HOT TOPICS MARCH 2020 - Alexander Forbes
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HOT TOPICS MARCH 2020
ALEXANDER FORBES Contents Foreword 1 Section one 3 Ferial Haffajee 4 Muitheri Wahome 7 Isaah Mhlanga 11 Gyongyi King 22 Section two 27 Mercer | themes and opportunities ... it's a matter of time 28 Section three 39 Diagnosis | An analysis of key trends in the medical schemes industry from 2000 to 2018 40 The issues surrounding trustee duties are complex and depend entirely on the particular circumstances facing each fund. Trustees must in all cases take their own decision on issues based on their particular fund’s circumstances at the time. It is for this reason that trustees can’t simply rely on what we’ve discussed here today, neither should they regard our discussions as advice. Trustees should get specific assistance where they are uncertain of the consequences or reasonableness of any contemplated action. The information in this document belongs to Alexander Forbes. You may not copy, distribute or modify any part of this document without the express written permission of Alexander Forbes. Alexander Forbes Financial Services (Pty) Ltd is a licensed financial services provider (FSP 1177 and registration number 1969/018487/07). Alexander Forbes Investments Limited is a licensed financial services provider (FSP 711 and registration number 1997/000595/06). Alexander Forbes Health (Pty) Ltd is a licensed financial services provider (FSP 33471 and CMS registration number ORG 3064). Taking action based on information provided While care has been taken to present correct information, Alexander Forbes and its directors, officers and employees take no responsibility for any actions taken based on this information, all of which require financial advice. For further details of our services please contact our office in Johannesburg: Telephone: +27 (0)11 269 1800 Email: info@aforbes.com For further details of our services please contact our Alexander Forbes Investments office in Johannesburg: Telephone: +27 (0) 11 505 6000
HOT TOPICS I MARCH 2020
Foreword
Sustainable investing has been gaining momentum in the Narrowing it down to the internal mechanisms of an asset
investment landscape within the last year and it is an agenda manager, we address the enabling factors of people, diversity
that cannot and should not be avoided. The need for the and innovation and how they promote and enhance the
double-benefit bottom line is more apparent than ever and as sustainability of asset management practices and success.
a leading financial services provider, we acknowledge the role As with everything, asset managers do not exist or operate
that we play in driving this agenda forward and implementing in isolation and need to consider the demands of society,
its principles. particularly the growing demand from institutional investors to
put their money where it does not compromise the future of
The first Hot Topics of seminar of the year focuses on
generations to come.
investment issues relating to sustainability through different
lenses – from the national level to the local level. It is important
for us to take note of what our clients and communities expect It is key that we maintain a global outlook to be aware of
of us. every cycle and trend in the markets to inform our approach
and our views. The 2020 themes and opportunities from our
We look at South Africa’s current social, political and economic partner Mercer sets the global scene by analysing how risks
backdrop as these elements either contribute or detract from and opportunities evolve over time, what the resultant trends
the sustainability of the country. There is a significant focus on are and how they affect investors and the investment industry.
the contribution of these elements to sustainability and what we Some trends have already started to play out in the market –
are getting right as a society. some are focused on the short term, and others will play out
over the long term.
Economic growth is a key measure in how we can analyse
whether we are sustainable. Considering the risks of the global
We believe that sustainable investing makes financial sense.
and local macroeconomic environment, we look at:
Sustainable investment returns over the long term rely on the
■ ways to improve the growth outlook creation of sustainable environmental and societal benefits. It is
■ restoring fiscal credibility in everyone’s best interests to achieve a sustainable world. Even
■ the central role of investing in aiding economic growth though the investment landscape is evolving, our goal remains the
same – to secure a lifetime of financial well-being for our clients.
|1
SECTION
ONE
|3
ALEXANDER FORBES
What about sustainability?
Ferial Haffajee
The idea of a viral Facebook page called #I’mStaying is great, but it’s not a hashtag I find the need to use. South Africa
is home. It is beautiful, challenging, a country with an eight-month summer, an interesting land with many longs walks
to a proper freedom. And it’s where Nelson Mandela became Nelson Mandela.
I am constantly inspired by the vision and smarts of South Africa’s creatives – Trevor Noah of the Daily Show, John
Kani’s stage brilliance, the design beauty of the Mocca Zeitz museum, the fun of the Durban promenade, Laduma
MaXhosa’s latest clothing range, DJ Black Coffee’s beats.
I draw inspiration from how the Archbishop Desmond Tutu, well into his nineties, is still a voice of grace and leadership
– even now, he remains an activist, this time against fossil fuels.
With all its challenges, South Africa is always interesting.
But what of our sustainability?
Sometimes in the beloved country, I wonder about our resilience But who has she put in charge? An adviser called Thami ka
and sustainability as a viable state. Plaatjie who once led the grand Pan Africanist Congress but
who has not been a successful political leader in a free South
The networks that undergird the state are on increasingly shaky Africa. While government has repeatedly promised that the right
foundations. Think about our energy systems, our water, our people will be put in public jobs to ensure sustainability, the
data – in each, there are stresses and strains that threaten habit of employing political cadres seems too ingrained.
their viability.
And what of data? Data, and access to data, is recognised as
You have experienced load shedding, in December up to the essential as energy and water to successful countries. But a
unprecedented Stage 6, which can see power shutdowns for data market inquiry found in 2019 that South Africans are
the major part of a day. Sometimes, it seems the grid is being paying far more for data than countries of similar sizes and
kept going by a combination of bubble-gum and Super-glue populations.
– it is that wonky. Now, we are set for regular and scheduled
power cuts for 18 months as Eskom implements enhanced Until these prices start coming down, South Africa will not
maintenance schedules. properly be able to integrate into a global economy that is
driven by services and by technology. If you consider that 4 in
Eskom’s sustainability is the defining factor in South Africa 10 young people cannot find a job or sustain a small business,
today. This monopoly utility seems impervious to retrieval from then this is our standout sustainability challenge.
the years of state capture. Electricity prices are rocketing so
high that they can now imperil economic growth. But Eskom Cheaper data is key for getting young people into the labour
still thinks tariffs are pegged too low although real increases market or enabling them to become self-employed by starting
have shot up by over 100% in the past decade. small or micro businesses.
