Finweek 21 May 2020

ECONOMY

SA BUSINESS LOSES PATIENCE WITH LOCKDOWN

COLLECTIVE INSIGHT

DISRUPTING THE WORLD OF FINANCIAL ADVICE

COLLECTIVE

INSIGHT

INSIGHT INTO SA INVESTING FROM LEADING PROFESSIONALS

MAY 2020

DISRUPTING THE WORLD OF FINANCIAL ADVICE Inside

SHIFTING TOWARDS A MODEL THAT WILL SERVE THE BEST INTERESTS OF ALL SOUTH AFRICANS

20 Introduction 22 Lessons from the ‘Wolves of Groote Schuur’ 24 How to shake off inequality 25 Finding scaling solutions for the masses 27 The times they are a-changing

How advice should adapt in a post-pandemic

SA 28 Narratives and numbers 29 Better investment decisions should be everybody’s beeswax 30 What Covid-19 has taught us 31 The financial advice model of

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OPINION: WILL AFRICAN STATES USE COVID-19 TO GRAB MORE POWER?

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from the editor

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JANA JACOBS

riting this week’s note had me on tenterhooks. Not because of the usual uncertainty that comes with having to write 400 words that aren’t complete drivel, but because as I write this, I am filled with stomach-churning anxiety – and a side of anger – because, frankly, it’s not been a great couple of weeks since our last deadline. It started with the news that Associated Media Publishing had closed its doors, followed a few days later by the shock announcement that Caxton had decided to withdraw from magazine publishing. Most of us at finweek know people who have been directly affected by this – former colleagues, friends or even family. My mother is one of them. As of 4 May she is out of a job, as is the entire team that she has worked with for more than ten years. So too over a 100 people that worked on other titles. Nothing quite forces you to confront the reality of this lockdown like the gut-punch of its consequences hitting home. Queue the stomach-churning anxiety. Of course, my mother and our colleagues in the media industry that are now dealing with this reality are not the first or last casualties of the lockdown. But we knew this harsh inevitability would arrive, right? Our president warned us that the fight against the threat of the coronavirus would be “difficult to endure”. We had seen what the consequences of global lockdowns were in countries that are in far better economic shape than we are. But the hard lockdown that started on 26 March was going to give us the best fighting chance against this pandemic. (I truly believed this.) When the first 21 days were announced, most South Africans accepted it (some more begrudgingly than others), because there seemed to be a plan. After another two weeks were added, sceptics started to raise red flags. Nearly two months later, add in some regulation flip-flopping, toss that together with irrational restrictions that take away our civil liberties – many based on anything but fact – and any goodwill that was left dissipates, leaving behind unadulterated anger. Ever heard the anecdote about the frog in boiling water? Throw a frog into a pot of boiling water and it will jump out immediately for fear of burning. But, place a frog in a pot of cold water and slowly start to boil it, and it won’t notice… Or maybe we were just drunk on the Ramaphoria Kool-Aid that we’d been religiously sipping every week as we listened to him address and reassure us because our liquor had run out. (Guilty as charged.) Either way, it’s been nearly three weeks since one of those addresses, and most of us have cottoned onto the fact that we are boiling in a pot of absurdity. Unfortunately, we can’t jump out, leaving us to fester in our anxiety and anger indefinitely. ■

contents Opinion

4 Sport serves bigger goal than we think 6 Will African states use Covid-19 to grab more power?

In brief

8 News in numbers 10 Virtual working will be the only option for many small businesses 11 Time to hit pause on gold miners

Marketplace

14 15 16 17 18 32

34 35

Fund in Focus: Growth at the right price House View: Mining, Sasol Killer Trade: Kumba Iron Ore, Vodacom Invest DIY: To take profit or not? That’s the question Investment: Change as the times do Simon Says: Anheuser-Busch InBev, Comair, Kaap Agri, Metrofile, Phumelela Gaming and Leisure, PSG, SA bonds, US markets, Vivo Energy Invest DIY: Lessons from Berkshire’s AGM Share View: British American Tobacco bullish in the long run

Collective Insight

19 Disrupting the world of financial advice

36 The return of oil

In depth

42 South Africans’ goodwill wanes in web of lockdown regulations

On the money

44 Personal finance: Thy will be done 45 Quiz and crossword 46 Piker

EDITORIAL & SALES Acting Editor Jana Jacobs Deputy Editor Jaco Visser Journalists and Contributors Simon Brown, Peter Fabricius, Samuel Feinstein, Johan Fourie, Moxima Gama, Jessica Hubbard, Mariam Isa, Schalk Louw, David McKay, Timothy Rangongo, Petri Redelinghuys, Melusi Tshabalala, Glenda Williams Sub-Editor Katrien Smit Editorial Assistant Thato Marolen Layout Artists David Kyslinger, Beku Mbotoli, Nadine Smith Advertising Paul Goddard 082 650 9231/paul@fivetwelve.co.za Clive Kotze 082 335 4957/clive@mediamatic.co.za 082 882 7375 Sales Executive Tanya Finch 082 961 9429/ tanya@fivetwelve.co.za Publisher Sandra Ladas sandra.ladas@newmedia.co.za General Manager Dev Naidoo Production Angela Silver angela.silver@newmedia.co.za Published by New Media, a division of Media24 (Pty) Ltd Johannesburg Office: Ground floor, Media Park, 69 Kingsway Avenue, Auckland Park, 2092 Postal Address: PO Box 784698, Sandton, Johannesburg, 2146 Tel: +27 (0)11 713 9601 Head Office: New Media House, 19 Bree Street, Cape Town, 8001 Postal Address: PO Box 440, Green Point, Cape Town, 8051 Tel: +27 (0)21 417 1111 Fax: +27 (0)21 417 1112 Email: newmedia@newmedia.co.za Printed by Novus Print Linbro Park and Distributed by On The Dot Website: http://www.fin24.com/finweek Overseas Subscribers: +27 21 405 1905/7

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opinion

By Johan Fourie

SOCIOECONOMICS

Sport serves bigger goal than we think Nothing quite unites South Africans like sport does. New research suggests that this shared pastime can effect positive change in people’s behaviour towards each other – long after the game is won or lost.

i

miss sport. I miss following my favourite teams, the bloggers who write about them, the news about new recruitments, arriving at a friend’s house on match day, the intensity of a big rivalry, the gloating after a win, and, yes, even the agony of perennial disappointments (and, to be honest, there are many if you’re a Protea, Stormers and Arsenal supporter!). Sport, I now realise more than before, has a way of bringing people together like no other social event can. On a big match day, I could have the same conversation with people of all walks of life, men and women, black and white, rich and poor, in multiple languages. I miss those interactions with my fellow South Africans. We, more than any other nation, know only too well how sport can unify. Thousands of people gathered for the Springboks’ parade after their World Cup win last year. The 1995 World Cup win was so momentous some of the biggest names in Hollywood even made a film about it. What that film, Invictus, also demonstrated, was that sport is – and always has been – a powerful political tool. Karl Marx famously said that religion is the opium of the people. But sport, I would argue, is our new faith. Stadiums have replaced temples, cathedrals and mosques as the most prominent buildings in our cities. Many of us spend more money on our favourite teams than on our favourite theology. And we almost certainly dedicate more of our most precious resource – time – to sport than religion. To what end, you might ask? Has this new faith helped us build a better society? A new paper published in The American Economic Review shows that it has. The three authors do two things. They first use recent statistics on the matches played by the national football teams of African countries to test how match outcomes affect citizens’ self-reported national identity – whether you consider yourself, for example, Zulu first and then South African, or the other way round. They then take those same match outcomes and test how winning increases or decreases the likely civil conflicts between ethnicities. To answer the first question, they use the Afrobarometer. Administered in 25 African countries since 2002, this survey asks detailed questions about respondents’ attitudes towards people of a different ethnicity or about the level of trust in their government. Afrobarometer field workers can’t survey everyone at once, of course: Over the course of several months, field workers go from house to house to collect this information. What makes the paper so interesting is that the authors use this variation in timing of the survey questions to look at how respondents answer questions just before and just after their national football team played. I was surprised by the size of the results. Individuals surveyed in

the 30 days after an important victory of a country’s national team are 37% less likely to identify primarily with their ethnic group, and 30% more likely to trust other ethnicities. That is substantial. In many cases, it switches the primary identification from the ethnic to the national level. And the effect is asymmetric: There is no effect of national team defeats on self-identification. It is one thing to feel more patriotic towards your country, but quite another to actually change your behaviour. That is the second, and more important, question the authors ask: Do national victories affect civil conflict? To answer this, they combine the football data with data on the occurrence and severity of political violence events. They then exploit the randomness of qualification for the Africa Cup of Nations: They compare two teams in the same group that, going into the very last round of matches, could still qualify. The team that qualified is the ‘treated’ group and the team that (barely) failed to do so, is the ‘control’ group. Sport, it turns out, is indeed the opium of the people. Countries that qualified had significantly less ethnic conflict in the following six months than countries who (barely) didn’t. As the authors note: “... this effect is sizeable, significant, and appears to be quite persistent, lasting up to several months after the event”. A few things are worth highlighting. The effect is driven only by victories in high-stakes official games (like the Africa Cup of Nations and FIFA World Cup qualifiers and finals). The effect is substantially higher for victories against traditional rivals. It is similar for wins at home and for away games, suggesting that the effect is not driven by those actually attending the match. One conclusion I find particularly enlightening is that “the effect of victories is stronger the more diverse the ethnic composition of the national teams”. We may think of these results as curiosities. But that would be a mistake. As a consequence of the Scramble for Africa and the arbitrariness of borders drawn up by colonial powers, many ethnic groups within Africa are fractured across country borders. This has often been a cause for conflict, both civil and international. Countless experts have tried to find policies that would encourage ‘nationbuilding’ – from mass schooling and military conscription to infrastructure building and resettlement programmes – but with limited success. Such policies require not only vast resources but also a competent state, both of which, as a consequence of these ethnic divisions, are usually in short supply. This paper offers a much cheaper alternative: nation-building through sport. Francois Pienaar or Siya Kolisi lifting the William Webb Ellis trophy weren’t just historic moments, they had very real positive consequences. In these times when sport is a fading memory, let’s not forget that it can serve a much bigger goal. ■ editorial@finweek.co.za

Photo: Shutterstock

Karl Marx famously said that religion is the opium of the people. But sport, I would argue, is our new faith.

4

finweek 21 May 2020

Johan Fourie is associate professor in economics at Stellenbosch University.

www.fin24.com/finweek

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a portfolio’s risk profile, and suggests that the ESG criteria should become an integral part of the investment decision-making process. We’ve done our own analysis and achieved similar results, in the table below. Q: Is sustainable investing just a market trend? A: Sustainable investing is here to stay. Values-based investments give investors an opportunity to invest in companies that share their core beliefs, and attach their name to social or environmental change. ESG integration will only enhance the fund’s risk and return profile as shown in the table below, in turn, achieving both social and financial goals over the long term. Q: What is Old Mutual Investment Group’s approach? A: Our dedicated proxy voting and engagement specialists ensure that material governance issues are addressed through our listed equity holdings. We don’t simply invest in companies with the best ESG profiles. Our customised approach to managing investments has led to the development of the Old Mutual ESG capability, with the end goal of investing in disruptive companies leading to greater financial rewards. CVAR[2] (95%)

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opinion

By Peter Fabricius

AFRICA

Will African states use Covid-19 to grab more power?

n

Photo: Gallo/Getty Images

Economic and ideological fault lines were revealed by Covid-19. How will African nations shift on these spectra? ever let a good crisis go to waste, Sir Winston Churchill may, or the IMF and the World Bank. Private creditor support this year could may not, have said. Many politicians and economists are now amount to an estimated $13bn. That leaves a financing gap of around taking that advice anyway, capitalising on the Covid-19 crisis, $44bn. But Lopes himself told La Tribune Afrique that Africa needs at to advance their own agendas or justify their pet theories. least $200bn to beat Covid-19 and the economic fallout from it. And In South Africa, for instance, the minister of cooperative only the IMF could provide it, in the form of special drawing rights. governance and traditional affairs, Nkosazana Dlamini-Zuma, If this huge rescue package is somehow forthcoming and Africa a strong anti-smoker, seems controversially to have browbeaten does survive Covid-19, where will it then be? Firmly in the hands of President Cyril Ramaphosa into reversing policy and imposing a ban governments, Lopes, like Gray, seems to believe. The two share just a on tobacco and cigarette sales during the lockdown. The minister of whiff of the same schadenfreude over the apparent collapse of global trade and industry, Ebrahim Patel, likewise banned e-commerce partly capitalism which Covid-19 seems to have precipitated. because of “the impact on other businesses”. But whether a return to economic nationalism and state centrism So Patel, a communist, is clearly using the regulations to try to can work anywhere, even in rich states like Britain, is doubtful. That it effect fairness among businesses. Neither of these policies have much can work in Africa seems very unlikely – and not necessarily a good to do with curbing Covid-19. thing anyway. African governments have not all shown themselves to At the other end of the Cabinet’s ideological spectrum, finance great advantage, many clearly exploiting the crisis to wield the big stick minister Tito Mboweni is evidently trying to use the Covid-19 crisis to or dodge elections to cling to power. force through some long-thwarted reforms like grounding SA Yes, it is true now that Africa should become more self-sufficient Airways and slashing the public service wage bill. – as in producing enough to cover its costs. But it surely doesn’t Globally, though, it’s more the left than the right make sense to lament, as some economists are, that Africa that is seizing the opportunity. Not surprisingly should itself have already been producing all the medical perhaps, since the economic fallout from all the equipment it would need to fight Covid-19. Who could travel restrictions and lockdowns, airlines going have anticipated suddenly needing trillions of masks? bust and countries turning inward certainly looks Africa should no doubt capitalise on the global like evidence that the era of globalisation, of reaction against “one-country risk” (especially to China) market rule and liberalism has ended, as John Gray in global supply chains and so boost its manufacturing, as essentially concludes in a much-read essay in New the Brenthurst Foundation suggests in an article in Daily Statesman. He revels in the way that the nation state, Maverick in early May. Nkosazana Dlamini-Zuma in Britain, as elsewhere, has reasserted itself, stepping But, of course, diversification – especially away from the Minister of cooperative into the breach to save health systems and economies, continent’s long and fatal dependence on single commodity governance and traditional affairs while multinational institutions such as the EU – and exports – has always been what Africa should have been one could add for good measure, the United Nations doing anyway. Nothing has really changed. Security Council – have dismally failed. He envisions the new nation If we take some of the apocalyptic arguments we are now hearing state henceforth being far more self-sufficient and feeding itself, for to their logical conclusion, our benevolent governments should now example, rather than importing its food. be giving us all a few chickens and perhaps a cow and some vegetable Where does this all leave Africa? Not in a good place. First of all, seeds to replace our roses so we can feed ourselves in our own homes Africa faces graver economic peril than most. The IMF predicts that in this post-pandemic, post-globalisation world. the global economy could shrink by 3%. The World Bank forecasts For it is not just the global economy that has been dislocated that Africa’s economy could contract further, by as much as 5.1% by the coronavirus. It is just as much, or probably more, national in 2020, mainly due to a sharp decline in commodity exports to key economies and supply chains that have been disrupted. trading partners such as China and Europe, as well as a steep fall in There is much we don’t yet know about the coronavirus, but commodity prices, led by oil, a plunge in tourism and remittances as one thing we can be fairly certain about is that it does not have any well as the domestic impact of lockdown measures. ideological disposition. “I think African economies are indeed in danger of suffering a fatal But the danger is that many of these ideological forecasts that crash,” Carlos Lopes, former head of the UN Economic Commission for are being made as though they are objective visions of the future, Africa, told New African in late April. will become self-fulfilling and will drag Africa and the rest of the To prevent that crash, the African Union has asked the world back into a protectionist past, which will only aggravate the international community for at least $100bn to defeat Covid-19 and economic crisis. ■ keep economies afloat. The World Bank has estimated Africa needs editorial@finweek.co.za more, about $114bn. It says official creditors have so far mobilised up Peter Fabricius is a consultant to the Institute for Security Studies (ISS) and a freelance to $57bn for Africa in 2020 – including upwards of $18bn each from foreign affairs journalist.

