Offshore Investments

High Volatility - Who wants to time the market?



                           

ALSI: 1 month to 12 Sep 2011

Dow Jones Ind: 1 month to 12 Sep 2011

Price of gold - From 2000

Today's chart provides some long-term perspective in regards to the gold market. As today's chart illustrates, gold has been in an extremely strong bull market since 2001. The pace of that upward trend has increased over time. There was a slight increase in slope both in 2001 and 2005. Following the financial crisis of late 2008, however, gold significantly increased the pace of its ascent. Recently, gold made new rally highs but has pulled back after approaching long-standing resistance (red line) of its current accelerated trend channel. Despite the pullback, gold currently trades for over six times what it did when the rally began back in 2001.

The Current Market Sell-off - by Coronation

The Current Market Sell-off

The ongoing sovereign debt problems of the Western world suddenly erupted into a full scale

panic in financial markets in the first week of August 2011.

The proverbial straw that finally broke the camel’s back was a combination of the problems

experienced in raising the US debt ceiling, the lack of a clear and strong enough policy

response to the Eurozone’s debt problems by the ECB and the EU, and the release of poor

economic indicators across a number of countries. Investors have lost confidence in the

authorities’ ability to support the recovery in the US and to deal with Europe’s funding issues.

In response there was a massive spike in risk aversion and indiscriminate selling of risk

assets. To top it all, rating agency Standard & Poor’s lowered the US’s credit rating from

AAA to AA+ - its first ever down-rating – adding further fuel to the fire and the extent of panic

selling.

South African equities and the rand weakened substantially as investors sold en-masse.

Safe haven plays like gold, the Swiss Franc and somewhat perversely even US treasuries

were the winners in this flight to perceived safety.

What can one expect now?

A far stronger policy response from, in particular, the EU and ECB is required. Large

countries such as Italy and Spain cannot be allowed to flirt with defaults on their bonds. If

such an event were allowed to happen it would deal a lethal blow to European banks and

may spell the end of the Euro. No matter how politically unpalatable it may be for the Italians,

Spaniards, Greeks and others, some form of greater fiscal union (or a mechanism forcing

increased fiscal accountability) in the Eurozone is likely to result from this crisis.

Coronation is in no position to predict what macro outcome will result - as events of the last

few years have taught us all that no-one can foretell what the future will bring. But what we

can say is that we will, as always, stick to our valuation based investment approach.

Preceding the crisis we found global equities to be reasonably attractively priced. We also

thought most global bonds were terribly expensive. The panic selling of good quality shares

has made the value in these stocks even more apparent, and the flight to US treasuries has

in our view only made an expensive asset even more expensive.

In the South African market the cyclical stocks such as Anglo American and BHP Billiton sold

off more aggressively than the defensive shares such as British American Tobacco and

SABMiller. The relative price moves were extreme and we used the opportunity to switch

from the defensive counters to the more cyclical ones.

We acknowledge that the loss of confidence in the ability of policymakers to steer the correct

course is a blow to growth prospects. And as commodity prices weaken, South Africa will

earn less for its exports and will run a higher current account deficit unless spending on

imports also declines.

The lower than expected economic growth does however mean interest rates will stay low for

even longer. A period of stagflation (stagnant growth combined with some inflation) is

becoming an ever greater probability for the globe and South Africa.

In such a scenario, negative real returns on cash and bonds are common. In previous

episodes of stagflation, equities proved to be the only asset class to give investors a real

return. We also remain very comfortable with our high holdings of inflation-linked bonds

across all our balanced and bond funds.

We are likewise pleased not to own conventional government bonds. Our equity holdings

have certainly suffered as prices collapsed but we view the sell-off as an opportunity to take

advantage of the compelling long-term opportunities that so often present themselves in

times of crisis.

Our funds have weathered the sell-off well so far, with price behaviour of all the funds in our

flagship unit trust range remaining comfortably within their respective risk budgets.

