealth Management teamappreciates that, once you retire, you cannotearn back capital lost due to poor advice.Talk to us about how to invest your moneyin solutions that will enable you tocomfortably achieve your lifestyle goals, forhowever long that may be.

Sourceswww.statssa.gov.za/?p=8176www.forbes.com/sites/jamiehopkins/2014/02/03/planning-for-an-uncertain-life-expectancy-in-retirement/#7f196e407c15

By Lisa Praschma, Chief Operations Officer, SWM

70 is the new 60why we need to plan for longer

(Performance over periods to 31 December 2016)

South African asset classes (in rands)

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

Equities All Share Index -2.1% 2.6% 6.2% 13.0% 12.6%

Property Listed Property Index 1.3% 10.2% 14.7% 17.3% 12.8%

Bonds All Bond Index 0.3% 15.4% 6.9% 7.3% 6.9%

Cash STeFI Call 1.7% 6.8% 6.0% 5.6% 5.9 %

Inflation CPI (one month in arrears) 1.0% 6.6% 5.7% 5.6% 5.0%

Source: Morningstar

Global asset classes (in dollars)

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

Equities MSCI AC World Index 1.2% 7.9% 3.1% 9.4% 10.0%

Property S&P Developed Property Index -5.0% 5.4% 7.0% 10.8% 7.0%

Bonds JPM Global Bond Index -9.3% 1.1% -1.3% -0.3% 4.5%

Cash US 3-month deposits 0.2% 0.6% 0.3% 0.3% 3.8%

Inflation US CPI (one month in arrears) 0.9% 1.7% 1.1% 1.3 % 3.1%

Source: Morningstar

Currencies

Currency Value at 30/6/2016 3 months 1 year 3 years 5 years LT-average*

Rand / Dollar 13.68 0.6% 11.7% -9.3% -11.1% -7.0%

Rand / Sterling 16.90 5.4% 26.0% 0.9% -6.1% -5.3%

Rand / Euro 14.42 6.7% 14.3% 0.0% -6.6% -6.7%

Source: Morningstar

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

Market Overview | Quarter 4, 2016The tables below provide a review of key local and international investmentindicators for the past quarter, as well as over longer periods.


International

The major event of the final quarter of 2016

was undoubtedly Donald Trump's unexpected

victory in the US presidential election. This

regime change at the top of US politics

sparked a significant shift in performance

trends across most asset classes. Ahead of

the result, many thought that a Trump victory

would cause a bout of risk aversion, which

would hurt equities and benefit safe havens

such as government bonds and gold.

However, once Trump's victory was realised,

markets promptly did precisely the opposite

of those predictions. Investors chose to gloss

over worries regarding potential trade and

immigration tensions, and instead focused on

the likelihood that tax cuts, infrastructure

spending and deregulation would boost US

and global growth in 2017. Against this

background, interest rate expectations quickly

adjusted to reflect the increased likelihood

that the Federal Reserve would raise interest

rates at its December meeting. Janet Yellen

duly obliged on 14 December 2016 with the

announcement of a

quarter point increase.

Aside from the US

election, the other

noteworthy event of the

quarter was the late November OPEC-led

accord to cut global oil production in an effort

to boost its price. This was the first agreement

of its kind for over eight years, and the

successful outcome came as something of a

surprise to the market since many were

sceptical that the major players, such as Saudi

Arabia, Iran and Russia, could find enough

common ground to reach a deal. In response,

the oil price rose sharply, which boosted

inflationary expectations and added to the

growing pressures within the bond markets.

Over the period, economic and corporate

news-flow was generally positive. Reflecting

this trend, most economists pushed up their

forecasts for both GDP growth and inflation

in 2017. On the corporate front, third quarter

earnings announcements also exceeded

expectations, and, for the first time in over a



Economic OverviewQuarter 4, 2016

For the period ended December 2016

The following market review looks at the performance over the past quarter of local andglobal asset classes, as well as currencies, and puts this into perspective relative to longer-term performance. The purpose of this review is to provide a context in which the performanceof the investment solutions in which you are invested can be assessed.


year, the absolute level of earnings came in

higher than the comparable quarter in 2015.