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finweek 21 May 2020

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IN PARTNERSHIP WITH

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in brief

>> Trend: Jury still out on success of sudden remote working p.10 >> Mining: Slow down on going for gold for a while p.11

“IN THE ABSENCE OF A BUSINESS RESCUE PLAN, THE ISSUING OF NOTICES COMMENCING A CONSULTATION PROCESS OVER PROPOSED RETRENCHMENTS IS PROCEDURALLY UNFAIR.”

“THERE IS NOTHING SINISTER IN A CHANGE OF POSITION FOLLOWING A CONSULTATIVE PROCESS ... IN FACT, THE VERY NATURE OF CONSULTATION IS THAT CHANGE MAY RESULT.”

Nkosazana Dlamini-Zuma

− Nkosazana Dlamini-Zuma, minister of cooperative governance and traditional affairs, said there was nothing odd about the decision to renew the cigarette ban in court papers seen by Business Day. The statement was in response to the urgent challenge to the tobacco ban by the Fair Trade Independent Tobacco Association (Fita). Dlamini-Zuma is strongly defending the state’s disputed decision to uphold the ban and denied any suggestion that she and President Cyril Ramaphosa were “at odds” over it. On why Ramaphosa initially made the announcement to lift the ban, she said: “My understanding is that the president made this statement based on the view that the NCCC [National Coronavirus Command Council] had taken on the issue at the time”.

Photos: Gallo/Getty Images

“When you hear government saying that the Reserve Bank should be funding us or something like that, we say: ‘That is very interesting’. It’s tantamount to a client saying to their banker: ‘I instruct you to fund me’.” − Judge André van Niekerk of the Labour Court ruled that the retrenchment notices issued to almost 5 000 South African Airways workers were “procedurally unfair” under section 136 of the Companies Act because the airline’s rescue practitioners, Les Matuson and Siviwe Dongwana, had not presented a decisive plan on how the airline will be rescued, according to Daily Maverick. The court ordered the rescue practitioners to withdraw the retrenchment notices as a result. Dongwana told Reuters that the administrators will appeal the court ruling. 8

finweek 21 May 2020

− South African Reserve Bank governor, Lesetja Kganyago, said the idea of the central bank funding the government is not feasible, during a virtual panel discussion hosted by Investec, reported Fin24. “Banking does not work that way, the world does not work that way and the authors of our Constitution were very conscious of this when they segregated the responsibility between the fiscal and the monetary authority,” he said. Deputy finance minister David Masondo shared views that the central bank could do more during a panel discussion hosted by the ANC, saying that he would support a decision by the bank to purchase government bonds directly from Treasury. www.fin24.com/finweek

C

M

Y

CM

MY

CY

CMY

K

LOST PRODUCTION

11 000 oz

DOUBLE TAKE

BY RICO

AngloGold Ashanti announced in a statement that it had lost 11 000 ounces of production because of coronavirus-related stoppages at its operations. With stoppages at Brazilian, Argentinian and South African mines, total production dropped to 716 000 ounces at a total cash cost of $814/oz in the three months to end-March from 752 000 ounces at $791/oz in the same period last year. AngloGold has resumed operations at affected mines, with local mines able to produce at 50% capacity after government lifted an order for most underground mines and furnaces to be put on care and maintenance as part of a nationwide lockdown. POSSIBLE DEATHS

48 000

The Actuarial Society of SA (Assa) has warned that as many as 48 000 people could die if the country fails to flatten the curve. Lusani Mulaudzi, a healthcare actuary and president of Assa, told City Press that the model was based on the key mechanisms of a pandemic, namely susceptibility, exposure, infection and recovery. “Conservative modelling indicates that the peak is only likely to be reached between August and September, depending on the effectiveness of the lockdown and other non-pharmaceutical interventions. Deaths may exceed 48 000 within the next four months if government does not remain strict about Iress Print Advert 210flattening x 70mm.pdf the curve.”

THE GOOD

THE BAD

THE UGLY

SA fell out of the World Government Bond Index following downgrades of the country’s debt to junk by all three major rating agencies; S&P, Fitch and Moody’s. But the immediate impact seemed muted; bonds gained and the rand rallied after the exit. The R2030 government bond yield dropped 105 basis points in the last week of April, after a 70 basis points decline the week prior, said the Bureau for Economic Research. Kieran Curtis, investment director for emerging markets at Aberdeen Asset Management, told Bloomberg, “the Moody’s downgrade had been such a long time coming that many active fund managers will either have sold, or will have the flexibility to continue to own and presumably are 1 24/02/2020 15:41 comfortable with that”.

The SA government said that it is holding back some information (data that includes epidemiological models drawn up by leading scientists, actuaries and mathematicians tracking how effective the lockdown has been on the Covid-19 pandemic) to avoid panic, reported Sunday Times. Experts said the government’s decisions on reopening the economy are based on information and data that is not available to the public. President Cyril Ramaphosa’s spokesperson, Khusela Diko, told the publication: “We don’t want to put these models out to the public as if they are the gospel truth … There is an element where we want to avoid panic in communities.”

The South African Reserve Bank (SARB) has temporarily prohibited the use of debt issued by the Land Bank as collateral after the state-owned agricultural lender was downgraded deeper into junk status and missed $2.7bn in loan repayments. “In light of recent developments surrounding the Land Bank ... the SARB has taken a decision to temporarily suspend Land Bank bills as eligible collateral in its repo operations”, the central bank said in a media statement. Acccording to Reuters, this will put additional pressure on the banking system – especially commercial and investment banks and institutional investors – which is already starved of the debt instruments necessary to access overnight cash to fund daily operations.

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By Jessica Hubbard

trend

Virtual working will be the only option for many small businesses

w

While it’s potentially more cost-effective, there are a number of risks that come with operating virtually.

ith South Africa’s extended national lockdown having forced many businesses to embrace remote working at just a moment’s notice, the jury is still out as to how effective the rushed transitions to a purely digital existence have been. It’s simply too soon to tell. Most business leaders and teams are still immersed in Zoom meetings and Google Docs, fighting screen fatigue and bleary eyes as they acclimatise to a strange ‘new normal’. Cocooned in makeshift home offices, the daily stresses of long commutes and road rage have been replaced by the evils of online trolls and Zoombombing (when uninvited users enter your online meeting and share inappropriate or disturbing content). And while some companies have flourished in this purely virtual way of working, others have faltered. “SA businesses have experienced an earthquake of incredible magnitude, which has not only forced them to embrace the digital tools that have been available for some time – but also the type of culture which makes it viable for a business to use these tools,” says Arthur Goldstuck, founder of IT consultancy World Wide Worx. “For those that have adapted, many are finding remote working to be both more efficient and costeffective. One can call it the digital transformation dividend: The massive advantage enjoyed by firms that embraced digital processes as a strategy and not just because they were forced to.”

Photos: Shutterstock I Archive

From workforce to ‘taskforce’

As SA enters a cautious and phased approach to reopening the economy, many business leaders will have little choice but to pursue the most costeffective business models available – which in many instances could mean a permanent shift to remote working and increased reliance on virtual business tools. Yet, in a country with such a stark digital divide, in which many employees lack access to devices and affordable data, the viability of virtual work is still being debated. Goldstuck believes that many of the smaller firms will simply stick to a remote working model and slash their fixed operating costs (most notably, office leases), while others will pursue a ‘blended approach’ with certain functions and teams 10

finweek 21 May 2020

operating remotely. For companies that wish to return to ‘normal’ and don’t allow for more flexible working, there is a very real risk that top talent will go elsewhere – and seek more ‘progressive’ and adaptable business cultures. Richard Mulholland, speaker and founder of presentation firm Missing Link, notes that one benefit of the country’s extended lockdown has been that it’s given businesses a chance to explore “the many advantages of distributed, asynchronous work”. “I think it’s extremely viable for applicable SA businesses – one reason for this is that it hasn’t just taught us how to do it, but it has taught our customers that it’s okay, too,” he says. “A Zoom meeting will now be a perfectly acceptable form of business communication.” As business leaders devise new strategies for coping in a difficult post-lockdown economy, the next six to 12 months will reveal just how much they are willing to change and adapt. “The winners [post-lockdown] will be those that allow themselves to escape the ‘legacide’ inherent in the old world of work,” says Mulholland. “Those that can smoothly shift from having a workforce (time-at-work) to having a taskforce (work-by-time) will achieve the transition more quickly. Those that go as ‘all-in’ as they can (thus closing the door to how we used to do it) will be better off. ‘Sometimes’ is not a viable strategy.”

Education around cyber risks is key

In addition to rethinking their tools and workflows, businesses will have to pay careful attention to cyber security risks. When people work from home, says Goldstuck, they are even more vulnerable to phishing attacks and malware. And while businesses have expressed concern around platforms such as Zoom, Goldstuck highlights that the risk does not sit with the platform – instead, it is sloppy user behaviour and lack of security protocols that create the opening for cyber criminals. “The cyber risks associated with remote working are enormous, but only because staff are not properly educated and equipped,” he says. “If remote working is going to be the new normal, then businesses have to prioritise cyber awareness training and security protocols.” ■ editorial@finweek.co.za

Arthur Goldstuck Founder of IT consultancy World Wide Worx

For companies that wish to return to ‘normal’ and don’t allow for more flexible working, there is a very real risk that top talent will go elsewhere.

www.fin24.com/finweek

in brief in the news By David McKay

MINING

Time to hit pause on gold miners Even as the rand gold price soars, the uncertainties around miners of the yellow metal call for a temporary halt on their shares.

t Photos: Gallo/Getty Images

A miner working several kilometres below ground at AngloGold Ashanti’s Mponeng Mine in Gauteng.

he pressure on government to relax, if testing and quarantine facilities in place, and we not lift, lockdown measures is only likely have had good support from unions,” he said. to grow over the coming weeks, not Asked if AngloGold Ashanti had received least of which from South Africa’s gold indication from government as to whether the companies. lockdown as it applies to the sector might be Peter Steenkamp, CEO of Harmony changed, the group’s CEO, Kelvin Dushnisky, Gold, was obviously careful with his told finweek: “It’s not something I can prewording at the firm’s first quarter judge. We have been careful, though, presentation mid-May, but the not to get to 50% of production as message was nonetheless clear: quickly as we can. We’ve been very Nearly a month after the end cautious and that’s probably the way of the initial 21-day Covid-19 to proceed: not to rush things.” lockdown, his company is ready Clearly, there’s no saying how the – hopeful even – of resuming full situation will play out. “I’m reluctant to production. make predictions. I would rather bank “I’m confident that the mining the stuff and then update the market,” Kelvin Dushnisky CEO of AngloGold sector has positioned itself well, so said Harmony’s Steenkamp of how Ashanti I’m also confident we could get relief gold production would proceed for the at the next level,” he said in response remainder of the company’s year. to analyst questions. According to Arnold van Graan, a The relief to which he refers is that the precious metals analyst at Nedbank Securities, country’s underground mines are allowed the current level of uncertainty might be the to progress to 100% production at level 3 of time to hit the pause button on SA gold stocks, lockdown restrictions. The current dispensation the strong prospects for the dollar price of the in terms of the government’s amended lockdown metal notwithstanding. regulations is that underground mines operate He believes the full impact of SA’s lockdown at 50% of capacity, whereas mechanised, less is yet to be felt in the production and earnings labour-intensive open-cast mines are permitted numbers of the likes of Harmony Gold and to operate at full throttle. another gold producer, DRDGOLD, which “We have done a tremendous amount of retreats gold mining dumps and is therefore work so we can get back to 100%. The minister allowed to operate at 100%. [energy and mineral resources minister Gwede “We ... believe this is just the start of the Mantashe] has been to the operations. We have bad news cycle for Harmony and many other @finweek

finweek

finweekmagazine

“We’ve been very cautious and that’s probably the way to proceed: not to rush things.”

finweek 21 May 2020

11

in brief in the news

Photo: Gallo/Getty Images

“So, this Covid-19 has been a leveller for everyone, and it’s given the mining sector a chance to show how much it actually does because the industry has really stepped up.”

