My profit is gone! Q3 Y18

In our previous letter BVSA warned against uncertainty and volatility in the local and international economy and political environment. The powers that be did not disappoint. Joe Public, normal investors and pensioners, are all losing sleep about the world, our country and their hard-earned money. They lie awake at night, wondering what to do and if there is indeed a future for investments.

Together with the ongoing trade war that is first going to worsen before it gets better, developing markets’ instability and South Africa’s numerous challenges, from liquidity to an ANC power battle, the future looks bleak and uncertain.

The Rand is under pressure, proprietary rights remains a question and declining capital is becoming a challenge for everyone. The profit of most investors has been wiped out and inflation is biting at everyone’s heels.

The above is reality and we cannot give a date of when this will become any better. We daily receive questions from our clients: “Must I move all my investments overseas?”, “Is South Africa doomed?” and “Must I not rather invest all my investments in fixed interest at a bank?”

As financial advisors we have to look at each client’s individual situation. This also includes whether the client is before or after retirement, does the client have income from his/her investments, which percentage of capital the client uses as income, risk profile, asset value, etc.

To take your money out of the country for foreign currency is not a cold overnight decision. To receive income from foreign assets is not always cost effective and income (interest, dividends and rental income) is substantially lower than in SA.

Fixed interest is not necessarily the solution, seeing as one has to pay income tax on interest. Interest exemption is not sufficient in a portfolio for retirement. It is, however, a good place to keep your emergency fund.

Banks, as we’ve been hearing, advertise interest rates of up to 13%, but then your money has to be fixed for 5 years. You have no liquidity. The 13% must also be converted to an annual compound rate. It works out to 10,05% per year. This is 22,7% (2,95/13) less income per year than what most people use to make their calculations.

In 2001 most investors also thought our country was doomed and that there is no future for the Rand and our economy. We reckon South Africa and its people will also get through this low point.

What to do?

Do not act on emotion alone. We so often forget the double-digit growth over the last decade. Get expert advice. Foreign exposure in Rand denominated funds is one option to consider – if your local fund does not yet have at least 30% (or more) direct foreign exposure. We are convinced that foreign exposure is a must for a portfolio.

Q4 Y18 What lies ahead?

America is still phasing in import tariffs on Chinese goods, England’s time is running out for a meaningful Brexit agreement and South Africa’s election is only in May 2019.

Local and foreign shares have markedly decreased over the past two months and buying opportunities at reasonable prices are starting to develop. This will support the market, but volatility and uncertainty did not disappear.

Now, more than ever, it is important to have a long-term outlook with regards to your investments and receive expert financial and investment advice.

Author: Guillaume Oberholzer, BVSA investments and financial planning

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