And what of water? As Cape Town discovered a few years ago,
there is a concept of Day Zero, the day when the taps run dry.
While it turns out that the Day Zero campaign may have been
a marketing ploy to scare Cape Town residents into using less
water, the droughts gripping the Eastern Cape and the Northern
Cape reveal the truth that South Africa is a water-scarce country.
4|
HOT TOPICS I MARCH 2020
So, where’s the bright side?
It is 30 years since FW De Klerk, the last apartheid president, But the greatest asset South Africa has to sustain democracy is
saw the writing on the wall. He unbanned the ANC and most the quality of the judiciary and civil society.
other organisations outlawed during apartheid.
If we are to be honest, the ANC as a government has only been
Democracy in South Africa is 26 years old this year and it has so-so. Its development outcomes have been poor when one
been a sustained democracy. considers that South Africa is a middle-income country. The
education system is not a sea-change after the criminal system
Elections are held regularly and not one has been declared of Bantu education, which was a key disc in the spinal column
defective – each has been free and fair, according to the of apartheid.
Independent Electoral Commission.
Obviously, the purpose of today’s system is different, but the
Given our history, the way in which elections, the symbol of execution is tragic. The school dropout rate is extremely high
democracy, have become part of our institutional DNA is a and the matric pass has been compromised by lowering the
credit, as is the Constitution that is sovereign in South Africa. percentage pass across key subjects like maths, languages
This is not a common story in our region although the electoral and science.
trajectory is more positive than negative.
In health, it’s the same story. South Africa spends much more
Then, the other way to measure democratic sustainability is in than most similarly sized economies on health, but outcomes
how regularly the head of state has changed: President Cyril are poor by comparison. And the government is about to put
Ramaphosa is South Africa’s fifth democratic era leader, if you the entire health industry into disarray through an ill-conceived
include the term of interim president Kgalema Motlanthe. national health initiative. While the NHI has a laudable goal – to
bring in a system of equitable and universal health coverage,
The idea of the leader for life got short shrift in South Africa the road the ANC has planned is as pot-holed as any street so
when the first democratic president Nelson Mandela stepped badly governed.
down after a single term. This made popular the notion that
leaders should not overstay their welcomes. This is also a way to
measure democratic sustainability.
|5
ALEXANDER FORBES
So, where lies hope?
The civil society is a vital vein in South Africa’s body. In the It was journalists working with whistle-blowers who revealed in
nightmare years of state capture, it was civil society that showed x-ray detail what was happening in Eskom, Transnet, SAA and
its mettle. Denel as various patronage networks sucked out rents through
colonising the procurement and other strategic sites of the
While other countries have sunk into kleptocracy when saddled state-owned enterprises.
with leaders like the former president Jacob Zuma and netted
by the patronage networks like the Gupta family which extracted It was civil society who mobilised the unhappiness of South
billions from South Africa, that did not happen here. And the Africans into organisations like Save SA. Civil society took case
reason it did not was because of civil society, the network of after case to court to force the reform of institutions like the
organisations outside the formal political society. National Prosecuting Authority It also put pressure on the ANC
to change its leadership at the party’s national conference in
This included the whistle-blowers and the media which December 2017, which ushered in a reformist presidency of
investigated state capture without fear and who exposed the President Ramaphosa.
#GuptaLeaks, the trove of emails which helped them piece
together the story of how South Africa was captured.
Conclusion
In future, it is this civil society that will be vital to the idea of what South Africa has set itself to be – a non-racial,
non-sexist and equal country of laws. On the globe today, there is no more important topic than sustainability, of earth,
our environment and the only planet that humans can call home.
At the World Economic Forum in Davos in February the founder Klaus Schwab highlighted the existential questions
facing market-based economies. He called for, along with others, a rethink of what capitalism is today and how it is
shaped for sustainability in the future.
At the centre of new thinking is that the system of sustainability must be one that works for all people, not only for the
financial markets – the model of stakeholder capitalism.
Of course, in South Africa, the history of our country has meant that we are ahead of the curve. The empowerment
charters, the social and labour plans as well as laws like those geared to support employment and other forms of equity
are about turning employees, suppliers and small enterprises into stakeholders in the system.
But while this is both laudable and gives the country a headstart, the key requirement is implementation and execution.
6|
HOT TOPICS I MARCH 2020
How sustainable is the South African asset management industry?
Muitheri Wahome
Lessons from the past and what the future may hold
Globally, institutional investors dominate financial markets, controlling more assets than banks and individuals do.
Insurers provide us with policies, unit trusts are our savings and pension funds are our retirement savings. The asset
management industry is therefore integral to our financial well-being. It plays an important role of allocating risk capital
to fund projects and businesses, providing us with investment opportunities that we would not necessarily be able to
access on our own.
The rise of institutional investors in South Africa began centuries ■ the first occupational pension established in the Transvaal
before asset management firms as we know them were even Republic in 1882
conceived. The origins can be traced to several moments: ■ the Public Investment Corporation Limited (PIC), the largest
■ the arrival of insurance multi-national companies – an domestic asset manager in South Africa
extension of the British industry – from the 1820s
■ the formation of trust companies that administered and Initially established as a custodian and asset manager of trust
settled estates in the Cape of Good Hope funds, today the PIC manages the assets of the Government
Employees Pension Fund, ranked the 17th largest fund in the
■ the spectacular discovery of minerals that created wealth
world. The PIC’s demonstrated track record of 109 years to
in the hands of private individuals, to that of banks and
date, is a feat matched by few asset managers globally.