gold producers, with the coming quarters likely to reflect the real and material impact of the lockdown and level-4 restrictions. In the absence of a higher gold price, the gold stocks could come under pressure,” said Van Graan. Shares in Harmony fell 16% in the days following an announcement it planned to raise $200m in shares to help pay for the $300m purchase of Mponeng from AngloGold, but they have since partly recovered. According to an industry source, it makes enormous sense for Harmony to have issued the shares. Firstly, they were trading at fiveyear highs; secondly, there’s the relatively unappreciated fact that bundled with AngloGold’s Mponeng, one of the deepest mines in the world, is Mine Waste Solutions, which re-mines or processes gold tailings and is therefore allowed to operate at 100% of capacity. “There’s a massive margin to be made on surface gold at the current rand gold price. Harmony is going to do extremely well out of that at the current gold price,” the source said. Increasing the production rate of its Elikhulu Tailings Retreatment Plant and Barberton Tailings Retreatment Plant helped Pan African Resources, a gold junior listed in London and Johannesburg, minimise ‘lost’ gold production from the 21-day lockdown to a mere 5% of its previously guided annual total. In addition, the improved gold price meant that over the course of the firm’s financial year, which ends on 30 June, the company is set to cut debt some R500m, about 28% year-on-year. DRDGOLD reported an 18% quarter-onquarter increase in adjusted earnings before interest, tax, depreciation and amortisation (ebitda) because it was able to draw down on stockpiled ore, which is a feature of surface mining. Nedbank’s Van Graan, however, says the full impact of Covid-19 is yet to show itself, especially on DRDGOLD. “The bulk of the impact of the lockdown is yet to be felt,” said Van Graan in a report on the company’s recent third quarter performance. “In addition to further production losses, the depletion of its inventory pipeline will have a knock-on impact in the next quarter as the pipeline will need to be refilled.” ■ editorial@finweek.co.za 12

finweek 21 May 2020

Bristow’s hopes of consolidation

It’s clear that Mark Bristow, the South African CEO of Barrick Gold, the world’s largest gold producer, is thinking in even bigger terms in a post-Covid-19 world. well-known. Earlier this year, he disclosed a Famous in the gold sector for banging on meeting had taken place with his counterpart about restructuring the industry – before at Freeport-McMoRan, a Canadian company. making huge strides in achieving this But with opportunity comes additional following the merger of his Randgold responsibility. It’s no secret that after the Resources with Barrick – Mark Bristow, the Covid-19 pandemic, public sector policy will South African CEO of Barrick Gold, is now fall increasingly on poverty alleviation and calling for a restructuring of the mining sector, economic disparity. The onus will also fall across all commodities. on world leaders to roll out better disaster “The global industry has come closer management approaches, especially together on a net asset value basis and it needs rearrangement, not just in gold,” he said as greenhouse gas emissions and other environmental pressures receive a fresh blast in an interview with finweek following the of attention. publication of Barrick’s first quarter In this world, the mining financial statements earlier this footprint will become more month. exposed to scrutiny than ever. “We have created “Let’s be frank, the ‘ESG’ a real opportunity for [environment, sustainability genuine rearrangement and governance] was mostly and modernisation of the about environment, which industry. It is a challenge was strongly driven by the owing to personalities Democratic Party in the last US [other CEOs in the sector], and Mark Bristow election,” said Bristow. “But people relative commodity prices, but South African CEO of Barrick Gold have forgotten about poverty at the same time, it’s a huge alleviation, and the difference opportunity,” he said. between the haves and have-nots. One of the factors giving “So, this Covid-19 has been a leveller for Bristow the confidence to think in terms everyone, and it’s given the mining sector a of broad industry consolidation is the fact chance to show how much it actually does that Barrick has been able to attract “a huge because the industry has really stepped up. amount of generalists”, which has created “But I think it’s changed forever. The “a new playing field”. Bristow is referring to mining sector is going to have to show more non-specialist investors who have turned to agility; it has to be modern, younger, and mining while other asset classes fail in the more visionary because the recognition of all current period of pandemic. stakeholders is absolutely critical if we are Bristow’s ambitions for Barrick to buy or going to come out of these things in better merge with a copper producer – because he shape,” he said. believes the future of the world’s remaining “If we stay the way we are, it will become gold discoveries is now restricted to a geology a complete disaster.” ■ known as gold/copper porphyry deposits – is

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market place

>> >> >> >> >>

House View: Mining, Sasol p.15 Killer Trade: Kumba Iron Ore, Vodacom p.16 Invest DIY: Before you enter, have an exit plan p.17 Investment: Be careful of clinging to a buy-and-hold strategy p.18 Simon Says: AB InBev, Comair, Kaap Agri, Metrofile, Phumelela Gaming and Leisure, PSG, SA bonds, US markets, Vivo Energy p.32 >> Invest DIY: Buffett on Covid-19: Rather be overcautious p.34 >> Share View: It’s a buy on BAT p.35

FUND IN FOCUS: REZCO VALUE TREND FUND

By Timothy Rangongo

Growth at the right price Investing when the ‘medicine doesn’t fit the disease’.

Fund manager insights:

FUND INFORMATION:

Benchmark: Fund managers:

FTSE/JSE All Share Index Rob Spanjaard and Simon Sylvester

Fund classification:

South African – Multi Asset – High Equity

Total investment charge:

2.37%

Fund size:

R5.1bn

Minimum lump sum/subsequent investment: Contact details:

R100 000/R10 000 0861 739 468/info@rezco.co.za

TOP 10 HOLDINGS AS AT 30 APRIL 2020:

1

SA Government 7.75% 2023-02-28

42.5%

2

NewGold ETF

11%

3

US Treasury Note 1.5% 2023-02-28

6.4%

4

Pan African Resources

3.8%

5

US Treasury Note 1.5% 2030-02-15

2.7%

6

US Treasury Bond 5.375% 2031-02-15

2.6%

7

US Treaury Note 2% 2023-02-15

2.6%

8

US Treasury Note 2.625% 2023-02-28

2.6%

9

US Treasury Bond 2.375% 2049-11-15

2%

10

Investec Australia Property Fund

1.6%

TOTAL

77.8%

PERFORMANCE (ANNUALISED AFTER FEES)

As at 31 March 2020 ■ Rezco Value Trend Fund 16 12 8 4 0 -4 -8 -12 -16 -20

14

■ Benchmark 14.9% 12.2%

9.5%

Why finweek would consider adding it:

-18.4%

1 year

finweek 21 May 2020

Rezco Asset Management’s Value Trend Fund invests in a variety of asset classes, including shares, listed property, commodities, bonds and money-market instruments. At end-March, 72.2% of the fund’s R5.1bn under management was concentrated in fixed-income securities. Of its heavy asset allocation towards bonds, co-portfolio manager Simon Sylvester says that Rezco is concerned the economic recovery will be more protracted and complicated than what is currently being priced into risk assets. Rezco doesn’t agree that “the hole is simply and largely plugged through government stimulus packages (quantitative easing)”. Unlike the global financial crisis, when QE was “like a vaccine to the virus, the problem now is that the medicine doesn’t fit the disease”. According to Sylvester, there will be periods of optimism and pessimism, but overall, Rezco is of the view that “we are near the beginning of a severe economic recession and bear market. The April rally, in our view, was a fairly standard bear market rally as is normal through the history of markets.” The fund aims to outperform SA’s equity market over the long term, without taking on greater risk via its investment style of “Growth at the Right Price” (GARP). Its stock selection strategy focuses on companies with strong earnings growth, sustainable revenue streams and low borrowings, at reasonable price levels. The fund has allocated 3.2% of its underlying assets to equities and holds a small allocation to Rezco’s internal equity fund, hence the small position. These holdings include the Investec Australia Property Fund, Naspers* and the NewGold ETF. The risk management view, according to Sylvester, is to hold liquid and short-dated government bonds, which forms the core. “In addition to this core, we have added gold exposure given the benefit of a store of wealth in uncertain times and due to the magnitude of QE being delivered by central banks globally,” he says. Locally, “it also increases the US dollar exposure for the fund above the 30% limit”. As far as difficult times are concerned, monthly returns dipped to negative 1.6% in February from a positive 2.5% in January. The fund sold out of risky assets prior to the coronavirus crash, and rebounded to growth of 0.9% in March, largely coming from the weakening rand and the fund’s exposure to dollars, explains Sylvester. Going forward, Rezco believes “there will be bottom-up stock-picking opportunities, largely on global markets, but we are not there yet”. Locally, the economic uncertainty for SA is still very high, he says.

Since inception in September 2004

The fund’s team is of the view that the All Share Index is near the beginning of a bear market, and that the recent equity rally gives investors a second opportunity to reduce their portfolio risk by switching out of SA equities and into a multi-asset fund with a flexible and global mandate. ■ editorial@finweek.co.za *finweek is a publication of Media24, a subsidiary of Naspers.

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house view BUY

MINING

SELL

marketplace

CAUTION

By Simon Brown

Will China help?

Last trade ideas

Mines are starting to reopen, with coal and open-cast mines allowed to operate at 100% and the rest at 50%. This is subject to the mines being able to implement safety measures to manage the spread of Covid-19. The problem for the industry is demand. Industrial metals are seeing a marked reduction in orders, and the demand for platinum group metals is even weaker due to vehicle sales collapsing. The only exception is gold, with investors buying it as a “fear hedge”, and its price being supported by reduced gold mining activity. That said, the weaker demand is in part being offset by reduced mining capacity, albeit there are aboveground stockpiles that can be sold. An important aspect to watch is China. The Chinese government is surely going to spend on infrastructure to help boost their now largely reopened economy and this will add to demand. I am also watching for other countries and potential infrastructure projects. Another boost for mining stocks is the weaker rand. All of these elements make mining one of the sectors to watch closely during the Covid-19 pandemic. ■ BUY

SASOL

SELL

CAUTION

Food Retail 7 May issue

BUY

Diverse ETF 2 April issue

BUY

Grindrod Preference Shares 19 March issue

BUY

Sibanye-Stillwater 5 March issue

HOLD

By Moxima Gama

Deep cuts may work

Photos: Gallo/Getty Images

In 2020 so far Sasol’s share price has lost about 70% of its value. After announcing that it was expecting its Lake Charles Chemicals Project in the US to make another loss for its financial year in 2020 – because of the explosion in the facility and the recent oil price rout – its share price plunged to an all-time low of 2 075c/share. Sasol produces oil from coal and the overruns of the chemicals project have been weighing on the company’s earnings annually. This year, oil prices have been under immense pressure from the weakening demand and storage shortages. For the first time in history, US crude oil futures turned negative in April. Sasol is now looking to pay down its debt by generating cash of $6bn through cost-cutting measures, asset disposals and possible rights issues. Management salaries are also being cut – director’s fees are being reduced by between 20% and 40% and salaries of the middle to junior management are being cut by 10% and 15%. How to trade it: Sasol’s share price gapped downwards from 15 710c/share to 10 300c/share in March. Gaps are usually closed and now that Sasol is teetering along 10 300c/share, breaching that level could trigger upside. This momentum could see Sasol close that gap towards 15 710c/share. A buying opportunity would be presented above 10 300c/ share, with potential gains to 15 710c/share. Revise long positions at this level, otherwise stay long on continued upside. Alternatively, if Sasol reaches a ceiling at 10 300c/share, it could fall back towards 2 075c/share. In which case, refrain from going long. ■ editorial@finweek.co.za @finweek

finweek

finweekmagazine

Last trade ideas BUY

Pan African Resources 7 May issue

BUY

Datatec 2 April issue

BUY

Aspen Pharmacare 19 March issue

CAUTION

Nepi Rockcastle 5 March issue

Sasol is now looking to pay down its debt by generating cash of $6bn through costcutting measures, asset disposals and possible rights issues.

finweek 21 May 2020

15

marketplace killer trade By Moxima Gama

XXXXXXXXXXXXXXXX KUMBA IRON ORE

k

Recovery or return? umba Iron Ore, operator of Sishen, Africa’s largest open-cast mine, told the market in late April that it will focus on preserving cash amid the global coronavirus pandemic. The company scaled back its 2020 production and sales guidance to between 37Mt and 39Mt, and 38Mt and 40Mt of iron ore, respectively. It targets cost reductions of R325m and deferred capital outlays worth R1bn. This follows on a first quarter decline of 3% in sales as local demand for the steel ingredient halved. On the charts: Kumba broke out of its long-term bull channel driven by a mass market sell-off from fears of the Covid-19 pandemic in February. The downside halted at 20 525c/ share, and after reporting a 62% jump in full-year earnings before interest, tax, depreciation and

KUMBA IRON ORE

52-week range: R205.25 - R529.03 Price/earnings ratio: 7.19 1-year total return: -1.62% Market capitalisation: R117.5bn Earnings per share: R50.73 Dividend yield: 12.82% Average volume over 30 days: 397 207 SOURCE: IRESS

SOURCE: MetaStock Pro (Reuters)

amortisation (ebitda) to R33.4bn, Kumba’s share price staged a recovery in mid-February. What to anticipate: Kumba’s share price is currently teetering on the lower slope of its long-term bull channel. With the three-week relative strength index (3W RSI) slightly overbought, sellers may resurface. However, support retained at 32 515c/share or above 30 970c/share would be a

bullish sign. Go long: Continued upside above 37 510c/share would present a good buying opportunity, as Kumba’s share price would resume its channel and the resistance trendline of its medium-term corrective bear trend – formed within the channel – would be breached. Long positions could be increased above 43 700c/ share, with potential gains towards

53 900c/share – or even to the upper slope of the channel towards its all-time high at 61 955c/share. Go short: Resistance encountered at 37 510c/share and support breached at 30 970c/share would mean Kumba is struggling to resume its bull channel – and that the current upside was merely a return move, only for Kumba to pull back again to support at 20 525c/ share and even through it. ■

VODACOM

i

Bear may be ending n mid-May, Vodacom, South Africa’s largest mobile operator, said its revenue for the year ending 31 March rose 4.3%. It also added 5.9m users for a worldwide total of 116m. Despite deep cuts to its SA data prices, Vodacom’s CEO, Shameel Joosub, said these reductions – specifically out-of-bundle data rates, announced in the first quarter – led to a steady increase in data traffic with 1.9m more data customers connecting to the Vodacom network: “a 9.7% increase to 21.9m”. Outlook: Vodacom’s share price fell like many others when Covid19 fears crippled global markets in March. Fortunately, downside was curbed by the lower slope of the bear channel, which led to a reversal of all of those losses. In April, Vodacom said it bought the mobile money platform M-Pesa from Britain’s Vodafone. M-Pesa 16

finweek 21 May 2020

VODACOM

52-week range: R90.70 - R136.64 Price/earnings ratio: 13.62 1-year total return: 23.57% Market capitalisation: R236.3bn Earnings per share: R9.45 Dividend yield: 6.1% Average volume over 30 days: 2 428 069 SOURCE: IRESS SOURCE: MetaStock Pro (Reuters)

has grown to become the largest payments platform in Africa with 40m users, and it processes over a billion transactions every month. On the charts: A move above 12 845c/share would mean Vodacom has breached the upper slope of its bear channel. The 3W RSI has recently traded through its own short-term resistance trendline, meaning investor sentiment is turning bullish – potentially ending the

long-term bear channel. Go long: A positive breakout of the channel would be confirmed above 13 730c/share and upside towards 16 030c/share could ensue. Long positions may be increased above that level, as Vodacom would resume its previous primary bull trend and gains may persist to the 18 700c/share prior high in the medium term. Go short: Vodacom has a few times before encountered resistance at

13 730c/share. Refrain from going long if it should reverse below that level again. Vodacom would return to its bear trend on downside towards 10 940c/share and support at 8 855c/share may well be retested. ■ editorial@finweek.co.za Moxima Gama has been rated as one of the top five technical analysts in South Africa. She has been a technical analyst for 12 years, working for BJM, Noah Financial Innovation and for Standard Bank as part of the research team in the Treasury division of CIB.