Karl Leinberger

Chief Investment Officer

Coronation

10 August 2011

Price of Oil

Chart of the Day

Today's chart provides some long-term perspective on the price of a barrel of crude oil with a long-term chart of inflation-adjusted West Texas Intermediate Crude. Today's chart illustrates that most oil price spikes coincided with Middle East crises and often preceded or coincided with a US recession. The logic behind this is that a Middle East crisis can potentially disrupt an already tight oil supply and thereby drive crude oil prices higher. Also, rising oil / energy prices can, among other things, increase costs within the global economy’s supply / distribution chain and thereby contribute to inflation which can in turn encourage governments to halt or reduce any plans to stimulate the economy. It’s worth noting that crude oil prices have surged over the past 10 days and are once again approaching the $100 per barrel level.

A few words on retirement

By Matthew Lester, Professor of taxation studies at Rhodes University, Grahamstown

Many South Africans are conveniently using the looming introduction of some form of social security system as a convenient excuse not to provide for their own retirement. Some say ‘By the time I get to be that old, the State will provide! I would far rather have a new set of wheels than a retirement annuity. You can’t take it with you!’

Are they right? Will it all be okay in the end? Or are many South Africans cruising towards a huge wakeup call (at best) or poverty in retirement. Or worse, will they land up living with their kids?

This year the RSA population will cross the 50 million mark. And about 2,5 million are pensioners with nothing else between them and starvation than the R1070 per month social pension. Some think that this will improve with time. No ways - before there is anything more to be done for the aged, Government is going to have to provide a better deal for: -

• The 11 million children under the age of 18 who only receive a social services grant of R270 per month. And there are nearly 100 000 new applications every month.
• The 4 million unemployed and 10 million economically inactive South Africans who, at present, receive absolutely nothing from the State.

So the prospect of an employed South African ever receiving a meaningful pension from Government is about as remote as the prospect of finding snowflakes in the desert.

There has not been much good news for South African pensioners in recent years. For starters interest rates have plummeted since 1999 when Reserve Bank Governor Chris Stals handed over to Tito Mboweni. Today, with Gill Marcus at the helm, the prospects for the return of high interest rates of the Stals era are remote. So one cannot simply hope that the pensioner will be saved by higher rates.

Add to the above that the pensioner’s shopping basket is heavily weighted to medical services, electricity and rates and taxes. These costs are rising faster than the inflation rate.

As frightening as these issues may be, they are not the biggest threats to the prospective RSA pensioner. The biggest problems are the following:

• Dads used to work to 65 and die at 70. So Dad’s retirement fund only had to last five years. Then Mom sold the house and moved in with the kids. That’s why employers provided defined benefit pension funds. Today Dads retire at 60 and die at 80. So the retirement package has to last for 20 years. And employers provide defined contribution provident funds with no guarantees to see the pensioner through to the end.
• Children used to leave home at 18 to 20. ‘Empty nest’ syndrome we used to call it. But this has been replaced by KIPPERS syndrome, i.e. ‘Kids in Parents’ Pockets Eroding Retirement Savings.’ So instead of children supporting parents, it has all turned the other way round.

Around the Millennium celebrations the futurists were predicting that our biggest problems would be associated with retirement. But then the world went off on a consumer binge that culminated in the Global Credit Crunch. So the issues got hidden away. Now, as we come back from the Global Credit Crunch the same issues are waiting for us, only much, much bigger.

Some say that they would be better off somewhere else. And that all our problems are caused by the new RSA. ‘Emigrate to America and Australia,’ are the usual calls. But when they get there they find exactly the same social problems.

In RSA today, about 1,3 million taxpayers make tax deductible contributions to pension and provident funds through their employers. Only about 18 000 bother to make any additional voluntary or top-up contributions to these funds. 1,8 million make tax-deductible contributions to retirement annuity funds. And many of them are the same lot who are already contributing to pension and provident funds. Whichever way you look at it there are less than three million South Africans with a pension plan of any sort. Out of the 12 million employed South Africans that represents only 25%. Or just 6% of the 50 million total population.

One has to wonder what will happen to the rest of them.

Again some blame the Government for not being more proactive in making all South Africans provide for their retirement. But the tax incentives for retirement savings do exist. So, it is more a case that it’s easier to blame Government than actually getting on with recognising the problem.

The government philosophy on encouraging retirement saving works on the philosophy of :


Tax-deductible Contribution

For years there have been rumours that Government would seek to restrict or even totally withdraw tax-deductible contributions to retirement funds. To date this has not happened. But the threat is now much closer.