stockbrokers
Assets under management in South Africa in context
1995 2018 Compound annual growth rate
R billion
Life insurance 408 2 816 8.8%
PIC 94 2 083 14.4%
Unit trusts 34 2 195 19.9%
Private pensions 112 1 224 11.0%
Sources: PIC, ASISA, SARB
|7
ALEXANDER FORBES
Key dates in the evolution of the asset management industry in South Africa
The first savings bank system is established in the Liberty Life launches first individual
1822 Cape Colony 1960 retirement annuity
UAL, the first local merchant bank, offers
1845 Old Mutual is established by royal charter 1957 segregated investment management services to
pension fund clients
Allan Gray becomes the first South African to
1882 First recorded pension fund in the Transvaal 1969 qualify as a chartered financial analyst
The discovery of gold in the Witwatersrand leads to First pension investment performance
1887 the formation of the Johannesburg Stock Exchange 1971 measurement survey is launched
James McGowan is appointed the first Government UAL launches first linked-investment services
1890 Actuary of the Cape Colony 1986 provider
UAL launches first standalone equity-linked living
1891 First Life Insurance Act of 1891 1989 annuity
Public Development Corporation (PIC Limited) Ginsburg Malan Consultants and Actuaries is
1911 established as custodian and asset manager of 1990s granted a life licence to operate non-life pooling of
trust funds of the public sector annuities, leading to the first multi-managed living
annuity in South Africa, Die Nuwe Dinamiese
Uittreedings annuiteit (later renamed Superflex)
First socially responsible fund Community Growth
1918 Sanlam opens its doors 1992 Fund is launched
Marthinus Louw becomes the first
1919 South African- born actuary 1992 SAB issues first corporate bond
Southern Life Association becomes the first local Herman Steyn launches the first index fund
1923 life insurer to open an office in London 1993 unit trust
Time Life establishes first multi-manager in
1943 Sanlam opens an investment department 1995 South Africa
Sanlam launches the first ‘managed trust’
1946 company in the SA insurance industry 1998 First money market unit trust is launched
National Finance Corporation established to First exchange-traded fund launched by a joint
1949 develop the South African money market 2001 venture between Gensec, Corpcapital and the JSE
Pension Funds Act of 1956 – the first dedicated South Africa adopts real estate investment trusts
1956 pension fund legislation in the world 2013 (REITs) structure for listed property assets. Tower
Property Fund becomes the first new fund to list
on the JSE REITs sector
South Africa Growth Equity (SAGE) unit trust
1965 is launched
8|HOT TOPICS I MARCH 2020
Although South Africa accounts for less than 1 of the global The modern South African asset management industry took
GDP, it has seven firms in the list of Top 500 asset managers its first steps from the 1950s. The immediate period after
globally (excluding the PIC) – a standout performance when World War II was a time of prosperity and optimism globally
compared to the BRICs. South African managers have exported that heralded significant growth in financial assets and wealth.
their success internationally. In 1956, South Africa had an estimated 1 200 pension funds
serving approximately 400 000 members. The majority of
For example, Investec Asset Management – a globally pension funds were underwritten by insurers and set up by
competitive firm and a well-established international investment means of a life policy contract.
firm based in Cape Town and London – has its roots in South
Africa. The late Allan WB Gray built two successful asset Later in 1965, the pioneers of unit trusts made it possible
management firms – one in Cape Town and another, Orbis for small savers to invest in shares by providing them with a
which is internationally focused with its home in Bermuda and a professionally managed and diversified portfolio. By pooling
presence in Australia. small savings, unit trusts also helped increase the supply of risk
capital for investment in the economy.
The pioneers of the industry learnt from other parts of the world
and found ways to do them in an environment where savings As the magnitude of money invested grew, so did the demand
were encouraged. Since the first South African qualified as a for specialist investment expertise to manage it, giving rise to
chartered financial analyst (CFA) in 1969, increasing numbers the asset management industry. To manage a portfolio of shares
have successfully earned the designation, putting South Africa required structure, discipline and significant effort that called for
among the top 20 CFA societies in the world. insurers to gradually professionalise their investment activities.
According to Nerina Visser, president of the South African A favourable macroeconomic backdrop of low inflation, low
CFA chapter, South Africa is the fourth largest society in the interest rates and high economic growth in the 1960s created
Europe Middle East and Africa (EMEA) region after the UK, one of the longest rising markets South Africa had ever seen
Switzerland and Germany, and ahead of larger countries like that lured institutional investors to allocate more capital into
France and Russia. listed equities on the JSE Securities Exchange. After years
of benign inflation, a surge in inflation in the 1970s spurred
The financial industry in South Africa maintained international investors to invest in equity and property.
contacts through the presence of foreign insurance and banks,
allowing the emergence of human capital development to a level
that could compete globally, when South Africa was reintegrated
into the rest of the world after 1994.
|9ALEXANDER FORBES
This fertile ground for innovation attracted new contenders to By pooling capital from savers and allocating it to those who
the nascent asset management industry: required it, they stimulated the economy. Without addressing
■ new competition from merchant banks, owner-managed the fundamental requirements of a growing economy, the
asset management firms to multi-managers industry is at risk that the government and society at large do
not perceive its value – that shared sense of destiny and social
■ new investment products to hedge against rising inflation
utility – and could face both regulatory challenges (risks to fees
■ new distribution channels that catapulted unit trusts and
charged), and worse, lose its social licence to operate.
asset managers who managed the flood of savings that came
in the 1990s
Asset managers cannot shy away from the plight of their clients
■ a focus on portfolio construction and risk
as they navigate their challenges and strive to meet their financial
goals throughout their lifetime. The work of an asset manager is
not just about targeting assets under management or beating a
What then are lessons we can learn from the benchmark. Behind the assets under management that firms
past and what are the implications for the feverishly seek to grow, is what Sunel Veldtman, founder of
Family Foundation Wealth calls ‘humans-in-transition’.
future?
Thirdly, the asset management industry is heavily dependent
Firstly, regulation plays a key role in providing confidence on the state of the economy, politics, markets and the global
to consumers and in shaping competition and financial environment. The policies that guide and either build or
market development. The collaboration between industry and damage economies have a direct impact on the work of asset
policymakers to create a supportive regulatory environment is managers. They determine the state of the markets into which
crucial to the success of an industry. asset managers make investments and highly influence the
availability of funds to be invested. This calls for a responsible
Secondly, innovation that meets the needs of savers and partnership between the industry and its regulators that places
investors is a critical ingredient to the success and sustainability South Africa first.
of the asset management industry. As stewards of capital, the
industry must consider the interests of those whose assets it Astute leadership with an appreciation of the intersection of
represents to remain relevant. politics, and a vision for a better society and business are
required. The industry must be responsive to the needs of
The historical reverence with which the life insurance sector society to avoid criticism. A culture that promotes diversity and
was held stemmed from the benefit the community could see inclusion to further the ends of transformation and reflect the
and what the institutions did for them providing a safety net increasing broad range of stakeholders is non-negotiable.
against disaster. By offering savings and insurance products
that uplifted individual savers from poverty, they earned the How to bring the uninsured, unbanked and expand the market
trust of their policyholders. to include everyone with the power to save requires market
participants to understand the aspirations of the people in
product design. Progress demands constant reinvention in this
globally competitive industry.