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marketplace invest DIY By Simon Brown

XXXXXXXXXXXXXXXX INVESTMENT STRATEGY

To take profit or not? That’s the question

a

Photo: Shutterstock

Investors need to have an exit strategy even before they buy a stock. Sticking to that plan will reduce uncertainties and anxiety. s global and local markets continue to rally after the collapse of late March and early April, I am being flooded with questions from people who bought shares during the collapse and now want to know if they should be selling. The point I always make is that an investor or trader needs to have a plan for selling a position when they initially enter that position. Sure, the plan is to make a profit, but it needs more detail because what is a profit? Is it 1% or 100% or somewhere in-between? Equally important is that while we focus on the profit side of the equation, we also need to be very cognisant of the potential for a loss and, as such, our exit plan needs to have both a profit and a loss side. For traders, the loss side of the exit plan is easy. You have a stop-loss that is a pre-determined level at which you exit the trade, no questions asked. You’re losing money and you need to stop the bleeding and protect capital. The profit side of the trade is harder. Some charting patterns give potential targets for exiting at a profit, while other traders will use different technical features to determine when the trend is going against them. Still others will take their profit once they hit a certain profit point. Personally, as a trend trader who accepts that trends can last longer than expected, I usually exit trend trades on stop-losses that I trail upwards as the trade moves in my favour. It does mean I give up some of the profits as the trade reverses and hits my stop-loss. But it also means if the trend continues longer than expected, I can bank more profits. The point is that no exit strategy is perfect, but we need to live within that imperfection and always have @finweek

finweek

an exit plan in place before entering a trade. And we must always action the exit as per the plan and not change our rules halfway through the trade. Long-term investors still need an exit strategy, but it will likely be based on fundamentals rather than price, as it is with traders. As I have written before, when buying a long-term holding, I have my list of what I really like about a company. That includes at least three points that set the company apart from its peers and make it my preferred purchase. I then hold and bank the dividends. Ideally, I’ll try to hold them forever if the fundamentals remain in place. This point is important. I’ll only exit when one or more of the points I liked about the company starts to erode. So, for example, I may buy a retailer because I like their operating margin and so I would keep a close eye on that. I would not worry about the operating margins of the company’s peers and rather be focused on the operating margin of the company in which I have invested. The issue here is that it’s very unlikely that I’ll ever be a seller anywhere near the top of the price action. But that’s fine. I don’t want to be a panicked seller. Rather, I want to hold for as long as possible and, if things go well, I’ll potentially be sitting on hundreds of percent of profit. So, losing some of that profit before exiting is far from the end of the world. The bottom line is that you must understand that there is no perfect exit strategy and to accept that fact. You need to be clear about your exit strategy when you enter the position. Otherwise, you’ll panic as the position moves in your favour or against you and end up hurting your overall profits. ■ editorial@finweek.co.za

finweekmagazine

The issue here is that it’s very unlikely that I’ll ever be a seller anywhere near the top of the price action. But that’s fine. I don’t want to be a panicked seller.

finweek 21 May 2020

17

marketplace investment By Schalk Louw

PORTFOLIO MANAGEMENT

Change as the times do

i

A buy-and-hold investment strategy may work for some. But be careful of clinging to this view as it may result in losing out on returns.

Indexed to 100

FTSE/JSE ALL SHARE INDEX VS TOP 10 BUY-AND-HOLD SHARES SINCE 2005 have always been fascinated by the concept of human perception, especially when it comes to the selective 450 decision-making process of what to remember and what 400 not to. 350 As a young man, I fell in love with the Alfa Romeo GT Junior sportscar. To me, there was no car more beautiful than that little 300 red monster. It didn’t matter to me that technology, luxury and 250 handling had improved over the years; I believed that if you were 200 lucky enough to find one of these beauties, it would be the last 150 car you own. 100 About 15 years later, I finally managed to buy a 1976 model and I could hardly contain my excitement as I waited for the 50 arrival of my new toy. Make no mistake, I enjoyed this car 0 immensely, but what I imagined I would be driving and what I May ’05 May ’07 May ’09 May ’11 May ’13 May ’15 May ’17 May ’19 actually ended up driving were two very different cars. Compared Buy/hold top 10 of 2005 FTSE/JSE All Share to modern cars, the 1976 Alfa was a bumpy ride, it was SOURCE: PSG Wealth Old Oak & Iress uncomfortable and, in many ways, highly impractical. If you ask Warren Buffett, one of the most successful investors of our time, what his favourite holding period is for provided excellent portfolio growth, only for Didata’s share The reality is that if you had followed a a share that he has bought, his answer will be, “forever”. So, price to tumble from R75 per share in 2000 to below R2 in buy-and-hold strategy if Buffett follows a buy-and-hold strategy, then surely, much 2003, while Datatec saw its price drop from R146 per share in in 2005, roughly like the Alfa Romeo sportscar in 1976, it should be the best 2000 to below R4 in 2008. strategy? Many investors would be eager to point out that this refers Many investors tend to forget that as time goes by and to the bursting of the dotcom bubble, and that it’s unlikely to the world out there changes, our investment environment be repeated, although I think that’s highly debatable. also changes. Just look at Buffett’s own company portfolio When we turn back the clock to 15 years ago (May 2005) of your portfolio would (Berkshire Hathaway) of 25 years ago. You will see that all without considering any significant occurrences, you will have been invested in resources shares. investments above $1bn (out of their total portfolio value of see that there was no sign of Naspers* in the top 10 largest $22bn) comprised of only seven companies. Of these seven shares listed on the FTSE/JSE Top 40 Index, although all 10 companies, they still own four, while the other three have since of those shares still find themselves in the Top 40 Index today. been sold. It is therefore safe to say that none of those 10 shares The most famous of those sold has to be their 9% were bad shares. Secondly, and more importantly, 45% of the shareholding in Freddie Mac. Although Freddie Mac only Top 40 Index consisted of resources shares. Today, 15 years started experiencing financial difficulties in 2008, in down the line, this weighting stands at 30%. The reality is 1999 Buffett was already concerned about the risks that if you had followed a buy-and-hold strategy in 2005, the company was facing in achieving their earnings roughly 50% of your portfolio would have been invested forecasts, and he sold his entire stake. in resources shares. Back on local soil, I regularly attend consultations If you had invested R100 each in the FTSE/JSE and presentations where investors, and even experts, All Share Index and a portfolio consisting of the top 10 recommend that investors should simply “buy the largest shares on the local market 15 years ago, your 10 largest locally-listed shares and keep them”. These R100 investment in the JSE would have been worth 10 shares make up 60% of the total market, and more R375 today (4 May 2020), while your buy-and-hold importantly, there is a reason why they have become strategy investment would have been worth only R230 the 10 largest shares. How can you go wrong? I’m not (see graph). saying at all that the 10 largest shares are in any way poor Don’t just assume that a buy-and-hold strategy is choices, but you need to keep in mind that just because my Alfa the best strategy to follow under all circumstances. The world GT Junior was the best car on the market in 1976, definitely does is constantly changing, so make sure that your personal not mean that it still is today. investment portfolio keeps up with those changes. ■ If you had followed a buy-and-hold strategy at the turn of editorial@finweek.co.za the century, tech companies Dimension Data or Datatec surely Schalk Louw is a portfolio manager at PSG Wealth. would have been part of your portfolio. Both shares initially *finweek is a publication of Media24, a subsidiary of Naspers.

Photo: Gallo/Getty Images

50%

18

finweek 21 May 2020

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COLLECTIVE

INSIGHT

INSIGHT INTO SA INVESTING FROM LEADING PROFESSIONALS MAY 2020

DISRUPTING THE WORLD OF FINANCIAL ADVICE Inside 20 22 24 25 27 28 29 30 31

SHIFTING TOWARDS A MODEL THAT WILL SERVE THE BEST INTERESTS OF ALL SOUTH AFRICANS

Introduction Lessons from the ‘Wolves of Groote Schuur’ How to shake off inequality Finding scaling solutions for the masses The times they are a-changing How advice should adapt in a post-pandemic SA Narratives and numbers Better investment decisions should be everybody’s beeswax What Covid-19 has taught us The financial advice model of the future

collective insight By Evan Gilbert

INTRODUCTION

finweek publishes Collective Insight quarterly on behalf of the South African investment community. The views expressed herein do not necessarily reflect those of the publisher. All rights reserved. No part of this publication may be reproduced or transmitted in any form without prior permission of the publisher.

CONVENOR Anne Cabot-Alletzhauser Head of Alexander Forbes Research Institute EDITORIAL ADVISORY COMMITTEE

Sandira Chaithram Product Manager at Alexander Forbes Kelly de Kock Chief Operating Officer at Old Mutual Wealth Trust Company Lindelwa Farisani Head of Equity Sales South Africa at UBS Investment Bank Professor Evan Gilbert Associate professor at USB and research analyst at Momentum Investments Delphine Govender Chief Investment Officer at Perpetua Investment Managers Craig Gradidge Executive Director at Gradidge Mahura Investments David Kop Executive Director at the Financial Planning Institute of Southern Africa Monika Kraushaar Senior Consultant at RisCura Deslin Naidoo Founder of NEBULA SI Nerina Visser ETF Strategist and Adviser Muitheri Wahome Financial Services Professional

20

finweek 21 May 2020

Financial advice in the future

s

What would a model of financial advice that would serve the best interests of all South Africans (not just those with money to invest) look like in a post-Covid-19 world? outh Africa is a country of diversity – this is obviously true across many dimensions, but it is the skewed distribution of employment and wealth present in our country and its implications for the financial advice sector that is particularly important for this issue of Collective Insight. It is the nature of a capitalist economy to arrange itself to serve the needs of those who can pay for them. While this system can have many beneficial outcomes for society, it is not the only way to do it. As the current experience of the US medical industry shows in its response to the Covid-19 pandemic, it can result in very haphazard and discriminatory care to citizens in times of need. The SA financial services sector is currently arranged in a similar fashion – there is excellent support for those people who are formally employed with savings and insurance advice needs. Even so, there are some peculiarities: Higherincome clients are typically sold retirement annuities, and lower-income clients funeral and life policies. The financial advice space is also a very product sales-driven industry, rather than being truly advice-led. Advisers seem to be stuck in the position of being independently employed salespeople for financial products rather than truly independent advisers focusing on helping their clients manage their financial health. While the reasons for this are varied, the current remuneration structure arrangements of the product providers are certainly significant in terms of arriving at this outcome. The unfortunate implication of this approach is that there is no easy answer to the following question: How do you provide a service to a person who needs it very much, but has very little money to either pay for it or invest in products that will generate a fee for the adviser? In short, the financial advice system in this country is currently a

very haphazard and fundamentally skewed system, providing only partially for the financial needs of their existing clients and effectively nothing for the financial needs of large parts of South African society. Given the importance of financial health for an entire society, we set our contributors the challenge of re-imagining the SA financial advice industry with the goal of overcoming these discriminatory outcomes. Unfortunately, this challenge turned out to be a step too far for most of our contributors. While this edition will show that there were some interesting and insightful contributions, the vast majority of the submissions consisted of proposing effectively minor tweaks to the current system. This was very disappointing for the committee and so we have decided to do something slightly different in this edition. We have decided to use it to focus more on the key issues that have been identified in the SA financial advice industry that need to be resolved. The challenges and barriers to achieving this change will also be discussed. Finally, some of the proposals for change received will be presented. This edition will be the precursor to a live roundtable discussion where possible solutions to these problems will be discussed with all the relevant role players being invited to contribute. With this in mind, we start with Deslin Naidoo’s comparison of the medical and financial advisory industries, which provides an illuminating perspective on how the latter can be changed to achieve some of the similar benefits for society that the former provides. This is an excellent example of a different perspective on the industry that could lead to significant improvements in its impact on society. Two contributions then highlight the financial advice needs of most South Africans that are not being addressed by the current system. By highlighting the different financial outcomes of two similar individuals driven purely by their social contexts, Abu Addae www.fin24.com/finweek

Photo: Gallo/Getty Images

PLEASE SEND ANY FEEDBACK AND SUGGESTIONS TO CABOTA@ AFORBES.CO.ZA.

collective insight

It is the nature of a capitalist economy to arrange itself to serve the needs of those who can pay for them. While this system can have many beneficial outcomes for society, it is not the only way to do it.

identifies the potential for the financial services sector to help overcome the perpetuation of income inequalities. He recommends a subscription-based model to make a more holistic financial advice accessible to all. Gugulethu Siziba considers both the gaps in coverage and the issues of access to financial services for all South Africans. She then evaluates how technology can be useful to overcome both issues. David Kop and Anne Cabot-Alletzhauser consider the barriers to change that this industry currently faces. David recommends specific changes across the entire industry ecosystem – from regulators to consumers, practitioners and product suppliers. Anne highlights the importance of the current remuneration structure, explaining its outcomes. Echoing other contributors, she emphasises the need for holistic, rather than purely investment or insurance advice and the potential for technology to help by making relevant information more easily available. Many of the contributions received focused on the challenges of providing good

How to contribute to Collective Insight Contributing authors can determine whether any of the suggested angles under each topic would be of interest to address – or they can elect to introduce their own angle on the specific topic. There is no restriction. Contributors should avoid using their contributions as marketing pieces, opinion pieces or investment recommendation pieces. An advisory committee selects which contributed articles to include in Collective Insight. Selection is on merit and suitability only and is completely unrelated to any advertising that may appear in the publication. Please send any proposed contributions to Anne Cabot-Alletzhauser at cabota@aforbes.co.za

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investment advice. The best of these are included here. Ian Macleod highlights the importance of narratives to explain (and motivate) individuals’ investment choices. He discusses how epidemiological models can be used to explain the rise and transmission of sentiment through virally transferred narratives. Paul Nixon builds on this by using the story of Odysseus tying himself to the mast and stopping his oarsmen’s ears up with beeswax as a metaphor for clients, financial advisers and asset managers having to deal with uncertainty in times of crisis. He makes the point that having a systematic plan helps them to avoid making incorrect decisions in these situations. In a similar vein to Paul, Grant Locke explores the reasons why investors are not on track to meet their investment goals. He shows that most of the time it is the own decisions of the investor that create the problem and argues that the use of technology to provide real-time feedback on the implications of their decisions could help

them avoid making bad ones. The final contribution in this edition is by Louis van der Merwe. He looks at ways in which an employer could act as the bridge between the financial adviser and their employees. He points out that this could not only increase the level of coverage of the advice industry, it could also be a way for companies to differentiate themselves to new employees. As you will clearly see when reading this edition, the problems facing the financial advice industry have not been solved. In fact, they have barely been spelled out. We want you to be part of the journey, so we invite you to be part of the roundtable discussion that will follow the publication of this issue. Details of the roundtable will be circulated to all readers and everyone is encouraged to attend and to contribute. We look forward to working with you on improving this industry for itself and the good of all South Africans as we strive to improve the overall level of financial health in our country. ■ Evan Gilbert is an associate professor at USB and research analyst at Momentum Investments.

Theme for the next issue of Collective Insight The advisory committee is calling for articles on the theme How to better measure the value and impact of your investments in the forthcoming Collective Insight. The deadline for submission is 13 July 2020.

The following topics will be considered: ■ Can we make use of better metrics

for assessing the value and impact of our investments? ■ Can we ever get to a universal agreement around appropriate metrics of value-add? ■ Do we understand where to turn to if we want investing to have an impact on a specific aspect of South African needs? ■ What are investors really capturing

when they invest in the JSE? ■ Different types of investments reflect different business models: • How do you assess which business models are likely to deliver what South Africa requires, for example: short-term vs long-term investing; paying for alpha performance (outperformance); private equity vs venture capital vs impact investing? ■ What needs to change?

How to attend the roundtable discussions An online roundtable discussion will be held on 3 June 2020 at 17:30. The authors of this edition’s articles will share their insights and opinions. Visit the CFA Society’s website at https://cfasociety.org/ southafrica/Pages/Home.aspx and look under the Events page for the online roundtable discussion.

