View of the month - July 2019 - Vista Wealth Management

View of the month – July 2019

Dear Investor,

Every year in July, thousands of the world’s largest marine mammals are irresistibly drawn to their
breeding grounds in the temperate and tropical waters of South Africa. Humpback whales (this month’s
“View of the Month” picture) and Southern right whales are the main migratory species and their
numbers are increasing with every passing year to create a natural spectacle that can be enjoyed from
almost any coastal town along the South African coastline.

Not only were the whales a beautiful sight for South Africa in July this year, we also had an array of
other good news during the month:
    - Ford announced that it would create an additional 1,200 jobs at its Silverton plant outside
        Pretoria
    - Pepsi, the world's third-largest food and drink company, wants to buy South Africa's Pioneer
        Foods
    - Retail sales rose by 2.2% (Jan – May 2019) – while economists were only expecting 1.7%
    - Bafana Bafana got to the quarter finals in the Africa Cup of Nations
    - The Springboks beat Australia and drew against New Zealand
    - A 25 basis-point interest rate cut – the first in more than a year!

With us being our own worst enemy, the good news did not last long:
   - Public Protector Busisiwe Mkhwebane ordered President Cyril Ramaphosa to discipline
        Minister Pravin Gordhan within 30 days; for Speaker Thandi Modise to refer him to the joint
        committee on ethics and members’ interests, and for the SAPS and NPA to investigate criminal
        charges against him and the SARS leadership that established the so-called “rogue unit”. The
        courts later ruled in favour of Gordhan’s application for an interim interdict to suspend the
        implementation of Mkhwebane’s remedial orders while he takes her report into his work at the
        South African Revenue Service (SARS) and conduct in the executive on judicial review
   - In the same month Mkhwebane first found that Ramaphosa deliberately misled the National
        Assembly when he was asked about a donation made to his ANC election campaign by Bosasa,
        the company that has been implicated in serious corruption by the ongoing state capture
        commission. She also found that Ramaphosa was in breach of the provisions of the Executive
        Ethics Code and the constitution
   - Then the Eskom bad news started with Finance Minister Tito Mboweni announcing a R59bn
        financial support package over two years for the embattled state owned-entity. Moody’s
        Investors Service, the only major credit-rating company that still assesses South Africa’s debt as
        investment-grade, said the additional support without an accompanying plan to make the
        company more sustainable is “credit negative”. Later Eskom reported a loss of over R20bn;
        lower than predicted, but still the outcome of crippling debt and sinking sales

Internationally there were also quite a few developments during the month:
    - In the UK, Alexander Boris de Pfeffel Johnson emerged victorious from the Conservative party
        leadership contest and was installed as the UK’s 77th Prime Minister. Having pledged to deliver
        Brexit “no ifs no buts” by 31 October, Mr Johnson wasted no time carrying out a seismic
        ministerial clear-out that has established a new eurosceptic Cabinet. Britain’s pound is subdued
        amid rising fears of no-deal Brexit
    - Senior members of the US administration met with a Chinese trade delegation in Shanghai. No
        deal was concluded with each side blaming the other. Further dampening sentiment have been
        comments from President Donald Trump, who stated that he believed Beijing may not want to
        sign a trade deal until after the 2020 US presidential election in the hope they would be able to
        secure more favourable terms from a Democratic president
    - The US Federal Open Market Committee (FOMC) cut the Federal funds target rate as broadly
        expected, by 25bps to range between 2.00% and 2.25%. It also opted to halt the quantitative
        easing balance sheet run off, sooner than the initial stop which was scheduled for the end of
        September. The US Dollar firmed up against all major currencies including the Rand

Is South Africa worth the risk?
Every year we’re fortunate to attend the Allan Gray Investment Summit. It is a massive event hosting
over 2,000 people at the Johannesburg venue. Kevin Lings from Stanlib is arguably South Africa’s best
economist presenter and we thought his presentation at this event was very insightful as he attempts to
answer the question: Is South Africa worth the risk?

Still being an economist, Kevin started the presentation by painting a bleak picture with some scary
South Africa (SA) economy statistics:
      - SA GDP growth has been steadily declining and currently forecasted to be 0.7% for 2019
      - SA youth unemployment rate is 55% (excl. discouraged workers) and 69% (incl. discouraged
          workers)
      - SA government gross loan to debt the is highest ever and nearing 60%
      - SA is the 73rd corrupt country in the world

He then went on to indicate that despite the terrible statistics for SA above, our equity markets have
been performing in line with other emerging markets (EM) as indicated by the graph below:

He also indicated that SA’s GDP growth is in line with other emerging markets by presenting the
following table:

So if the SA markets are not driven by economic data and we’re still performing in line with other EM,
what is the problem? He answered this question by making the following 4 points:

    1. South Africans are too fixated on equity markets
He proved this point with the following graph which indicates SA’s equity market capitalisation
compared to other EM:

He went on to indicate that the problem is compounded by foreigners that has been favouring EM
bonds, as opposed to EM equities as indicated in the graph below:

The yield on SA bonds is very high compared to first world countries where the yields are often negative.
To illustrate this point he showed the graph comparing the 10-year bond yield of SA versus Germany:

    2. South Africans are unrealistic
We want President Cyril Ramaphosa to reverse 9 years of looting and maladministration within 2 years.
This is unrealistic when compared to companies where a new CEO will get at least 3 years to implement
a turnaround strategy at a company that is in trouble.