10 |HOT TOPICS I MARCH 2020
Macroeconomic review and outlook
Isaah Mhlanga
Reviving economic growth
2019 was dominated by United States (US) and China trade tensions, fears of US recessions, Brexit and Middle
East geopolitical uncertainties. However, the year ended on a high note, with global financial markets pulling the best
performance since the global financial crisis (GFC). This hit a record high as some of these concerns eased and the
global central banks' accommodative stance injected liquidity into financial markets.
Asset class returns for December 2019 were strongly boosted by the easing of trade tensions between the US and
China when they signed a phase one trade deal, which boosted global risk appetite. An increase in global liquidity by
major central banks also supported the global financial markets, with investors buying emerging market equities and
bonds, compared to global bonds and US dollar cash.
Global financial markets experienced a strong 2019, returning The Mid-Term Budget Policy Statement (MTBPS) showed a
resilient returns across a broad range of asset classes and deterioration in fiscal outlook. Eskom’s debt burden and rolling
geographies. The MSCI ACWI returned 27.3% in 2019, from electricity blackouts increased risks for both the fiscus and
negative returns of 8.9% in 2018, in US dollars. economic growth and negatively impacted market sentiment and
business confidence.
Regionally, developed markets outperformed the emerging
market equities in the year, with the MSCI World (developed Tight domestic credit, weaker currency pass-through effects,
markets) returning 28.4% in 2019, from -8.2% in 2018, in and low economic growth have kept inflation contained in
US dollars. This was driven by the strong performance in the 2019. South African CPI slowed to an eight-year low of 3.6% in
US, Europe and Japan. In 2019, the MSCI Emerging Markets November 2019. Inflation averaged 4.1% in 2019 to the end of
(MSCI EM) returned 18.6% in US dollars from -14.3% in 2018. November, well below the South African Reserve Bank’s (SARB)
Emerging markets were boosted by the strong performance from point target of 4.5%. The SARB has cut rates by 25 basis points
Russia, India, Brazil, and South Africa. to 6.5% in 2019 due to low inflation and weak economic growth.
Global bonds underperformed equities for the year as the global Ultimately, the favourable global backdrop drove the majority
fundamentals improved, favouring risky assets. The Citi World of asset class returns into positive territory. The ALSI returned
Government Bond Index and corporate bonds returned 5.9% 12.1% in 2019, from -8.4% in 2018, in rands. While the Capped
and 14.5%, respectively in 2019, in US dollars. SWIX returned 6.8% in the year, from -10.9% in 2018, in rands.
The ALSI benefitted relative to the Capped SWIX from its higher
In the commodities markets, oil prices and gold saw strong gains allocation to commodity shares. The increase in equities was
of 5.7% and 3.6% in the last month of the year, which brought broad-based across, small, medium and large caps.
gains for the year 2019 to 22.7% and 18.3%, respectively.
However, iron ore saw the strongest gains in 2019, returning Resources were the best sector in the year, returning 28.6% in
28.6%, despite the slowing global manufacturing activity during 2019 from 15.7% in 2018, in rands, particularly well supported
the year. by gold mining shares. It was followed by industrials which
returned 9.1% in 2019 from -17.4% in 2018. Despite the dovish
South African markets returned positive returns despite negative global central banks, financials marginally performed in 2019,
domestic fundamentals like power cuts, low business confidence, returning 0.6% from -8.7% in 2018. The financial sector has a
worsening fiscal constraints, and a weak local economy. Local strong correlation with the performance of the local economy.
markets were boosted by rand-hedge stocks and a strong rally in
commodities. The economy saw the largest drop in growth over Bonds and cash lagged equities in the year, with 10.3% and
the past decade following the power utility’s implementation of a 6.6%, respectively as global investors preferred risky assets.
series of power cuts in the first quarter of 2019, which resulted in Property bucked the strong performance trend, returning 1.9%
a contraction of 3.2%. Economic growth subsequently recovered for the year as the rental vacancy rate remained high due to weak
in the second quarter but contracted again in the third quarter. economic growth.
| 11ALEXANDER FORBES
Outlook for 2020
Global outlook – gradual recovery but growth will remain sluggish
Global economic growth has stabilised but the recovery remains sluggish. The slowdown in the US and China is expected to be more
than offset by an improvement in some large emerging markets, Europe and the United Kingdom (UK). Inflation expectations remain
stable, at or below targets in advanced economies and trending lower in emerging markets. Consequently, monetary policy in many
advanced economies is expected to remain loose, which will support global growth.
The direction of the US dollar has a disproportionate impact on the global economy as global trade is priced in US dollars to a large
extent. The US dollar is expected to weaken against major currencies, which implies that the emerging market exchange rate driving
inflationary pressures will remain muted. This will help emerging market economies as well as global economic growth.
Figure 1: G lobal baseline growth forecasts show stabilisation
3.3 3.4 6.1
2.9 2.3 2.0 6.0 5.8
1.7
1.4 1.5
1.3 1.4
1.2 1.3
2019e 2020 2021 2019e 2020 2021 2019e 2020 2021 2019e 2020 2021
2019e 2020f 2021f United States Euro area United Kingdom China
Average: 2.7 2.9 3.1
5.8 5.9
2.7 5.6
2.5 3.5 3.5
2.4 3.3 3.2
2.8
2.3
1.6
0.8
0.1
2019e 2020 2021 2019e 2020 2021 2019e 2020 2021 2019e 2020 2021
Emerging and Middle East and Latin America and
Sub-Saharan Africa
2019e 2020f 2021f developing Asia Central Asia The Caribbean
Source: IMF WEO, World Bank and Alexander Forbes Investments
12 |HOT TOPICS I MARCH 2020
Figure 2: Global inflation
Global inflation expected to continue to trend lower Major countries' inflation forecast in 2020 and 2021
% DM EM World %
2.5 US Euro Area UK
5.0
2.0
1.5
4.0 1.0
0.5
0.0
3.0 2019 2020 2021
% China
3.0
2.0 2.5
2.0
1.5
1.0
1.0
0.5
0.0 0.0
2019 2020 2021 2022 2023 2024 2019 2020 2021
Source: IMF and Alexander Forbes Investments
The biggest four global risks that dominated financial markets in In particular, the US dollar has reached the top of the cycle and is
2019 have been reduced: overvalued against major currencies. We expect the US dollar to
■ U S–China phase one trade deal weaken against the pound sterling and against the euro. As far as
the pound is concerned, the reduction in Brexit uncertainties and
■ B oris Johnson’s decisive victory in the UK election narrowing economic growth differential favours the pound relative
■ D e-escalation of the US–Iran tensions to the US dollar, which is why we expect the pound to appreciate
■ U S recession risks against the US dollar. Growth differentials between the US and
the euro area also favours the euro going forward.