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collective insight By Deslin Naidoo

FRAMEWORKS

Lessons from the ‘Wolves of Groote Schuur’

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Aligning financial advisers’ roles in a similar way to the medical profession may deliver better results for clients. hy is it that doctors have not yet earned the title “The Wolves of Groote Schuur”? Is the differentiating element the perception of care? Financial advice seems to be geared towards those that have money; and if you do not, then the profession has little vested interest in you. It seems blindingly obvious that we are missing a trick to reach people when it comes to financial advice. Rather than being practical, relevant, and accessible, we have created an industry that has an aloof yet in-your-face personality. Financial health is as relevant as medical health. It makes sense to recognise that if your citizens are not able to be financially independent, or productive enough to be self-sufficient, the burden on the social system will be more than can be managed. The economic and social ramifications can far outstrip the costs of medical care, or pension shortfalls that arise due to longevity. Social unhappiness due to financial inequality is most relevant when large portions of society are not financially selfsufficient and the means to become so are not available.

Photo: Gallo/Getty Images

Lesson one: Financial healthcare must be a daily activity

Healthcare globally is organised across three tiers – defined as primary, secondary and tertiary healthcare. The underlying principles defining each tier, the purpose, and the associated role players, can be used to define the parallel framework to deliver financial health across a country – particularly those where large parts of the population are not financially equipped. Let us not argue the efficacy of delivering this, but rather focus on the principle that belies it. At a primary tier level, the focus is about access and this means integrating financial health into people’s daily lives. This includes (but is not restricted to) activities such as financial literacy; access to financial planning tools; core banking services; relevant core financial products; individual services for financial soundness such as tax advice and debt management; wills and estate planning; and accessibility to grants and loans. Secondary and tertiary financial healthcare deals with less common and more complex problems that one would face. Solving these issues requires more specific skills and would require the individual to be appropriately referred from practitioners in the primary tier to more specialised practitioners. Suitability, appropriateness of service and affordability of fees are relevant elements within this tier. Like scheduled drugs, access to services should protect individuals from abuses and other dangers. Technology and advertising, which have democratised services such as financial speculation and option-based trading to individuals not equipped to manage the associated risks, would be better regulated.

Lesson two: Treat the patient holistically

Financial advice is currently skewed, almost obsessively, towards investments and insurance. Practitioners themselves know this, but 22

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unfortunately it is how financial rewards are structured. To make financial advice practical, accessible and holistic, its definition must evolve. The purpose of financial advice is to provide a prudent, understandable, and executable plan that firstly encompasses both financial assets and human capital; secondly optimises the trade-offs between consumption, savings and risk; and, finally, is placed in the context of the individual’s aspirations and their responsibilities to a household. This changes the way you look at the problem. The power of compounding is a popular argument promoted in the industry to encourage young people to start early to save for retirement. If you contextualised this with the value of human capital, financial modelling would reject the argument. It is of greater value for an individual to continue to invest in growing their human capital. Similarly, one can model other financial scenarios that prove that traditional financial advice, in the absence of human capital advancement, leads to poorer outcomes. If this is expanded from individuals to households, with intergenerational effects, it starts to explain wealth gaps and financial inequality.

Lesson three: We all know what doctors, nurses and pharmacists do

There is no standardisation of roles across financial services practitioners. It is an individual choice, and regulation relies on disclosure to protect the public. It is naïve to believe that specialised practitioners can provide effective advice from a narrow base. As the industry moves towards an advice-fee model (non-commission), it becomes imperative that the industry evolves toward general practitioners that have a holistic foundation. The requirements of the Financial Advisory and Intermediary Services (FAIS) legislation must be reviewed, advocating that all practitioners are qualified generalists before allowing financial specialisations. These general practitioners operate in the primary tier, under a limited product and service model, referring more complex problems to specialists. Alternate qualifications for pre-defined functional or support industry roles, as with nurses and pharmacists, can be structured alongside this. Beyond policy and regulation, government has an enablement role, as self-care is a big element for success. Financial health, like medical health, needs to be introduced early in one’s education process. This is then augmented by access to tools and information. Clinics play such a role in healthcare; libraries and post offices can be retooled to do the same, subsidised through the issue of social impact bonds. Banks and employer benefit schemes can play a significant role in financial literacy and access to practitioners. Robo-advisers must evolve from risk-profiling and fund-matching algorithms towards more integrated financial modelling. There is without doubt many technical complexities that need to be debated, but I challenge the thinkers in our industry to seek solutions that can build on the principles of this framework. ■ Deslin Naidoo, CFA, is the founder of NEBULA SI, a savings and investment start-up integrating traditional finance with artificial intelligence.

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Times change. Time doesn’t. KINGJAMESJHB 3131

Allan Gray is an authorised financial services provider.

collective insight By Abu Addae

DISRUPTION

How to shake off inequality

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The Covid-19 crisis has highlighted that the current financial system is not set up to help ordinary South Africans – many of whom are already held back by family circumstances and the burden of black tax. f Covid-19 is teaching us anything, it is how little financial resilience there is among the general population of South Africa. Personal finances remain in a perpetually precarious state. The current financial system is not set up to help ordinary people. Sure, you can get easy access to credit at exorbitantly high interest rates, but it’s much harder to get proper advice on how to manage that debt, or how to get ahead in life more generally. This is true for traditional financial services globally, but even before Covid-19, South Africans already had to contend with more than most: a broken economy, rolling blackouts and a weakened currency. Then there’s the hidden To put this into numbers, burden of ‘family tax’ or ‘black tax’, which sees many a 10% to 20% black tax people working hard and earning well, yet struggling to deficit means it will take thrive because of responsibilities for ageing parents or you five years longer to family members that are dependent on them. buy your first property, By some estimates, among first-generation middleand when you do, it will be in an area class earners, as many as 80% are paying, or have paid, some form of black tax, and it consumes between 10% and 25% of their income.

A tale of two circumstances

Looking at two typical SA stories illustrates how the black tax burden plays out in people’s lives. Take Kagiso and Loyiso: Two young men equal in talent, education, and work ethic, but with quite different starting points. Kagiso gets his first car as a hand-me-down from his father, is on his parents’ medical aid until after university, and gets help so that he pays lower-than-market rent when he starts working. He also gets support in securing his first property. Loyiso, on the other hand, leaves university with a student loan, must put his parents and sister on his medical aid, and commits a chunk of his first paycheck to helping his sister complete her studies. He sends money home to his parents every month. These early circumstances gather momentum to define their financial futures. Because of his more privileged start, Kagiso finds himself in a position to take more risks in his career. He starts a successful business in his mid-30s and can leverage this wealth by investing in property and his retirement. Loyiso is never able to take any significant risks. He is saddled with student loan debt, contributing to family funerals, and supporting ageing parents, while juggling his own responsibilities and paying off a car. 24

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25% lower in value than your unburdened peers.

Fast-forward a generation and it’s plain to see why SA has such high and persistent levels of inequality. Kagiso’s children are property owners while Loyiso’s children are tenants who must support their father. Wealth flows backwards rather than forward through the generations and social mobility is painfully low. Even with a good education, South Africans are highly likely to end up where their parents were. To put this into numbers, a 10% to 20% black tax deficit means it will take you five years longer to buy your first property, and when you do, it will be in an area 25% lower in value than your unburdened peers. You will need to work seven years longer to enjoy the same lifestyle they do, and you’ll have 60% less wealth to give your kids a good start in life. Your margin for error is much narrower, too. If you have a financial setback – for example, a failed business that costs you R300 000 – it will take you five years longer to recover. You’ll have to work well into your 80s to make up the difference, with a strong possibility of ending up in a debt spiral along the way, and pass on black tax to the next generation. It’s not difficult to see how the current economic crisis is going to further disadvantage Loyiso.

Ripe for disruption

For SA’s economy to unshackle itself from its entrenched inequality, we need to look beyond macroeconomics and start focusing on people’s personal finances. The financial services industry is ripe for disruption. It currently caters for those who already have wealth, while ignoring those who need advice the most. And the problem lies at the very core of the traditional business model: Financial advisers make money from selling products, and products can only be bought by those who have money. The challenge facing us is to cater for the mass and middle-income market segments in a way that mimics the bespoke and independent advice reserved for the ultra-wealthy. In effect, we need to focus on helping people make the right life decisions that ultimately lead to the creation of wealth; the career, lifestyle and business decisions that shift a person’s trajectory. This demands a radical new way of thinking about financial advice – and, indeed, our clients. Instead of classifying somebody like Loyiso based on his current circumstances, we should be looking past these to what he can become.

Creating a sustainable business model

Making this model sustainable from a business point of view isn’t easy. Sometimes the important advice for Loyiso is that www.fin24.com/finweek

collective insight

he needs to pay off his debt first or find a side hustle or borrow to fund his MBA. Financial advice will need to be marketed in a way that convinces people to sign up and pay a monthly fee for advice. To do this, the service will need to deliver tangible value for the client over the long term, and at low cost. Fintech can help solve the problem of economies of scale because it can reduce the time it takes to give every customer a personalised financial plan and provide highquality and consistent advice every single time. It also allows you to empower clients to take charge of how they explore and interact with that advice. Of course, sound financial advice cannot be left to technology alone. When people interact with stressful decisions like finances, empathy is an important factor to eliminate translation errors between man and machine. More importantly, financial plans demand sacrifice, and people need an accountability partner to help them stick

to it. Technology isn’t great at driving behaviour change over the long term, but a trusted adviser might be. But the human factor should be used when it makes a difference, allowing the machine to take care of the rest. The future of advice is in leveraging the best of both worlds. In this new approach, a monthly subscription fee of a few hundred rand – multiplied over a decade – starts to look like a sustainable model. And for someone like Loyiso, it means a small monthly investment in his ideal future, at less than the cost of a gym contract. The current crisis has highlighted the vast inequalities in this country; it has also highlighted the urgency for innovation in the financial services industry. If we don’t manage to create a model that provides more South Africans with fair and wise advice, we will never shake off the persistent inequality that dogs this country. ■ Abu Addae is the co-founder and CEO of LifeCheq.

ACCESSIBILITY By Gugulethu Siziba

Finding scaling solutions for the masses

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Focusing on the underserviced portion of the economy needs a robust reimagining.

he mindset of ‘making your money work for you and not just working for your money’ is difficult to embrace for most people in South Africa living from one paycheck to the next. According to the Allianz Global Wealth Report 2019, approximately 10% of SA’s population is classified as middle class and earns more than R10 225 per month – a figure considered barely feasible to provide for one’s needs in the present, let alone setting aside for the future. The other 90% of the population is in dire need of good financial advice and cannot access it because they cannot afford it or don’t have enough to invest. The financial advice they do receive isn’t holistic and is directed towards savings, life assurance or funeral cover needs and less so towards debt management and budgeting. A reason for this is that financial advisers do not make money from budgeting or debt management. At the 2018 Morningstar Investment Conference, Alexander Forbes’ head of research, Anne CabotAlletzhauser, said that “up to now, the role of financial planning had been centred on the idea that if you stick to a financial plan and achieve it, everything else will fall into place, but this is not so”. The role of the financial adviser of the future will not be about picking the best investments for you, but rather helping you improve your financial capability, she said. There is undoubtedly a need to get good, holistic financial advice and education to the masses and fintech could provide some of what is required. @finweek

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Has fintech already improved access to financial advice?

Fintech has been researched and implemented to try and bridge the gap between financial advisers and the broader, less affluent population. The financial services industry has seen tremendous changes in the banking sector with the use of mobile and internet banking, and several roboadvisory platforms have also been launched but with varying success. However, most of this technology has not managed to bring financial advice to the market it was intended to help, but rather optimised administrative processes for the minority of traditional investors who are already financially literate and engaged. So as much as technology has had a big impact on the banking world, when it comes to good financial advice, there is still a lot more that needs to be done to find the right, scalable solution that will reach the masses. Having Google at everyone’s fingertips is not enough.

Who is being left out and what are their concerns?

An informal saving structure being utilised in SA is the stokvel. According to the National Stokvel Association in SA, there are roughly 810 000 active stokvel groups consisting of over 11m members and collecting an estimated R50bn annually. To contextualise these figures, nearly 40% of SA’s adult population belongs to a stokvel, according to the association. finweek 21 May 2020

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So instead of offering just traditional investment products, the solution may need to open itself up to alternative products that appeal to a broader audience.

After sitting with a group of ladies who run a stokvel, they explained that they would rather settle for informal ways of saving, investing and credit facilities because they felt deceived by the financial advice they had gotten previously. They also noted that they would prefer to keep a close eye on their investments and manage them in a language that they understand. The interesting takeaway from my time with this stokvel was that there was undoubtedly a culture of saving already established, but the group lacked knowledge and trust to engage with a licensed financial adviser. This lack of trust is filtered down to younger generations who are also opting to settle for informal ways of saving.

Possible solution?

Given the proliferation of mobile phones in SA, any fintech solution would have to be mobile. Anyone should be able to access financial advice via a mobile device and do so in an easy-to-understand and low-cost way. Putting an adviser in their pocket will improve transparency and give people peace of mind knowing where their money is and how it is being managed. A Deloitte report on trends in wealth management suggests that clients increasingly “want to stay in control of their financial lives and understand the advice they receive”. This is even more important when addressing an undereducated mass population in rural SA. To be easy to understand, the solution would need to meet each person wherever they are on their journey to financial stability. That means it probably also needs to be multilingual – providing guidance and education in a language that a client can understand – and provide guidance on how they can manage debt, their credit rating and draw up a budget. Another consideration will be the products that are offered by the solution as they need to resonate with the people being served. For instance, it would be difficult for me as a black child to get my parents to invest in shares or funds that they have never heard of. Their understanding of wealth and investments is cattle, chickens and farming. So instead of offering just traditional investment 26

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products, the solution may need to open itself up to alternative products that appeal to a broader audience; and regulators may need to create new structures to govern these less formal products and the advice surrounding them. A big challenge for a solution operating at scale will be providing personalised financial advice that considers each client’s circumstances, but not at a loss to the adviser. In future, technology including artificial intelligence may hold the answer to this piece of the puzzle, but there are already ways in which some of the difficulties faced by financial advisers in providing scalable advice in a cost- and time-efficient manner are being addressed with intelligent and compliant client and adviser platforms. Lastly, financial education should be one of the cornerstones of any solution as increasing a person’s financial capacity is vital to building trust. According to Rudzani Mulaudzi from the University of Cape Town’s Graduate School of Business, the “financial education of stokvel members is essential to increase awareness of how better investment and management of the money could result in bigger benefits to members. Members need to be made aware of the power of collaboration. A targeted education programme could enable stokvel members to transition in their thinking from being consumers to being investors and therefore begin to exhibit investor attributes and behaviours.” In conclusion, financial advice can reach the masses. Every South African can get good financial advice from a solution that is a truly comprehensive financial services product. However, the financial services industry needs to be open to new ways of communicating and improve access to information so that transparent, up-to-date tools can be made available to the client. It further needs to offer more straight-through processing options for numerous financial products (thereby relieving the administrative burdens faced by service providers) and restructure old products in new ways. Finally, it needs to embrace new ways to educate remotely and be more clientcentric and understand the needs and traditions of many. ■ Gugulethu Siziba is a junior financial adviser at Wealthcraft.