Another issue is that we compare our performance with the biggest strongest economy that’s been on
absolute fire thanks to quantitative easing over the last 10 years. To illustrate the point he showed the
graph below indicating what the equivalent of one US Dollar (USD) would have been worth in USD in SA
versus the US from 2010 to 2019:

     3. SA has investment opportunities, you just have to look harder for them
We too often throw the baby out with the bath water. News headlines like the “Mining sector is dead” is
incorrect and create a false sense of what’s really going on. Certain subsectors within the mining sector,
like the gold miners, have been performing badly but as a whole the mining sector still represents on
average 8% of the SA GDP in 2019 as it did in 1994.

Another fact is the SA manufacturing sector has been performing poorly compared to other EM
manufacturing sectors:

But if you unpack the SA manufacturing sector you’ll find the food and beverages sector has been
performing very well and it is actually the clothing manufacturing sector that has pulled us down:

4. Diversify offshore
SA has a very sophisticated financial services sector and it is very easy to invest offshore. It is bizarre to
think so many investors are quite happy to have all their investments in a small country at the bottom of
Africa that does not even represent half a percent of the world’s GDP.

In conclusion, South Africa turns out to be worth the risk if investors take the following into account:
    - Consider other asset classes like bonds in your portfolio
    - Be realistic, this is a big ship and it is going to need some time to turn around
    - There are investment opportunities, you just have to look harder for them like the iron ore,
        platinum and food/beverages sectors
    - Diversify offshore

How to diversify offshore?
Leading on to Kevin’s last point, below a high-level list of ways to diversify offshore:
   1. Foreign denominated currency bank accounts with transparent/low conversion rates and USD
        interest bearing ability
   2. Offshore share portfolios
            a. Shares – Invest directly in shares like Google, Boeing and Visa
            b. Exchange Traded Funds (ETFs) – Invest directly in international ETFs like S&P500,
                Vanguard and Semiconductors
            c. Investment Trusts – Low cost actively managed funds like Monks, Bankers and other
                themed trusts
   3. Offshore unit trust investment
            a. Invest in some of the best international unit trusts like Dodge & Cox, Schroder and Orbis
                to name a few
   4. Offshore single stock futures (IDX)
            a. Investors can take leveraged positions on international shares which are traded and
                cleared on the Johannesburg Stock Exchange (JSE)

5. Local share portfolios
           a. Invest directly in shares in dual listed companies listed on the JSE
           b. Invest directly in ETFs based on foreign indices and themes listed on the JSE
    6. Capital and return guaranteed offshore products
           a. These products will guarantee the investor’s initial capital and sometimes provide a
               guaranteed return
    7. Offshore tax wrappers where investors are taxed at a maximum of 30% as opposed to the
       potential 45% tax rate for higher income earners

It is important to note that we don’t believe in timing the market and just like everyone else, we also
don’t know what the future holds. The above merely confirms that investors need to not only be asset
diversified but also country diversified.

Quote of the month
Former President, Kgalema Motlanthe has warned of the dire impact on society if property rights in
SA aren’t protected. Speaking at a dialogue about a mooted agricultural development agency facilitated
by former constitutional negotiator Roelf Meyer in Pretoria during July, Motlanthe said there is no need
to amend Section 25 of the Constitution to enable expropriation in the public interest because the
country's supreme law already provides for that. Motlanthe made 2 very powerful statements at this
event:
    1. "If property is not protected, you destroy value, and if there's no value then you won't have
        an economy driving forward. People won't invest effort and resources in building assets”
    2. “And if you think about it properly, if property is not protected by law, society as we
        understand it today, will disappear because the kind of anarchy and chaos that would ensue is
        difficult to imagine"

Fuel prices
Fuel prices for August are set for changes with petrol up and diesel down, according to the unaudited
month-end fuel price data released by the Central Energy Fund.
“According to the latest figures, we forecast that petrol will increase by around 12 cents a litre,
and diesel will be down by approximately 16 cents. Illuminating paraffin is also down, by 8 cents a
litre,” said the Automobile Association.

The markets
The red block in the table below shows the market stats for July 2019. In short, it was a negative
month for the SA stock market, with the JSE All Share Total Return index ↓ -2.4% for the month (↑
2.2% for the last 12 months). The Financial sector was the hardest hit ↓ -6.6% with the Resource sector
short on its heels ↓-5.2% for the month. The Listed Property sector was the least negative ↓-1.2% for
the month. The only sector positive for the month was the Industrial sector ↑1.2%.

Market summary for the month of July 2019

Financial Indicators as at 31 July 2019:

Global indices:

Global indices – 1 Year:

Global indices – 5 years:

JSE Sectors:

JSE Sectors – 1 Year:

JSE Sectors – 5 Years:

Currencies (Positive indicates ZAR has weakened for the period, vice versa):

Currencies – 1 Month (Above 100 indicates ZAR has weakened for the period, vice versa):

Currencies – 1 Year (Above 100 indicates ZAR has weakened for the period, vice versa):

Currencies – 5 Years (Above 100 indicates ZAR has weakened for the period, vice versa):

Interest Rates:

Interest Rates – 1 Year:

Regards,

Vista Wealth Management
Magnus de Wet | 082 894 8654 (preferred) | Office: 010 141 6033 | magnus@vistawealth.co.za
info@vistawealth.co.za
www.vistawealth.co.za