The reduction in these risks has revived risk appetite. Emerging
markets are expected to receive portfolio inflows, which will
benefit their currency, equity, and bond markets. The historical
weakening of the US dollar has been a major driver of emerging
market economic growth. We expect this to be the case if the
US dollar cycle turns as the market expects.
Figure 3: The US dollar expected to weaken against the major currencies
EURUSD GBPUSD
% EURUSD Long-term ave + Std Dev -Std Dev %
GBPUSD Long-term ave + Std Dev -Std Dev
1.7 2.1
1.5 1.9
1.3 1.7
1.1 1.5
0.9 1.3
0.7 1.1
0.5 0.9
2000 2002 2005 2007 2010 2012 2015 2017 2000 2002 2005 2007 2010 2012 2015 2017
Source: Bloomberg and Alexander Forbes Investments
| 13ALEXANDER FORBES
Monetary policy in the advanced economies is expected to remain accommodative given benign inflation outlooks in the US, Europe,
the UK, and China and in most of the major economies. With a supportive global monetary policy backdrop visible in looser financial
conditions, emerging market currencies are expected to remain stable. This translates into stable or improving inflation outcomes and
better economic growth. This should benefit South Africa (SA), but domestic issues outweigh global factors for now.
Figure 4: G lobal financial conditions have improved, while the US dollar is expected to weaken
Global financial conditions have loosened The US dollar expected to weaken against major
currencies
Index, 100=January 2017 1.8
102 Advanced economies excl. United States 1.6
United States 1.4
101 EMDEs excl.China 1.2
1.0
Q1 2020 Q1 2021 Q1 2022 Q1 2023 Q1 2024 Q1 2025
100
GBPUSD
1.35
99 1.30
1.25
98 1.20
1.15
97 1.10
Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19 Q1 2020 Q1 2021 Q1 2022 Q1 2023 Q1 2024 Q1 2025
EURUSD
Source: Bloomberg and Alexander Forbes Investments
14 |HOT TOPICS I MARCH 2020
SA outlook – reviving economic growth
With a marginally supportive global outlook, we would have to electricity shortages and the slow pace of economic policy
expected SA’s economic growth to pick up as well. However, reforms. To improve this growth outlook, three things are needed
domestic constraints remain binding. Electricity shortages, weak in our view:
consumer demand and a constrained fiscus all contribute to 1. Re-establish fiscal credibility
a weak economic growth outlook of about 1.0% this year and 2. Implement structural economic reforms
1.5% in 2021. The risks remain tilted to the downside due 3. Attract fixed investment
Re-establishing fiscal credibility
The presence of fiscal credibility means that economic agents should be considered. Secondly, loss of fiscal credibility and the
believe what the fiscal authorities announced as their target resultant higher interest bill as well as the never-changing need
primary budget balance and that they will achieve it in the for higher social spending necessitates higher taxes in the future
timeframe they have set. SA's fiscal credibility has deteriorated to close the revenue gap created by increasing interest costs.
since the financial crisis, and the risk remains. This could persist
if the National Treasury continues to miss its budget targets. While forecasting macroeconomic variables is inherently
difficult, it is important that National Treasury sticks to its targets
Loss of fiscal credibility has two main problems. Firstly, bond in terms of stated goals or fiscal rules in relation to its primary
yields remain elevated because the sovereign risk premium budget balance, expenditure ceilings, and debt targets if it is to
remains high. This means that the cost of borrowing for the reclaim fiscal credibility. This will reduce the state’s interest cost
state remains high and therefore crowding out productive bill and bring favourable inflation outcomes.
spending that can lift economic growth, such as investment,
Figure 5: A decomposition of the SA 10-year bond yield
%
SA currencyrisk
SA currency riskpremium
premium SAsovereign
SA sovereignrisk
riskpremium
premium USrisk
US riskfree
freerate
rate
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2005 2006 2007 2008 2009 2010 2011 2013 2014 2015 2016 2017 2018 2019
Source: Bloomberg and Alexander Forbes Investments
| 15ALEXANDER FORBES
Figure 6: Re-establishing fiscal credibility in low growth requires sticking to the budget target
Real main budget revenue and non-interest spending Growth in real main budget non-interest spending
% of GDP Non-interest spending Revenue
% ch
28
10
27 8.4 8.3
8 7.2 7.0
26 6.3
6
4.9
25
4 3.3
2.1 2.4
24 2.0 2.0 1.7
2 1.6 1.4 1.4
0.8
23 0
-0.2
22 -2
2006/07 2009/10 2012/13 2015/16 2018/19 2021/22 2006/07 2009/10 2012/13 2015/16 2018/19 2021/22
Main budget balance Gross debt-to-GDP ratio
% of the GDP % of GDP 2019 Budget
8 Revised with financial support for Eskom
80
Interest payments Primary deficit Revised without financial support for Eskom
7
75
6
70
5
65
4
60
3
2
55
1 50
0 45
2009/10 2012/13 2015/16 2018/19 2021/22 2015/16 2017/18 2019/20 2021/22 2023/24 2025/26 2027/28
Source: Bloomberg and Alexander Forbes Investments
The budget has an expenditure problem which needs to be corrected by reducing spending. The 2018 MTBPS projected R150 billion
in spending will be cut over the next three years, which implies that R50 billion per fiscal year will be trimmed in each of the next three
fiscal years. We do not have a high conviction that National Treasury will be able to achieve this target given how difficult it is to reduce
headcount in the public sector.