For the tax year ending 28 February 2012 tax deductions to retirement funds will be determined as follows: -

• Employer contributions to pension and provident funds, 20 per cent of earnings. Note that tax-deductible contributions to employer owned insurance policies (sometimes referred to as Deferred Compensation Schemes) have been withdrawn with effect from 1 March 2012.
• Employee contributions to Pension Funds only - 7,5%.
• Individual Taxpayers contributions to Retirement Annuity Funds – 15% of non-retirement funding income ‘NRFI’ subject to a minimum of the greater of R3 500 – Pension Fund Contribution or R1 750.

In the 2011/12 Budget speech it was announced that there would be an overhaul of the contribution thresholds commencing from the 2013 year of assessment. The full details are not known at the time of writing this article but are anticipated as being:

• Employer contributions to pension and provident funds will be increased to 22.5% of earnings.
• Total tax-deductible contributions to retirement annuity funds will be subjected to a minimum of R12 000 and a maximum of R200 000 per annum per taxpayer.

So the High Net Worth Individual has a last chance to contribute an unlimited 15% of retirement funding income to a retirement annuity. And there is more to this opportunity than meets the eye.

Many taxpayers who have the benefits of a share participation or share option scheme contribute 15% of their scheme benefits to a retirement annuity fund. In that way they can withdraw wealth from their share incentive scheme and diversify the funds into a spread of underlying collective investment schemes without incurring taxation.

Tax free investment within the fund

In the early years of the new RSA the Katz Commission of Enquiry into the RSA tax system suggested that it would be a good idea to partially tax retirement funds. The resultant Retirement Funds Tax was a disaster and never yielded much tax to Government. So it did not last long and RFT was repealed in 2007, leaving retirement funds as tax-free institutions.

Very few South Africans appreciate that retirement funds are now virtual tax havens. Where else can one invest with up to a 40% tax incentive and thereafter the fund grows free of Income Tax and Capital Gains Tax?

But the moans still continue. ‘What happens if the Government simply nationalises all retirement fund savings?’ My answer to that is quite simply ‘if you believe that could still happen, what are you still doing in RSA. You should have emigrated years ago.’

Others argue ‘You cannot access your money until you are 55 years old.’ My answer to that is ‘that’s the whole point of the exercise. If you are going to need to draw down on your fund earlier, then invest directly into CIS schemes, life insurance policies or just a straight bank account. Nobody is suggesting that one invests everything in a retirement fund.’

Anyway, the fact that you cannot access your retirement fund also means it is safe from attack from your creditors. But please remember that this line of argument no longer includes a spouse in the event of divorce proceedings.

Some also say that the restrictions imposed by regulation 28 of the Pension Funds Act are also a negative factor. These regulations limit the exposure of the fund to equity investment of 75% of the fund and offshore investment of 25% of the fund. Personally, I think these are very well thought out conservative restrictions and it would be only in rare instances that they should be viewed as being restrictive.’

‘And what about the administration costs of retirement funds is the next complaint. The answers are quite simple: - (1). Today, all costs have to be disclosed and agreed in advance. (2). It is quite simply ridiculous to reject the potential of a 40% tax incentive because of an investment commission/cost.

So in desperation the final curved ball gets thrown, ‘well SARS will get it all back when the funds are withdrawn. That’s when all the chickens come home to roost.’

Note that the government policy is ‘partial taxation of the withdrawal benefit.’ Taxation is not imposed on withdrawal willy-nilly. There are wide ranges of procedures to legitimately minimise or control the incidence of tax on withdrawal benefits.

House prices in USA

Chart of the Day

For some perspective on the all-important US real estate market, today's chart illustrates the inflation-adjusted median price of a single-family home in the United States over the past 41 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased -- increased. That brings us to today's chart which illustrates how the inflation-adjusted median home price is currently 38% off its 2005 peak. That's a $100,000 drop. In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (8.5% loss). Not an impressive performance considering that more than three decades have passed. It is worth noting that the median priced home is currently in the bottom half of a price range that existed from the late 1970s into the mid-1990s

"from www.chartoftheday.com"