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collective insight

DEBATE

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By David Kop

The times they are a-changing here are probably hundreds of thousands of consumers who are in a better position due to the financial advice that they have been given, be it that person who could retire, or the family who was financially OK after the loss of a breadwinner. However, times have changed and the consumer’s needs for financial advice have changed with it. While some professional financial advisers and planners have moved with the times, I think that it is fair to say that the industry has not adapted fast enough. To be fair, it is not a simple matter. Financial advice is not provided in a vacuum, it is provided in an ecosystem that consists of government, consumers, practitioners and product suppliers. Change is required across the system for advice to move forward. 1. Regulation – The Retail Distribution Review is a process whereby the laws and regulations around the provision of financial advice is being reviewed. The three main areas being considered are remuneration of advisers, adviser relationships with product providers, and the services provided by financial advisers. 2. Consumers – While much focus has been on the fee chain

in the financial industry, consumers need to understand that financial advice is a valuable service that has always been paid for, albeit imbedded in the cost of the product. This may have created the impression that the value lay only in the selling of a product. 3. Practitioners – My pet peeve is advisers who try and demonstrate their value proposition by putting down another adviser. This puts a negative spin on the entire advice industry. It tells consumers that financial advisers are not to be trusted, except me. For me, a financial adviser must have a client-first mentality, the business model they operate in comes second. 4. Product suppliers – One of my favourite quotes is from Denna Katz, who said we used to give away advice to sell a product, and now we do just the opposite. Product suppliers remain a large employer of financial advisers. The current business model of remunerating on new policies needs to change. The focus should be on client relationships and retention, rather than just new business. ■ David Kop is an executive director at the Financial Planning Institute of Southern Africa.

How advice should adapt in a post-pandemic SA

Photo: Gallo/Getty Images

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here’s probably a good reason why financial advice has never been able to expand to a broader base – because the business of “wealth” management has been predicated on the notion that there was “wealth” in the first place. This means that compensation for this professional service would be based on either a fee as a percentage of assets under management or a commission embedded in the product itself – creating the illusion that they were getting the advice for free. In a post-Covid-19 world, financial advice will be the one thing that everyone in South Africa will require. But our starting point will be from a lack of wealth. How do we start again? Here is what this much-needed service will require: A new business model where advisers are compensated for helping people navigate their way back to financial stability: • This could be embedded in an employee benefits package deducted from the contributions made by members. Financial stability is a win for employers, employees and the government – it keeps people saving, while helping them @finweek

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By Anne Cabot-Alletzhauser

manage the financial trade-off decisions they must make over the course of their lives. • If people are unemployed, then the cost could be carried by the UIF or a retrenchment package. • Success must be monitored and measured. A new framework for attracting and training advisers: • The adviser of the future is one who understands a holistic picture of the lens of responsibility of a family or income earner. • The focus would be on trade-off decisionmaking around the full range of options: budgeting, job packages, savings for emergencies, retirement, health costs, housing, education, income or asset protections, taxes, and, if there is money left – investments. • The right candidate is someone with a passion for coaching and teaching. A new technology that allows an individual to aggregate all that planning insight and financial data and carry it with them to any new employer or planner: • Here is where blockchain could provide the key to servicing people who may be in and out of employment or moving from one employer to the next. ■ Anne Cabot-Alletzhauser is head of the Alexander Forbes Research Institute.

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collective insight By Ian Macleod

ECONOMICS

Narratives and numbers

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Photo: Gallo/Getty Images

The field of narrative economics offers a new view on how popular stories move markets.

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THE NARRATIVE OF MACHINES TAKING OVER HUMAN JOBS THROUGH MULTIPLE ECONOMIC CYCLES

% 0.00008

The perennial “labour-saving machine” narrative

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Labour-saving machine Technological unemployment Automation Artificial intelligence

0.00006 0.00005

0.6% 0.5%

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0.4%

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Relative frequency of articles containing the phrase (Proquest News and newspapers)

Relative frequency of phrase (Google Ngrams)

conomics, investing and financial advice have become highly mathematical pursuits. Indeed, numerical tools and models are paramount in these arenas. But we can always do better. The new and profound lens called narrative economics has the potential to elevate financial advisers’ analytical and predictive power. Spearheaded by 2013 Nobel Prize laureate Bob Shiller, this novel approach embraces the power of words. Shiller, professor of economics at Yale University, begins his argument for “a form of economics that takes narratives seriously” by demonstrating how economics and finance stand out from other faculties by their exclusion of narratives. “History, anthropology and sociology love narrative,” he says, “but the worst field for the understanding of narratives is finance.” The problem with this, Shiller continues, is that “it is important to learn about economic narratives because they are a fundamental driving force for the economy. We can’t pretend they don’t exist.” In his 2017 presidential address to the American Economic Association, he called narrative economics “the study of the spread and dynamics of popular narratives, the stories, particularly those of human interest and emotion, and how these change through time, to understand economic fluctuations.” So, narratives in this context are simply stories that we hear and share, and which have some impact on our economic behaviour. Like the trending field of behavioural economics, narrative economics appreciates the whims of being human, and how that drives our actions. One recent example of an economic narrative goes something like: We’ve had a very long spell of growth in America, some parts of the yield curve have inverted, so we must have a recession on the way. We’ve all heard it on Bloomberg. We’ve discussed it with friends and colleagues. It doesn’t seem like a stretch to suggest many people changed their economic activities because of it (albeit that any lurking recession was intercepted by the arrival of Covid-19). Even if just the odd bit of belt-tightening here, putting off that new car

0.00000 1750

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SOURCE: Narrative Economics: How stories go viral & drive major economic events by Robert J. (Bob) Shiller

purchase there, or holding back on expansion of your business, these small decisions aggregate to drive markets. Some economic narratives show incredible longevity, rearing their heads in mutated forms across centuries. Consider the story of “machines taking our jobs”. Shiller uses Google Ngrams to search for frequency of use of the phrase “labour-saving machine” to demonstrate the coincidence of a spike in its use with the luddite movement in the 1800s in the UK, as weavers fought the loss of their jobs to mechanical looms (see graph). Less widely-known is the role this same category of narrative played in the Great Depression. Here the phrasing was “technological unemployment”. This term rocketed alongside the famous Wall Street crash and ensuing recession. The narrative of robots taking over was, in Shiller’s words, “a strong reason for pessimism and reluctance to buy or invest”. Today’s equivalent of this narrative takes the shape of “artificial intelligence” taking our jobs. Very well, you may say, but how do we use this practically to better understand markets and advise clients? It’s not of much use if narrative economics amounts to incorporating stories into our gut-feel decisions and dissecting recessions post hoc. Shiller is the first to concede this is a novel lens that very few are studying. However, he’s adopted an existing science with

an uncanny relevance to narratives. It just so happens that all of us had a crash course in this medical specialty with the Covid-19 outbreak. Where epidemiology models the spread of viruses, it can do the same with narratives. That is, narratives follow epidemic models. From the early days of the coronavirus pandemic, experts monitored the contagion rate. That is the number of people, on average, infected by each person who contracts the virus. In narrative economics, think of that as the number of people each person tells the narrative to. Likewise, what epidemiologists term the recovery rate, we can roughly translate to a forgetting rate – the number of people who hear a story but forget it. Epidemiological modelling therefore gives us an already advanced science with which to turn the ideas of narrative economics into implementable tools. By way of example, one promising line of study is analysing popular media narratives to generate measures of emotion and, in turn, how investor emotions relate to speculative bubbles. What does narrative economics mean for money managers? This is a ground-level opportunity. There will be laggards. There will also be those who monitor and embrace the rise and formalisation of this powerful perspective to develop better models, build more valuable products and provide superior advice. ■ Ian Macleod has a background in both business and journalism. He is a member of the GIBS Centre for African Management and Markets.

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collective insight By Paul Nixon

BEHAVIOURAL FINANCE

Better investment decisions should be everybody’s beeswax

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Photo: Gallo/Getty Images

Sidestepping the market ‘sirens’ on a lifelong journey to financial wellbeing.

ourneys are part of the human condition. We possess an almost paradoxical nature of resisting change while simultaneously longing for new experiences. All the preparation in the world, however, cannot take away the inherent uncertainty and risk that exist in these journeys and they often, when recounted, can provide readers with many enthralling tales and opportunities to learn. The tale of Odysseus’ journey back to Ithaca is one that has many parallels to the way that clients, advisers, and investment managers make investment decisions. Like travellers, investors bear a similar disposition and face similar challenges. They sacrifice consumption today in the hope of being rewarded over time for braving sometimes very turbulent market waters. This inherent uncertainty, however, is often enough to either keep us from jumping in – thus forgoing the returns we need by investing over time – or, alternatively, jumping ship mid-journey to what appears to be a better-equipped vessel to get us where we’re headed. This behaviour applies to all parts of the advice chain and these behaviours can have a significant cost on the outcome achieved by the client. The Covid-19 global pandemic and its extreme impact on the financial markets has focused attention on these behaviours of late. Human beings in general detest uncertainty – it is way more stressful than knowing something bad is going to happen – according to the authors of “Computations of uncertainty mediate acute stress responses in humans”, published in Nature Communications in 1996. We even have machinery located near our brainstem called the locus coeruleus that is continually trying to predict negative outcomes and prepare us accordingly, Craig Berridge and Barry Waterhouse wrote in an article published in Brain Research Reviews in 2003. Furthermore, research presented by Wharton Business School in 2016 demonstrated how the stress hormone cortisol makes us more likely to use our gut instinct. Our natural stress response (forgoing critical thinking) is therefore setting us up to make investment decisions that are likely to have poor outcomes. The long-term effect on wealth as a result of these decisions should not be underestimated. After studying the investment behaviour of nearly 18 000 South African investors over a decade (2008 – 2018), it became clear that: 1. The fear that uncertainty elicits is a dominant motivator. Investors were 2.2 times more likely to switch investments @finweek

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(abandon ship) when they perform poorly (between 0% and 5% per year); and 2. On average, this switching activity causes a lower investment return. This “behaviour tax” is about 1% per year on average during turbulent markets because investors are generally in the wrong place at the right time (when markets recover). Following the battle of Troy, Odysseus set sail for his home of Ithaca, facing many trials on the way. He needed to devise a plan for a particularly treacherous area where sirens lured unwitting sailors to their demise with hypnotic melodies. Odysseus understood his limits and that his knowledge of the uncertainty was necessary, but not sufficient in preventing the ultimate demise of his ship, crew, and himself. He therefore decided to tie himself to the mast of the ship and to place beeswax in his crew members’ ears to protect themselves from making an almost inevitably poor decision. This event is a great metaphor for the challenges facing clients, advisers, and asset managers in times of crisis. How they deal with these challenges is vital for successful client investment outcomes – exactly what everyone should be paid for. The financial adviser plays the same critical role as Odysseus. They are the planner, strategist, guide, and mentor. While, as a profession, the six-step financial planning process has set down a crucial framework for providing more consistent advice, the emphasis remains on the quantitative assessment of a client’s financial state with little or no regard to how the client got there. Assessing a client’s so-called money scripts or their relationship with money from an early age could flag psychological obstacles to the implementation of their financial plan, as pointed out in a 2012 article by Sonya Britt and Bradley Klontz, published in the Journal of Financial Planning. Advisers will need to add psychological dimensions to their skillset in providing effective investment advice. Asset managers also need to deal with this challenge – they need to provide more reliable vessels to chart and navigate these uncertain waters. This means diverting resources away from the pursuit of elusive alpha and towards providing more predictable outcomes aligned with investors’ goals, as explained by Robert McDowall in Folklore. The insights provided by behavioural finance should be used to create a system that provides greater predictability to clients and more confidence to tie their hands behind the mast and place a little beeswax in their ears when the market sirens start calling. ■ Paul Nixon, certified financial planner, is head of technical marketing and behavioural finance at Momentum Investments.

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collective insight By Grant Locke

DIGITAL ADVICE

What Covid-19 has taught us

c

The crisis shows that investors don’t want to beat an index, but rather meet their savings goals. ovid-19 came out of nowhere and the world ground to a halt. REASONS OUR CLIENTS ARE OFF TRACK, TAKING THE MARKET CRASH OVER MARCH 2020 INTO ACCOUNT It stopped people from going to work, visiting friends and family, going on holiday, eating out and shopping for anything other than the essentials. 2% As the result of It halted global trade and interrupted many businesses, and has led to 3% market impact what might become known as the fastest rise in the unemployment rate the world has ever seen. It changed the behaviour of probably around a billion people overnight. 98% This pandemic almost stopped financial markets. From As the result of client impact 20 February to 23 March, many global equity markets – including 97% the UK, US, Europe, Australia, and many others – fell by over 30% as investors panicked and sold everything they could. As it stands, 0% 20% 40% 60% 80% 100% 120% equity markets have recovered some of their losses. Some of us are February 2020 April 2020 SOURCE: OUTvest wondering what is driving the recovery, given that the full effects on the global economy are yet to be understood. For financial advisers, this begs the question as to how to provide off track between February and April only increased by 3%, from 54% investment advice during something as unprecedented as this. in February to 57% in April, despite the market drops. The investment industry has, almost collectively, shouted at all its The reason is partly because the investment return of every single customers to “stay the course, stay invested”. investment contract is not the same. Every client invests a different Everyone was hopeful that John Bogle (the founder of Vanguard amount at different times, and those who are in the early stages of and known as the father of index investing) was right when he said: their investment journeys should care the least about market falls. “Stay the course. Regardless of what happens in the markets, stick What we realised is that with advice technology like this, we can to your investment programme. Changing your strategy at the wrong assess the impact of market performance individually and provide time can be the single most devastating mistake as an investor. Just individualised guidance to help them get back on track. And we can do ask any investor who moved a significant portion of their portfolio to this instantly. We are genuinely only now beginning to understand the cash during the depths of the global financial crisis of 2007-2008, power of these systems. only to miss out on a part or even all of the subsequent bull market.” We also learnt that time-weighted return is a useless method It wasn’t until a meeting a few weeks ago, when the OUTvest for any performance comparisons for an individual client. It’s a actuarial team presented the performance of our investment tracking comparative designed to compare the returns of fund managers system during the market crash, that we suddenly realised we were excluding cash flows, but cannot be used to assess whether a client able to prove this advice is true for each client. will achieve their investment objectives. The 30% fall in equity markets for almost all clients Clients experience the money-weighted return of The major reason why did not have a major impact on them achieving their their investment – this is the measurement of the return objectives on our platform. In fact, it only affected 3% of that gets them to where they want to go. our clients using our investment tracking system. Clients want to meet savings goals, not beat indexes. Our investment tracking is a real-time system that Moving to an outcomes-based investment approach can be turned on or off at any time. It recalculates the is more than just about changing the investment of our clients who use the system are off track performance of the client’s investment against its product. It’s about linking the investment product and is because of their own forecast outcome when the client logs in or changes the client’s objectives. The only way to do this is through actions: early withdrawals, their desired investment outcome, desired market value regulated advice, whether directly to the consumer or contribution changes, plan of the investment or amends their contribution and through a financial adviser. changes and the like. withdrawal timelines. Embedding digital advice systems into the process One of its most important features is its ability to can be life changing for individuals trying to reach understand why an investment is not on track to achieve the projected financial objectives. The investment plan becomes organic and flexible forecast, and this was key in helping to understand why a sharp, and links more closely to the events in the life of the client, rather than relatively short-lived market crash did not push our clients off track. an annual review meeting. Surprisingly enough the dominant reason for our clients currently This technology can also help advisers who are trying to scale their being off track to achieving their investment objectives is not related practice, reduce their cost burden and can improve compliance while to the market crash in March. The major reason why 97% of our clients reducing administrative burdens. It also means that the systems can who use the system are off track is because of their own actions: early support the advisers in becoming much more proactive when it comes withdrawals, contribution changes, plan changes and the like. to the support needed by clients. ■ Even more interesting is that the proportion of clients who are now Grant Locke, CFA, is head of OUTvest.

