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    Seed Weekly - The Great Exodus of 2017

    The past month has been interesting, and not necessarily in a positive way.

    A topic that has dominated discussions professionally and socially, for me at least, has been the increased desire of investors to invest a meaningful portion of their assets offshore. This follows a growing trend where assets under our care are steadily tilting towards hard currency global solutions as time wears on.
    The reasons for this vary. The main theme recently has been a desire to hedge oneself from SA political & systematic risk.

    When you look back to even a month ago, the risk of a political fallout has increased. Although we don’t think it is highly likely that we will see the country imploding in the next couple of weeks, the risk, in fact, is non-zero and thus does requires our dedicated attention.

    In spite of this, we still believe that the most important reason to invest overseas should not be because of a state of nervousness, but rather due to portfolio diversification strategy. It is something we tout quite often as being fundamental to a successful investment strategy.

    You may now ask if doing the right thing for the wrong reasons remains the right thing. I would say, ‘In a way, yes’.

    The political risk that South Africans believe they face, correctly or otherwise, is that we are at a crossroad where either it all breaks down, or not. The stakes are high. The higher the stakes, the more harrowing the experience of having to live through the events as and when they occur. This is compounded by the fact that what a person stands to lose is the ability to call South Africa home, which is indeed a very emotional consideration. It is therefore very difficult to completely disregard these emotions when making investment decisions.

    The problem with making decisions emotionally, is that it is always reactive. In order for your investment strategy to be successful, it is of utmost importance to remain proactive. Not in the sense of trying to predict the future at all, but rather ensuring that your asset & liability profile, remain aligned with a suitable strategy after considering the risks involved in the various options available.

    We support the idea of having a healthy portion of your assets invested outside of the country, even if your liabilities are in Rand. By comparison, SA is a small country, and although there are a few very good companies with which one can invest, the universe remains small. There are many sectors that remain underrepresented on the JSE that can only be accessed in a global portfolio. That doesn’t even touch on the multitude of excellent investment companies and opportunities available beyond our borders.

    We strongly believe that increasing the geographic breadth of your asset risk exposure is a wise move, all things considered. Doing so enables you to remove your exposure to SA systematic risk, though a few additional issues still need to be considered. While matching your assets and liabilities across different currencies are among the important considerations, ensuring that you have adequate diversification across asset classes should remain your primary consideration. Investing across multiple jurisdictions can also create additional considerations in the event of your death. However, with proper consultation and planning, these issues can be navigated.

    The situation we find ourselves in at the moment is rather unique, and requires level headed thinking. Disentangling yourself from SA can be an expensive exercise, and needs to be considered in broader context - SA is not the only country that has risks and challenges, political or otherwise. The Seed Team is on board with developing and managing solutions to these risks, and has been for some time.

    Looking at the big picture we recognize the influence of political risk. By its very nature, political risk is almost entirely unpredictable, and difficult to factor into our process. What we can say again, is that diversifying your assets is a good idea, as long as you have a proper plan in place and have considered the implications of selling SA assets and investing offshore.

    As we bear witness to a great exodus of cash, I think we all hope that things work out for us; the question we should ask ourselves is not “Am I hedged against the apocalypse?” but rather to look at your balance sheet and ask, “Can this be improved?”.

    Kind regards,

    Stefan Keeve

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2017-05-10, 09:56:28, by Mike Email , Leave a comment

    Seed Weekly - Residential Property in the Western Cape - the Best of a Bad Bunch

    South Africans like to own property. A secondary home, or even a holiday home, is no strange phenomenon in our country. The security of owning a physical asset that we can see and touch provides one with a sense of security and “wealth”. Property is personal and provides people with the ability to express their creativity and inspiration, something no other asset class can provide. Many South Africans also believe that property will always be a good investment.

    As they say, “The proof of the pudding is in the eating”. Looking at the performance of the residential property market using the FNB House Price Index, it does not paint a pretty picture.

    Graph 1 : Major 5 Regions House Price Inflation Rates (year-on-year)

    Source: FNB Property Barometer, April 2017

    The graph above, as at the end of March 2017, illustrates the slowdown in residential house prices. The Western Cape has been the darling of the residential property market since mid-2011, outperforming all of the other four major regions on a year-on-year basis. The year-on-year average house price growth for the Western Cape measured 6.2% in the first quarter of 2017. This is slower than the 7.7% rate of the previous quarter, and now considerably slower than the 10.6% multi-year high recorded in the first quarter of 2016. As illustrated in the graph above, there has been a significant decrease in residential property prices since early 2015.

    Over the last seven years, homeowners have been struggling to find any real returns from their residential properties, as house prices have hardly kept up with inflation. There has also been a significant decrease in the demand for buy-to-let properties. According to First National Bank, transactions have decreased from a peak of 25% in 2008, to below 6% in 2016. Since the beginning of 2010, the average house price for the Western Cape has risen cumulatively by 78%. That is an annualised capital growth of roughly 8.5% over the past 7 years. By comparison, the next strongest growth was in KZN, with a modest 46%, and Gauteng with 41% over the same period. This amounts to an annualised capital growth of 5.5% in KZN, and just over 5% in Gauteng. Hardly any real capital growth, outside the Western Cape, if you consider an annualised inflation rate of 5.5% over the past 7 years. Alternatively, a property tracker fund tracking the SAPY would have returned 16.5% annually over the same period.

    Graph 2 : Major 5 South African Regions House Price Increase since early-2010

    Source: FNB Property Barometer, April 2017

    As with all investments, there are also some risks to consider. Tenants paying late (or never), and an increase in interest rates, are some of the key risks that investors will need to consider before investing into a buy-to-let property. Rates and taxes have also been rising, on average way above the inflation rate per annum over the last few years.

    Higher interest rates bring me to my next point: “What will the impact of South Africa’s credit downgrade be on the residential property market?”

    As we are entering unchartered territory, we are not completely sure what to expect. However, one of the key risks of a credit downgrade, which can have a significant impact on the property market, is higher interest rates. With a potential increase in interest rates, investors will also have to deal with increased mortgage payments going forward.

    Some will reason that the average house price index is not a true reflection of the property market segments, as suburbs on the Atlantic Seaboard in Cape Town, or Westcliff in Johannesburg, have seen annualised house price growth in double digits since 2010. This is certainly true, though these properties are the exceptions to the general property market in South Africa. It will require some thorough research to identify the right area to buy in and determine which types of properties are in demand to uncover these gems.

    Property allocation is essential to a well-diversified portfolio, but taking the risks and returns into account, I would much rather place my allocation in listed property than residential property.

    Kind regards,

    Stephan van der Merwe

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2017-05-03, 12:12:04, by Mike Email , Leave a comment