These positive results effectively marked the

end of the US multi-national company

earnings recession, which had been largely

brought about by falling oil prices and a rising

US dollar. Equities rose by +1.2% over the

quarter, according to the MSCI All Country

World Index measured in US dollars. Among

the majors, the US (+3.4%) led the way, while

Asia ex Japan (-6.3%) and Emerging Markets

(-4.2%) were the most significant laggards. At

the sector level, cyclical sectors continued

to outpace stable earners. Rising commodity

prices boosted energy (+7.6%) and materials

(+3.1%), while financials (+12.3%) were helped

by a margin enhancing rise in longer-term

interest rates. Rising interest rates were a

significant headwind for the fixed income

asset class. A steepening of yield curves saw

sizable price declines in both government and

investment grade corporate bonds, especially

among longer-dated/more interest rate

sensitive issues. Over the quarter, the JP Morgan

Government Bond Index declined -9.3%.

Local

One of the key focus areas over the past

quarter was the review of SA's credit ratings

by the major ratings agencies. The

deterioration in the economic climate of the

country coupled with the unpredictable

political landscape caused market participants

to fear a possible downgrade. However,

following a review in November and

December, Fitch, Moody's and Standard &Poor's decided to retain their respective creditratings for SA's debt. Fitch retained SA's long-term foreign and local currency rating at onenotch above junk, revising its outlook fromstable to negative. Moody's retained SA'sgovernment bond rating at two notches abovejunk, with a negative outlook. Standard &Poor's reiterated SA's foreign currency ratingat one notch above junk but lowered the localcurrency rating to two notches above junk(both remain on negative outlook). Someconcerns were expressed by the ratingsagencies about the country's growth outlook,political turmoil, governance, and public debt.

The most recent release of economic growthfigures indicated that GDP growthdisappointed during the third quarter. SA GDPincreased 0.2% quarter-on-quarter, comparedto the second quarter where growth was morerobust at 3.5%. According to Stats SA thelargest contributor to growth was mining andquarrying (+5.1%), while the largest detractorwas manufacturing (-3.2%). Overall, SAeconomic growth is expected to be fairlymuted for the full calendar year. In hismedium-term budget statement, Pravin



Gordhan decreased his 2016 economic growth

forecast to 0.5% from 0.9%. He also predicted

that growth would recover to 1.3% in the

following year.

Business confidence declined in the final

quarter of the year according to the RMB/BER

Business Confidence Index. The index declined

to 38 points from 42 points in the third quarter.

A reading below 50 points indicates a lack of

confidence from business sectors. There was

some improvement in the Purchasing

Managers Index (PMI) during November.

Despite this improvement, the most recent

figure suggests that business conditions within

the manufacturing sector remain constrained.

SA inflation increased to 6.6% year-on-year

in November - from 6.4% in October - marking

it the third consecutive month that inflation

has been out of the SARB's inflation target

band of 3-6%. In its most recent monetary

policy statement the SARB noted that there

is a higher degree of policy uncertainty due

to developments in the global economic

environment (US election and Brexit). This

could potentially present upside risks to the

inflation outlook. Nevertheless, the

committee decided to keep interest rates

unchanged at their monetary policy meeting

in November.

SA equities remained volatile during the fourth

quarter, declining -2.1%. For the calendar year

SA equities were marginally positive (+2.6%).

SA listed property fared better during the

quarter (+1.3%) and the year (+10.2%). SA

bonds had a fairly pedestrian quarter (+0.3%),

but ended the year strongly (+15.4%) as yields

declined from almost double digit levels at

the beginning of the year. SA cash delivered

a predictable return of 6.8% for the year,

broadly in line with inflation.



talk to us

The Stone WealthManagement team

welcomes yourfeedback.

Email us [email protected] drop your feedback

into the box inreception.

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You asked us!

From a tax savings perspective, what is themaximum amount that I can contribute

towards a Retirement Annuity?

In March 2016, National Treasury changed the way that taxdeductions are calculated on retirement contributions. Thetotal allowable retirement contribution limit was set at 27.5%of an individual's total remuneration or taxable income(whichever is highest) but is capped at R350 000 per annum.Any retirement contribution above this limit will not enjoyan income tax deduction.

did you know?The decision around your investment assets and retirementassets will be one of the biggest decisions that you will everhave to make. Choosing the right financialadvisor is therefore essential.

Do you have any questions that you would like answered?Email [email protected] and we will post the answerin the next issue.

Documents

SWM Newsletter22 2 - Stone Wealth Management...end of the US multi-national company earnings recession, which had been largely brought about by falling oil prices and a rising US dollar