97%

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finweek 21 May 2020

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collective insight By Louis van der Merwe

FINANCIAL PLANNING

The financial advice model of the future

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How employer-facilitated advice can boost employees’ financial wellbeing. he distribution of financial advice favours clients that have already accumulated assets and are approaching the de-cumulation or retirement phase. Less than 6% of the South African population benefits from receiving this form of financial advice. The value of advice lies in both the technical elements and relationship elements. Technical value refers to factually correct and accurate plans as well as constructing and implementing various financial products in line with the plan. Relationship value refers to the confidence and trust that the client has in the adviser to assist them in achieving their objectives through ongoing support and coaching. I want to propose a financial advice model that better suits clients in the accumulation phase of their working life. The highest value of financial advice in South Africa lies in the ability to assist working-age employees to better plan and manage their finances to support not only themselves, but also their financial dependants.

Employer-facilitated advice

I’d like to introduce employer-facilitated advice that supports the technical and relationship elements of financial advice; thus, a marriage of retail and institutional advice. Financial planning as a benefit offered by employer groups alongside retirement funds, group assurance, and medical aid to reduce financial stress, increases employee productivity, retention and ultimately attracts new talent. Financial products can be distributed on an employer level with enough flexibility to implement financial plans on an individual basis, supporting a strong focus on cost reduction. Access could be in the form of existing umbrella funds, group assurance, group tax-free investments and contributing to voluntary investments via an employer portal. The implementation on employer level would ease the administration burden on the client and the adviser. A financial adviser and benefit consultant would work together to create a suite of cost-effective and transparent financial products, assembling a shortlist that an employee can utilise on the employer platform.

Photo: Gallo/Getty Images

The role of the financial adviser

Advisers would be able to focus on the financial planning process within the framework of the employer-provided product structure. This would be an important shift to comprehensive financial planning. By creating a goal-based financial plan, the advisers can demonstrate the financial impact of each decision in terms of the funding level relative to the goal. Advisers can offer educational training through webinars and newsletters to increase awareness and improve the general level of financial literacy. Group financial planning sessions can be held to help scale the distribution of advice and allow junior advisers to hone their skills. Financial advice can take place over time in a modular form, to help the employee address the area that requires the highest priority. This will reduce the cost of advice by limiting the amount of time it takes to prepare the financial plan. A key component in the modular, @finweek

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LEVEL OF CONTROL

LOW

MEDIUM

HIGH

Returns, start retirement date, end retirement date

Current income, withdrawal during retirement

Fees, contributions, escalation of contributions, future commitment

goal-based planning is allowing the employee to create an achievable and realistic goal. The adviser should focus on action steps that would guide the employee closer to their goals. By combining coaching and counselling skills, the adviser would be able to empower the employee to better manage their finances, shifting the focus to help generate insights in terms of their money and their life. The employee should understand that they do have control over their financial situation. One of these examples could be retirement planning, where the employee has various elements that can be adjusted to create a better outcome (see table). Demonstrating the impact of each area in the context of their personal goals often creates a new way of looking at their finances.

Utilising technology

By utilising payroll and data integration technologies, real-time financial plans can be created. The employee can permit the employer to share information with the company-contracted adviser through an employer portal. The adviser will receive information related to their salary, deductions, current retirement savings, financial dependants and insurance information integrated directly with financial planning software. A virtual consultation can be scheduled with the employee, allowing the employee to supplement the data so that the adviser can amend the financial plan. The adviser can assist the employee by coming up with their solutions, which may include increasing contributions, committing to future contribution increases or supplementing their income through alternative sources.

Sustainable adviser business model

The model would facilitate a shift from investment advice to comprehensive problem-solving and planning, helping employees weigh up complex decisions. The relationship moves from transactional to transformational. Adviser remuneration can be facilitated through payroll deductions and employer subsidies. The fee can be calculated as a percentage of payroll and agreed upon based on the complexity of the needs of the employees. This allows for a more sustainable and predictable income stream to fund the financial advice team.

Implementation

The technology is readily available but will require a shift from the current focus on financial products to the actions and habits of the employees to move them closer to their financial goals. By empowering employees, we create an environment in which they construct actions within the framework of employer-facilitated advice. â– Louis van der Merwe, certified financial planner, is the co-founder and a director at WealthUp.

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marketplace Simon says By Simon Brown

PHUMELELA GAMING AND LEISURE

Simon’s stock tips Founder and director of investment website JustOneLap.com, Simon Brown, is finweek’s resident expert on the stock markets. In this column he provides insight into recent market developments.

METROFILE

Buyout on hold

Photos: Gallo/Getty Images

Saved by the Oppenheimers Phumelela Gaming and Leisure went into the Covid-19 lockdown in an already tough space, battling government on its 50% share of tax raised from horse racing, equal to about half of their profits. Lockdown, of course, halted the industry and bleak results were swiftly followed by the announcement that the company was going into business rescue. Here a recovery seemed unlikely, but Mary Oppenheimer Daughters has offered a post-commencement finance deal that could save the industry, and possibly the company. Of course, as is always the case with business rescue, or bankruptcy, the shareholders are the first to lose any rights as they get all the upside from a successful business but, equally, all the downside when the business fails. Even if that failure is only partial and the business returns to operations, shareholders are often hugely diluted or replaced with new shareholders who converted debt or added more capital. 32

finweek 21 May 2020

Metrofile* updated the market recently in a statement on its proposed delisting, saying that the buyers remain committed to the deal but that it is unable to proceed until the lockdown in South Africa is over and international travel restrictions have been lifted. The buyers “will need to see three months of normal trading and revised projections and debt levels”, according to the statement. In other words, the deal is on hold until late this year at best and, frankly, may not happen at all, especially if lockdowns continue in some form or other into 2021. While this did see the stock dropping to 220c/share and well below the 330c offer price, I continue to hold it as I like the stock. However, like the potential buyers, I will want to observe trading activity after the Covid-19 lockdown is lifted. This activity will be reduced as economic activity is down and many clients would have ceased operations during lockdown.

The tech-heavy Nasdaq is certainly saying that

2021

will be fine, even excellent, for the stocks constituting the index.

SA BONDS

Debt rally silences critics A piece of good news was South African bonds having an excellent start to May as the ten-year bond traded down to 9.29% while shorterdated bonds were below 8%. This just a week after we exited the Citi World Government Bond Index and little over a month after reaching full junk status as an economy, which had pushed yields to over 11%. This recovery is not surprising, even at around 9.3% we have one of the highest yields in the world and many investors are more than happy to take the associated risks of a default (for which they can buy insurance) and lock in a solid yield. This reminds us that global investors don’t care about our politics, they care about returns.

US MARKETS

Nasdaq shrugs off joblessness Even as the US unemployment rate hit 14.7%, according to data for mid-April (the worst level since the Great Depression), and a likely surge to 25% expected by the end of May, the Nasdaq traded positive since the beginning of the year. This is a stark reminder of two things. Firstly, markets are not so much looking at today, rather they’re looking to the future. And the tech-heavy Nasdaq is certainly saying that 2021 will be fine, even excellent, for the stocks constituting the index. Adding to this optimism is 70% of recently unemployed people expecting to get their jobs back quickly. Of course, the market could end up being wrong and jobs may return very slowly, which would result in a sell-off, but for now the markets are bullish and running higher. The second important point is: Do not fight the Federal Reserve. They’re pumping trillions of dollars into the system, boosting confidence and the price of shares. Essentially this is the proverbial wall of money that is unstoppable until it runs out. But when the Fed owns the printing presses, it may not stop for some time. www.fin24.com/finweek

marketplace Simon says

KAAP AGRI

ANHEUSER-BUSCH INBEV

Debt worries Kaap Agri’s interim results for the period ended 30 March surprised to the upside as revenue and profit increased. However, their spending on the retail fuel business is not achieving the level of profit that the spending would require. The company sits on debt of R1.7bn while its market cap is just above R1.6bn. The business is cash generative, resulting in the debt being manageable. Management should, however, look to reduce the debt pile. They have stated to me that a capital raise to merely reduce debt is not part of their plans. The reality remains that the level of debt is a risk to the business, especially during a pandemic.

COMAIR

Will the rescue pay off? A recent Comair update sounded extremely bleak, with the company suggesting it would not be operating again until October or November. Then, within a week, another update stated the company had entered business rescue proceedings. The plan, according to the Comair board, is that a “return to operations may be achievable once restrictions are lifted”. This is the theory behind business rescue; companies that enter it get restructured and relieved of some debt. Shareholders take most of the pain, but the company can exit business rescue and ultimately continue trading. The reality is that this is not generally the case, because I think most companies enter business rescue too late. Comair likely did not enter too late and could be saved. @finweek

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PSG

Cash in on skewed valuation Eatery closures hit sales Anheuser-Busch InBev’s results are typically somewhat boring. It consists of flat to very modest volume growth with earnings boosted by a focus on the higher-priced premium brands that generate more profits. This is what happens when you’re a global business in a largely ex-growth sector (who doesn’t already drink beer that wants to – aside from South Africans in lockdown?). But their latest results saw volumes in March down 9.3% year-on-year while April collapsed 32% from a year ago. This is a staggering decline for a mature industry. Digging into the numbers, it turns out that some 58.9% of beer is consumed onsite at bars and restaurants. Just over 40% is bought to consume offsite at home or elsewhere. With global lockdowns shutting bars and restaurants, there has been extraordinarily little onsite drinking, causing sales to collapse. This will naturally reverse as lockdowns are lifted, but it will be some time before normal sales resume.

Anheuser-Busch InBev’s latest results saw volumes in March down 9.3% yearon-year while April collapsed 32% from a year ago. This is a staggering decline for a mature industry.

In the 7 May issue of finweek, I wrote about the PSG Group’s cautionary announcement that likely pointed to them wanting to unbundle their Capitec* stake. They have now confirmed that fact. They did not provide details and may keep some of it but, if they unbundle the entire stake, it will see PSG shareholders receiving one Capitec share for around every 6.5 PSG shares they hold. This means the rest of PSG is valued at pretty much nothing; hence one of the main reasons for the proposed unbundling. The trade here should be to buy PSG and sell Capitec to get the rest of PSG’s value for free. However, on the day that the proposed unbundling was announced, PSG was flat and Capitec added 10%.

VIVO ENERGY

Lockdown may hurt a bit less The quarterly trading update from Vivo Energy shows just how left-field Covid-19 is proving to be. Vivo owns over 2 200 fuel stations in 23 African countries. Fuel is generally considered to be inelastic in that demand is pretty much stable and linked to GDP growth. In Africa it may be a little ahead of GDP growth as we see an expanding middle class. However, Covid-19 has thrown that inelasticity out of the window with lockdowns resulting in far less driving and, as such, less fuel consumption. Ultimately, Vivo may see a smaller impact depending on levels of lockdown in their markets, noting that they do not operate in South Africa. It shows that carefully planned investment strategies simply never contemplated a world in lockdown. ■ editorial@finweek.co.za *The writer owns shares in Metrofile and Capitec.

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marketplace invest DIY By Simon Brown

OUTLOOK

Lessons from Berkshire’s AGM

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Simon Brown highlights some of the key takeaways from Berkshire Hathaway’s annual general meeting that he reckons are most suitable for investors at the moment. n the first Saturday of May each $137bn in cash the business is now about year Berkshire Hathaway hosts protecting its wealth rather than the earlier its annual general meeting days when it was about growing that wealth. (AGM). This is no ordinary AGM As individuals we’ll hopefully have the same as over 40 000 shareholders make the trek transition at some point, and we need to Omaha, Nebraska where Berkshire has its to notice it and adapt accordingly. When head office and Warren Buffett his home. you have created the wealth, the strategy In past years, the AGM was a festive changes. It’s not about playing it safe, rather event with Berkshire companies selling their about managing larger positions. It entails a products followed by over eight hours of shift in focus from only capital appreciation questions from the media and shareholders. to also spending the cash flow that comes But lockdown changed everything as the from dividends. event became virtual and Charlie Munger Another interesting point is that while the was unable to travel, so it was just Warren Berkshire share price is under pressure, the Buffett and Greg Abel fielding questions. company is not buying back its shares with Abel is the chairman and CEO of Berkshire the gusto one would expect, considering the Hathaway Energy and vice chairman of nondiscount at which it’s trading to its intrinsic insurance operations of Berkshire Hathaway. value. This is the usual metric used by the He is also the possible successor to Buffett company to decide at which price it will buy at Berkshire. back shares. A video of the AGM is available online on Buffett said Berkshire didn’t want to Yahoo! Finance, but here are my highlights of buy back shares as the sellers of those the event. shares would be current shareholders who To begin with, Buffett won’t have all the relevant Lastly, while Berkshire sold all his airline stocks information as to the actual normally keeps a massive and that left me with two value of Berkshire. This is thoughts. an important point. As a Firstly, I was surprised buyer or seller in the market when he bought them as right now we simply do he’s long been very sceptical not have all the important in cash as a buffer for unforeseen of the industry. However, he information and as such events, Buffett said that they would be keeping a higher level. got sucked in a few years should be extra cautious. I ago and ultimately did make have been managing this a profit but really as a trade rather than a extra risk by only buying exchange-traded long-term investment. funds (ETFs) and waiting for company Secondly, when he decided to exit the financial results later in the year to help guide industry, he did so wholesale. There was no me as to which shares offer opportunity. piecemeal selling. Contrary to this approach Lastly, while Berkshire normally keeps is an error many investors, including me, a massive $20bn in cash as a buffer for make. We sell a part, even a large part, of an unforeseen events, Buffett said that investment we want to exit. This shows a lack they would be keeping a higher level. This of conviction on our part. We want out but notwithstanding that they currently have we’re worried the stock will run, so we hold six times that amount of cash. Buffett’s some shares, essentially to cover all our bases. reason was simple: The Covid-19 pandemic But long-term investing in individual stocks is unprecedented and as such nothing is about conviction. Either hold or sell, don’t we’ve seen before can prepare us for how make half a decision and end up doing neither. the pandemic will play out. So, to be extra Another great point was that Berkshire cautious is a far better response and hence is no longer a get-rich company. It is now a keeping a larger emergency fund makes stay-rich company. perfect sense. ■ With billions in profit every year and about editorial@finweek.co.za

Another great point was that Berkshire is no longer a getrich company. It is now a stayrich company.