16 |HOT TOPICS I MARCH 2020
Structural economic reforms to unlock fixed investment
The economic reforms are structural in nature and as a result, they will take some time to effect. That said, the reform work that is under
way should help improve business confidence and will ultimately attract private sector fixed investment which will lift economic growth.
Figure 7: Economic reforms under way
An efficient and capable Mining (charter Land expropriation Economic
state. Prudent fiscal 2019) (2020) draft bill Transportation,
and monetary policy. A Must facilitate Inclusive
competitive and flexible Reform agenda Growth, and
Telecoms (2020)
exchange rate. A trade Competitiveness:
Information
regime which promotes Towards an
memorandum
open and beneficial Economic Strategy
trade, particularly with Urgency In energy, water,
transport and for SA {NT
the rest of the African Government \ Growth discussion paper}
continent SEOs. A telecom sectors.
reimagined industrial Governance \ SEOs
strategy. Opening up
'network industries'’ that Eskom \ manage
is transport, logistics and REMARKS BY MINISTER OF cash flow and
telecommunications. FINANCE, MR TITO MBOWENI, AT Policy certainty
re-organise (split)
This means reorganising THE TEAM SOUTH AFRICA WEF
Eskom and other DAVOS BREAKFAST BRIEFING
state-owned companies. DATE: 16 JANUARY 2020
Lowering barriers WEF global competitiveness
to entry. Prioritising index \ 60th (improvement)
job-creating sectors,
Our advantages
such as agriculture and
tourism. An overarching Perceptions 2nd SA investment
legal framework with an Conference \ pledges
independent judiciary Young labour World class
market infrastructure Sophisticated
and strong property
financial market
rights. A well-functioning
financial sector. Increase in FDI
Investment needs
Source: National Treasury and Alexander Forbes Investments
| 17ALEXANDER FORBES
Private sector fixed investment crucial for growth
Business confidence has remained weak for most of the past decade which resulted in volatile and low private sector investment growth.
Private sector investment will unlikely pick up before business confidence improves meaningfully. The ongoing economic reforms should
help to improve business confidence going forward. A trend that is also visible is the contraction in public sector investment which has
been contracting for some time as the government embarked on fiscal consolidation to reduce government debt.
Figure 8: Corporate SA (80% of investment) downbeat and “economising”
Low business confidence restrains investment Private sector investment drives overall investment
GFCF growth (% q/q, lhs) % y/y
%q/q Private sector GFCF (% y/y)
BER BCI (Index, rhs)
30 90 20
GFCF growth (% y/y)
80 15
20
70
10
10 60
50 5
0
40 0
-10 30 -5
20
-20 -10
10
-15
-30 0
-20
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2005 2007 2009 2011 2013 2015 2017 2019
Source: Bloomberg and Alexander Forbes Investments
Figure 9: Corporate SA (80% of investment) downbeat and “economising”
Business confidence drives private sector investment Public sector investment has been contracting
% y/y
General government GFCF (% y/y)
Real private sector fixed investment (% y/y)
60 Public corporations GFCF (% y/y)
GFCF growth (% y/y)
50
40
30
20
10
0
-10
-20
2005 2007 2009 2011 2013 2015 2017 2019
Business confidence index
Source: BER, SARB and Alexander Forbes Investments
Inflation remains benign
Inflation outcomes have surprised on the downside for most of 2019 and the outlook remains benign. In January 2020, the SARB cut
rates by 25 basis points to 6.25% to boost consumer demand. However, the impact of this rate cut on economic growth is negligible.
18 |HOT TOPICS I MARCH 2020
Figure 10: Inflation forecast remains stable
Stable inflation outlook well within the SARB’s Government CPI and private sector CPI
y/y (%)
%
Government CPI Headline excl. government CPI Headline CPI
6.5 6.3
6.1 10.0
6.0 5.8 9.0
5.6
5.5 5.3 8.0
5.0 4.8 4.8 7.0
4.6 4.6
6.0
4.5 4.3
5.0
4.0
4.0
3.5
3.0
3.0 2.0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2014 2015 2016 2017 2018 2019
Source: Bloomberg and Alexander Forbes Investments
There is still room for one more cut but the risk of a credit rating Moody's likely to downgrade SA to
downgrade from Moody’s keeps the SARB cautious. We expect
sub-investment grade
Moody’s to downgrade SA’s credit rating from Baa3 to Ba1
over the next 12 months due to lower growth and slow pace of The credit rating downgrade is largely priced in by financial
economic reforms. markets such that the impact on asset prices will likely be limited.
However, the macroeconomic adjustment, following the downgrade
to sub-investment, is usually painful and lasts for a very long time
depending on the speed and extent of policy response.
Figure 11: SA’s credit rating history
Factors working against fiscal consolidation Capital outflows from emerging markets
■ Real economic growth remains low
Moody's (RHS) S&P Fitch
AA- Aaa
■ Inflation rate lower than forecast A+
A
Aa1
■ Tax buoyancy rates overestimated A-
A3
Baa1
■ SOE bailouts (signs that this will stop are positive) BBB+
Baa2
■ Slow pace of economic reforms, though there
BBB
Baa3
BBB-
Ba1
have been some improvements BB+
Ba2
■ Insufficient economic growth to stabilise debt BB
BB-
Ba3
1994 1997 2000 2003 2006 2009 2012 2015 2018
We expect Moody’s credit rating downgrade in 2020.
Source: S&P, Moody's, Fitch and Alexander Forbes Investments
Figure 12: What happens post the downgrade to sub-investment grade: the case of Brazil and Russia
Brazil 10-year bond yields and currency Russia 10-year bond yields and currency
%
RUB 10-year yields (RHS)
BRL 10-year yields (RHS) % 80.0 14
5.0 18
70.0 12
16
4.0 14 60.0
10
12 50.0
3.0 8
10
40.0
8 6
2.0
6 30.0
4
1.0 4 20.0
2 10.0 2
0.0 0
2010 2011 2012 2013 2014 2015 2017 2018 2019 0.0 0
2010 2011 2012 2013 2014 2015 2017 2018 2019
Source: Bloomberg and Alexander Forbes Investments
| 19ALEXANDER FORBES
Table 1: Countries that have been downgraded to sub-investment grade
Countries Year lost Year regained Years Reason for downgrade Policy response
Significant economic
Colombia 1999 2011 12 Economic deterioration
and political reforms
A domestic currency,
Croatia 2012 2019 7 Privatization
financial or banking crisis
Fiscal consolidation
Hungary 1990 1996 6 Economic deterioration
and/or austerity
A domestic currency, Active intervention by a
Iceland 2010 2013 3
financial or banking crisis newly elected government
Fiscal consolidation
Ireland 2011 2014
and/or austerity
India Unsustainable Significant economic
1991 1994 3
(twice) macroeconomic imbalances and political reforms
1998 2004 6
A currency, financial or
banking crisis resulting
Indonesia 1997 2011 14
directly from neighbouring or
regional influences
Korea Debt restructuring and
1997 1999 2
Republic economic policy reform
Fiscal consolidation and/or
Latvia 2009 2012 3 Economic deterioration
austerity
Romania 2008 2011 3
Unsustainable Active intervention by a newly
Slovakia 1998 2001 3
macroeconomic imbalances elected government
Fiscal consolidation
Slovenia 2012 2015 3
and/or austerity
A domestic currency, Declining external and
Thailand 1997 2003 6
financial or banking crisis fiscal vulnerabilities
Significant economic
Turkey 1994 2013 19
and political reforms
Uruguay 2002 2011 9
Average 7
Source: International rating agencies and Alexander Forbes Investments
Financial market performance and outlook
Global asset class returns have performed relatively well in 2019 when compared to 2018. Developed market equities, driven by
US equities, outperformed emerging markets and local equities. Global bonds underperformed other global asset classes which is a
reversal of 2018 market dynamics where bonds performed better than equities.
Domestic equity markets performed in line with emerging markets but domestic economic issues capped the performance.
Resources, largely the gold and platinum sector, performed well while financials had poor returns.
20 |HOT TOPICS I MARCH 2020
The longer term trend has seen moderating returns which is the low investment return theme we have highlighted over the past few
years. However, for 2020, emerging market equities appear cheap and with stronger fundamentals. In a similar fashion, domestic
equities also appear cheap which should benefit investors who have added holdings of local equities in their portfolios. Local bonds
also continue to offer attractive real yields, particularly in an environment where global bonds offer negative or close to zero yields.
Table 2: Global asset class returns
Global asset class
Dec Q4 2019 2019 2018 5 years 10 years
returns in USD
MSCI DM Index 3.0% 8.7% 28.4% -8.2% 9.4% 10.1%
MSCI ACWI Index 3.5% 9.0% 27.3% -8.9% 9.0% 9.4%
MSCI EM Index 7.3% 11.7% 18.6% -14.3% 6.0% 4.0%
MSCI EFM EX SA Index 4.9% 8.6% 17.2% -12.6% -1.2% 2.3%
Citi World GBI 0.3% -0.4% 5.9% -0.8% 2.0% 1.9%
JP Morgan EM bonds 4.0% 4.4% 10.1% -6.9% 2.1% 2.5%
MSCI UK 2.7% 2.3% 16.4% -8.8% 6.7% 7.1%
Source: Bloomberg and Alexander Forbes Investments
SA asset class
Dec Q4 2019 2019 2018 5 years 10 years
returns in ZAR
All Share Index 3.3% 4.6% 12.1% -8.4% 6.1% 10.9%
TOP40 Index 3.6% 4.5% 12.5% -8.2% 6.2% 10.6%
Capped SWIX 3.1% 5.3% 6.8% -10.9% * *
JSE Resources 7.0% 13.8% 28.6% 15.7% 8.2% 3.3%
JSE Financials 0.7% 2.8% 0.6% -8.7% 3.9% 12.3%
JSE Industrials 2.3% 0.0% 9.1% -17.4% 3.6% 14.0%
ALBI (Bond Index) 1.9% 1.7% 10.3% 7.7% 7.7% 8.9%
Local property -2.1% 0.6% 1.9% -25.2% 1.2% 10.7%
Local cash 0.6% 1.6% 6.6% 6.6% 6.5% 6.0%
Source: Bloomberg and Alexander Forbes Investments
*Not available
| 21ALEXANDER FORBES
Change is inevitable
Gyongyi King
The investments profession is facing challenges that require unconventional ways of thinking. This is sparking
conversations around the asset manager of the future and challenging the investment industry as we know it today, with
technology being one of the key catalysts to the change.
Disruption is inevitable but it does not impact every industry in the same way. The markets have structural weaknesses that
expose the sector to significant levels of change but barriers of entry are inhibiting disruption – for now. The industry will
experience higher levels of technological change in the future.
Some structural changes have resulted in an increase of The public markets are becoming less relevant, and asset
passive investments in the USA, which broadly represents their managers need to position themselves in a way that enables
economy. But in South Africa, the indices do not represent them in the changing environment while keeping to goal-based
the economy and this adds to structural differences. High fees investment strategies.
and sub-par investment returns from active funds globally
have led to a flood of assets moving from active to passive
managers, and this trend is expected to continue into the future
The future lens
– highlighting the rise of passive.
As the asset management industry undergoes rapid
The number of listed companies in both the New York and change, investment firms are faced with the challenge of
Johannesburg Stock Exchange have reduced drastically over integrating technology into their existing business models and
the last 10 years. This has been largely driven by increasing developing investment solutions that align with client values.
venture capital, technology advancements, and diversification These changes pose significant implications for investment
risk, among other things. professionals, whose current roles are likely to change in the
next 5 to 10 years.
The asset manager
of the future can be
defined through three
broad categories: Innovative
Sustainability
solutions
People
22 |HOT TOPICS I MARCH 2020
1. Innovative solutions
The winning asset management business models of the future Integrate passive investment strategies
have the challenge of positioning themselves as:
Asset managers that want to remain competitive should seek
■ distribution powerhouses to build solid portfolios that integrate appropriate passive
■ solution providers investment strategies. Passive funds continue to gather assets
■ beta factories and with the advent of zero-cost exchange-traded funds in the
■ alpha shops United States, this is likely to accelerate this growth even further.
Distribution grant access to assorted products, The proportion of passively managed assets in the United
powerhouses distribution channels and investors States has consistently increased from 19.5% to 22.4% over
the last five years and is expected to continue in a similar
Solution have multi-asset and portfolio trajectory. Passive investing will grow at the expense of active
providers construction expertise that allow them management, as investors increase allocations to smart beta.
to develop innovative solutions
Beta factories can achieve high operational
Investing in artificial intelligence
efficiency through robust product Successful asset managers will use technology to develop
pipelines and operating at scale innovative solutions – allowing them to optimise their products,
gain economies of scale, and improve the overall solution
Alpha shops have deep expertise in either construction. Continuous investment in artificial intelligence-
traditional or alternative asset classes
enabled data solutions will help asset managers innovate,
improve services and reduce costs. Artificial intelligence is
reshaping distribution and enabling asset managers to launch
The asset management industry is moving to a point where you their solutions to new markets and customer segments which
must be either broad or niche to compete. The players in the have been previously underserved.
middle are going to suffer in these challenging market conditions.
| 23ALEXANDER FORBES
2. Sustainability 3. People
Members in pension funds increasingly demand that all The world of work is evolving, and the investment industry
parties in the investment chain take their broader long-term isn’t exempt from the change. In South Africa, the asset
interests, and those of future generations, into account. Society management sector doesn’t reflect the participants in the
is demanding that environmental, social and governance market and lacks the diversity of views needed to further
(ESG) factors, sustainability and climate change become key develop the sector.
considerations in the investment process – and their combined
voice refuses to be taken lightly. Looking at transformation trends in the South African asset
management industry, black-owned market share of traditional
Investing for the long term equities has fallen. This has been due to merger and acquisition
A sustainable investment view is more likely to create and activities that have increased across the sector, driven by
preserve long-term investment capital whereas stewardship B-BBEE and consolidation. The financial services sector should
through active ownership helps realise long-term shareholder be radically transformed to become a vibrant and globally
value. Long-term streams of returns and long-term themes, competitive industry that reflects the demographics of South
rather than short-term price movements, are more likely to Africa and contributes to the establishment of an equitable
achieve desired investment outcomes. society by providing accessible services to black people and
directing investment into targeted economic sectors.
Climate change
Climate change is a growing and significant priority to investors We need two types of diversity
globally. The social, environmental and economic risks posed To effectively function in the future, asset managers need to be
by climate change have long-term ramifications, including risks cognisant of both cognitive diversity and identity diversity:
posed on investments. The causes of climate change need
to be addressed timeously to avoid spiralling into dangerous
Cognitive diversity
temperature levels and the investment industry has a role to
It’s important to have a team of varied thinking and
play in doing this.
problem-solving skills. This means that we move away
from hiring professionals with just accounting and
The future will take its cue from the turbulence of the past. The
investment backgrounds and seek to hire individuals
private markets have seen negative share price reactions to
whose educational background and working experience
investor activism and this has led to occurrences like the tabling
lie anywhere in the spectrum. Data analysts, geologists
of climate change resolutions by the Johannesburg Stock
and information technology specialists, amongst others,
Exchange in 2019. Increasingly, investors and companies are
all have a place in the investment team.
including climate change in their investment decisions. Industry
interventions such as Bloomberg’s Task Force on Climate-
related Financial Disclosures (TCFD) and the Carbon Disclosure Identity diversity
Project have ensured that disclosing climate change and We live and work in a world in which individuality should
environmental risk is increasingly becoming part of companies’ be embraced because individuality is all around us.
financial reporting. ‘Different’ should never be seen as an anomaly, and
investment teams need to reflect the society we live in.
Both cognitive and identity diversity are connected, because
people of different identities often have different backgrounds
and experiences, making diversity a critical aspect in
investment teams to help foster a better understanding of the
marketplace and society to spark innovative solutions for clients.
24 |HOT TOPICS I MARCH 2020
T-shaped leaders are in demand
Adapts successfully to changing environments
Researchers have coined the term ‘T-shaped skills’ as
valuable skills to have in the future. A T-shaped person is an
all-rounder who: Works across disciplines
■ adapts successfully to changing environments
■ works across disciplines Is at ease with technology
■ is at ease with technology
Depth of related skills and expertise
An example is an engineer who is a subject matter expert,
easily transitions into investment management and knows how
to code. Both traditional and practical learning will drive the
new era of T-shaped leaders who combine leadership, soft
and technical skills. No single investment team can afford to
have a lack of diversity. Without diversity, people aren’t able
to sufficiently connect across disciplines to develop innovative
investment products.
The future presents a world in which artificial and human
intelligence complement each other, allowing people to leverage
the benefits of technology while enhancing transparency, ethical
consideration, communication and knowledge sharing.
Path to the future
The roadmap to success in the investment profession isn’t simple – a combination of skills and abilities will continue to
shape the industry.
What hasn’t changed, however, is that the asset management industry will always attract investment professionals with
a passion for learning and this will result in better outcomes for clients. It is the desire of investment professionals to
learn, adapt and gain new abilities that will shape the asset manager of the future and make it one that can adequately
serve its clients.
Our role as leaders in the financial services industry is to build the foundation that welcomes continuous development,
technological change and enhanced diversity and inclusivity to help propel asset managers into the future and investors
closer to their financial goals.
| 25SECTION
TWO
welcome to brighter
2020 vision
themes and opportunities
... it's a matter of time
| 272020 vision: themes and opportunities A number of forces have the potential to radically reshape the investment landscape over the next decade. After the first decade of this century brought 9/11, the “tech wreck” and the global financial crisis, the taper tantrums, polarized politics and trade wars of the 2010s seem quite benign. However, the puzzles facing investors in the coming decade are far from harmless: negative yields on more than a fifth of global bonds, stubbornly low inflation in the developed world, central banks running out of ammunition to stimulate growth, growing wealth inequality, and high public debt levels. The effects of climate change are also becoming clear: CO2 emissions are higher than ever and climate-related activism is accelerating. Change is on the horizon and you need to be ready. 28 |
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