Photo: Gallo/Getty Images

$20bn

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finweek 21 May 2020

Warren Buffett Chairman and CEO of Berkshire Hathaway speaks during the virtual Berkshire Hathaway annual general meeting held on 2 May in Omaha, Nebraska.

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marketplace share view By Samuel Feinstein

TECHNICAL ANALYSIS XXXXXXXXXXXXXXXX

British American Tobacco bullish in the long run

b

The world’s second-largest tobacco company outwitted the recent market rout. Will it last?

ritish American Tobacco’s (BAT’s) share price has had a volatile journey from 2016 to 2020 as broad market and regulatory pressures increased. After peaking at just under R1 000 in 2016, the price collapsed by close to 60% into the December 2018 global equity sell-off and has since rallied by 65%. From the same low, the FTSE/JSE All Share Index is negative – below the key 50 000-points level. Since the beginning of the year, the stock is up 16% relative to the FTSE/JSE Top 40 Index, which was down 11%: outperforming all local equity benchmarks. According to Bloomberg, the 12-month analyst target price on the stock is R796, which is a return potential of over 10% from current levels. A total 17 of the 22 analysts have a buy recommendation on the stock, four a hold and one a sell. I argue for short-term weakness; however, this should be used as a buying opportunity to build a position in a defensive company with a strong technical backdrop.

Fundamental context

BAT operates as a holding company for a group of companies that manufactures, markets, and sells cigarettes and other tobacco products, including cigars and roll-your-own tobacco. It is the world’s second-largest publicly traded tobacco company by market share (after Philip Morris International). The company rolls more than 700bn cigarettes a year, sold in 200 markets across

60-plus countries. BAT divides its business into two units: Strategic Combustible, and Potential Reduced-Risk Products (PRRPs). Based on results from its 2019 fiscal year, the company generates 40% of its revenue in the US, 24% in Europe and 36% in the rest of the world. The company increased revenue by 5.7% but has seen diluted earnings fall by 5.4%, with some operating margin compression. The business has strong cash flow generation, with £1.9bn in free cash flow after dividends in 2019 and a 65% dividend pay-out ratio. Management’s current strategy is focused on three areas – combustible value growth, moving into new categories, and simplifying company operations and its balance sheet (deleveraging).

Technical outlook

After bottoming during the first quarter of 2019, BAT has formed a steady uptrend of higherhighs and higher-lows. The 200-day moving average started to base, and as the price has ground higher it is now sloping firmly upward – confirming the price action’s trend. While there are still pockets of resistance, price will have to fight through to move higher; its recent relative performance against JSE benchmarks and peers shows strong momentum and relative strength, which should persist over time. While the longer-term trend is bullish, there is a rising risk of short-term weakness over the next few weeks if the price fails to hold above the recent highs of R675. The relative strength index (RSI) has failed to confirm the

BRITISH AMERICAN TOBACCO (BTI) Cents (ZAR)

– 100 000

Price/earnings ratio:

– 90 000

1-year total return:

– 80 000 – 70 000

Market capitalisation:

– 60 000

Earnings per share:

– 50 000

Dividend yield:

– 30 000

Average volume over 30 days:

– 10 000 Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar ’15 ’15 ’15 ’16 ’16 ’16 ’16 ’17 ’17 ’17 ’17 ’18 ’18 ’18 ’18 ’19 ’19 ’19 ’19 ’20 200-day EMA

finweek

Samuel Feinstein is the deputy chief investment officer at Definitive Capital Management.

BRITISH AMERICAN (BTI) – SENTIMENT INDICATOR Sentiment – 20 000

12.62 10.60%

– 15 000

$87.91bn

– 10 000 – 5 000

-

–0

7.07%

– -5 000

2 279 771

– -10 000

SOURCE: IRESS

– -15 000 – -20 000 Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar ’15 ’15 ’15 ’16 ’16 ’16 ’16 ’17 ’17 ’17 ’17 ’18 ’18 ’18 ’18 ’19 ’19 ’19 ’19 ’20

RSI SOURCE: Bloomberg

@finweek

$27.32 - $45.64

– 40 000 – 20 000

Price

52-week range:

recent higher-high in price, forming a bearish divergence. This divergence will be confirmed by the price closing below the previous high and opens downside risk to R500. Another gauge, which is useful to understand the prevailing sentiment in a stock, is to look at the Bloomberg fear and greed indicator. The goal of monitoring sentiment is to buy periods of fear during uptrends and sell periods of greed during downtrends. Current levels of sentiment are firmly in the positive zone, which historically has also resulted in a short-term pullback. So, how do we judge if the pullback is a constructive correction within an uptrend or the change of a trend to a new downtrend or sideways market? Firstly, we would want to see the price hold above the R500 level. Secondly, the 200-day moving average must remain upward-sloping. Thirdly, we want the RSI to remain above the oversold 30 level and for sentiment to get negative or neutral. If these conditions are met, we can be comfortably long BAT with a target price of R800 – which happens to be the 1.618% Fibonacci extension of the most recent pullback, the high of the 2018 rally, and support from 2017. The stock also provides an additional layer of defensiveness against domestic economic weakness and sentiment due to its global earnings base and strong historical track record of management performance. ■ editorial@finweek.co.za

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SOURCE: Bloomberg

finweek 21 May 2020

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cover story oil price

THE RETUR (ALMOST LIKE IN TH

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rebound will be so large that it’s a sector we must invest in. There are several factors that will cause energy prices to rebound in the coming months and we will examine the most relevant ones. Before we list the factors, we point out that many of these factors were already in play before the Covid-19 pandemic hit; the big drop has just caused the supply dynamic to worsen. We also need to answer the question: What has changed in recent years such that the Organization of the Petroleum Exporting Countries (Opec) can no longer increase prices by cutting supply?

The shale disruption

Simply put, the US developed more efficient technology to extract previously unattainable oil. In graph 1, notice the immense increase in oil production and how steep that increase has been. That is a game changer in any industry. In 2015 to 2016, the previous time oil prices crashed, you can notice the small drop in

GRAPH 1: MONTHLY US FIELD PRODUCTION OF CRUDE OIL

Thousand barrels per day

w

e’re going to kick right off with the hotspot sector of the moment: energy. Like most commodities, energy is a very cyclical business. It runs from boom to bust over medium-term periods of time. In other words, these boom-and-bust cycles tend to last only a few years at a time. Oil is a vital ingredient in the world economy and by the look of recent media reports, the world has attacked this source of energy and has deemed it replaceable. Green energy is all the rage currently but considering the total percentage of energy it supplies worldwide today, it’s actually irrelevant. Don’t get us wrong, we’re all for green energy, we’re just realistic about how much it’s likely to contribute to the bigger picture over the coming decades. In short, oil is still here to stay, especially as low prices (in our opinion anything below $80 per barrel is low) will make green energy look awfully expensive. We strongly believe energy stocks will rebound in the next two years and the

Oil has been hit hard by the global economic lockdow oil industry and a lack of investment in conventiona

14 000 12 000 10 000 8 000 6 000 4 000 2 000 0

1920

1940

1960

1980

2000

2020

SOURCE: US Energy Information Administration

GRAPH 2: PRICE OF CRUDE OIL IN DOLLARS PER BARREL $

120 100 80 60 40 20 2012

2014

2016

2018

2020

SOURCE: Trading Economics

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cover story oil price

URN OF OIL HE RETURN OF THE JEDI) Photos: Gallo/Getty Images

wn. Trader Petri looks at how the meltdown in the US shale nal wells are about to launch the price of this commodity.

production. That drop is important, and we will get back to it later. This production increase has been impacting on prices since 2010. Opec and Russia have many times tried to get the price of oil to increase but to no avail, as the US just fills the production cuts by further increasing its own oil production. In 2015 Opec decided to try and kill off US oil production (mainly shale oil) by flooding the market with oil. How can they kill off the shale oil producers? Simple: If I can make a profit at lower prices and you can’t, the theory is you go out of business before I do. Thus, referring to graph 2, oil prices fell sharply and by the end of 2015, US oil was in deep trouble. The oil price traded at around $30 a barrel and even below that for a while. Notice that today oil prices are a full $10 lower than that and in 2015 things were extreme in the oil space. So why can Opec and Russia kill shale oil? It is not cheap to drill and extract shale oil, and the average cost of production is much higher than anything the big Opec

By Petri Redelinghuys and Herenya Capital Advisors team

GRAPH 3: PRODUCTION COST OF OIL BY COUNTRY United Kingdom 30.7 21.8 Brazil 31.5 17.3 41 Canada 22.4 18.7 36.2 14.8 21.5 United States 36.1 Norway 12.1 24 35.4 Angola 16.6 18.8 35.3 Colombia 15.5 19.8 31.6 15.3 16.2 Nigeria 29.9 14.3 China 15.6 29.1 10.7 18.3 Mexico 27.8 Kazakhstan 11.5 16.3 23.8 Libya 7.2 16.6 23.5 Venezuela 9.6 13.9 Algeria 7.2 13.2 20.4 17.2 8.4 8.9 Russia Iran 5.7 6.9 12.6 5.7 6.6 12.3 UAE Iraq 5.1 5.6 10.7 Saudi Arabia 4.5 5.4 9.9 Kuwait 3.7 4.8 8.5

0

52.5 48.8

5 10 15 20 25 30 35 40 45 50 55 60 Production cost in $/barrel

• Capital expenditure • Operational expenditure • Total cost

countries produce their crude at. Graph 3 shows that Russia and Saudi Arabia, the two most important oil producers, have an enormous cost advantage over US shale. The current oil price of around $20 to $25 per barrel is unsustainable. There is a saying that rings true: The cure for low oil prices is low oil prices. If the oil price stays low for long enough, production drops, causing oil prices to increase. In graph 4 you can clearly see the reaction of US oil production to the lower oil price. In 2015, oil production dropped quite quickly, but as soon as prices rose, production recovered. How does oil production drop so quickly? Well, it starts with something we need to know about shale oil. Shale oil wells are not the same as traditional wells you get in places like Saudi Arabia. Shale oil wells have short lifespans, with most of the oil recovered in the first year. Referring to graph 5, which is measured in months, you can see how fast shale oil in the Permian basin, the US region in and around Texas, drops after

SOURCE: www.statista.com

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cover story oil price

12 months after the well is drilled. This doesn’t happen to traditional wells as they have much longer lifespans. Baker Hughes, a major producer of drilling rigs, keeps a weekly count of oil rigs in the US. Graph 6 shows the rig count collapse in 2015, which explains why oil production also dropped. As soon as prices picked up, oil rig usage also picked up and so production in the US recovered and, because wells became more efficient with new technology, less rigs were needed to produce more oil. This time around we see once again that rig usage has collapsed and is probably going to go much lower than in 2016. This will disrupt the future supply of oil. So, the important question now is: If rig counts have dropped, why can’t it just rise again when oil prices rise and put a cap on price increases like it did in 2016? Things may just be different this time in the US oil space. In 2016 oil prices did not remain below $40 for long enough to damage the balance sheets of most US producers to the extent where they were forced to declare bankruptcy. US producers were able to recover production quickly and prices went up before too much financial damage was done. This time, Saudi Arabia has not caused the oversupply in the market. The oversupply came because of the drop in consumption due to coronavirus shutdowns.

A debt-led decline in supply

US gasoline demand is at 50-year lows (see graph 7) due to coronavirus-led shutdowns. It is expected to slowly rebound over the coming weeks as the economy reopens, and normality returns. Yes, we believe eventually normality will return, although it will take some time to return closer to the old levels of consumption. Demand will recover but not as quickly as one would like and so prices will linger lower for longer than in 2015, causing much more financial damage to US shale producers. A 2017 survey by the Federal Reserve Bank of Dallas showed that many existing shale oil wells needed an oil price (the West Texas Intermediate contracts) of between $24 and $38 per barrel. Thus, at the current lower oil prices not even existing wells can cover their costs. Even though break-even costs in shale oil have improved, they are not low enough to allow them to make money. It is estimated that a price of $48 per barrel is an average break-even level. Shale oil companies borrow money to stay in business. Research from Rystad Energy showed that about 10% of shale producers had positive cash flow from operations compared with their capital expenditure cash needs in the first quarter of 2019. Although some companies have had positive cash flow, they couldn’t cover their capital expenditure.

GRAPH 5: AVERAGE OIL PRODUCTION PER WELL IN THE PERMIAN REGION

GRAPH 4: US OIL PRODUCTION’S REACTION TO PRICE FLUCTUATIONS

250

9 789 Dec 15, 2017

6 000

8 634 Jan 7, 1983

4 000

9 782 Dec 29, 2017

100

0 1983

1990

2000

2010

2017

SOURCE: US Energy Information Administration

38

150

50

2 000 0

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2015 2014 2013 2012 2011 2010 2009 2008 2007 pre-2007

first full month of production

200

8 000 Barrels per day

Thousand barrels per day

10 000

Already coming into this crisis, shale oil shareholders started pushing for returns to be positive and producers had begun slowing the expansion of wells at any cost.

0

12

24

36

48

60

Month of operation SOURCE: US Energy Information Administration

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cover story oil price

years. Since we are in that five- to sevenyear window right now, and there is a lack of any large projects coming onstream in the next few years, supply issues may arise if demand normalises. New oil projects are not coming online at a significant level anymore. That will lead to production in non-Opec countries declining rapidly after 2020, adding to worries about crude supply (see graph 8). Furthermore, although shale oil has been a big price-changer in recent years, production levels are only 70bn barrels of oil, which equates to roughly two years of world consumption and is not a longerterm supply solution.

Thus, shale oil producers live on debt is extracted at a loss. At $30 per barrel, to survive. Only 33% of shale producers North American shale and Canadian crude, had a positive cash flow by the third produced from oil sands, make up almost all quarter of 2018. of loss-making production. Hence, they will Many of these producers have a be the first to shut down production and mountain of debt falling due in the coming they’re also the most indebted. years and banks won’t be A dearth of conventional eager to roll over this debt Thus, shale oil producers live on debt to survive. Only – or issue new debt to pay investment Another factor from the off the existing debt. The supply side not related to Rystad research shows shale oil that is positive for that $71bn of debt from 40 oil prices relates to the lack shale oil producers is due for of shale producers had a of investment in traditional repayment between 2020 positive cash flow by the third quarter of 2018. oil wells. Since the price and 2026. That is 64% of their of oil peaked in 2014 and total outstanding loans. never went back above $100 per barrel, oil What has changed that banks won’t roll producers have cut back on investments over new debt to keep the shale revolution into traditional oil sources – traditional oil is going? In 2015, the US economy was going also called conventional oil. This was one of along quite nicely, and banks could take the risk of shale oil losses. Fast-forward to 2020 the reasons, before the coronavirus crisis, why analysts started forecasting a supply and we are in a completely different world. deficit starting in 2021. When the economy collapses, banks shut Since it takes between five and seven their doors to borrowers and this time will be years to get a traditional oil well into no different. A lot of shale oil will be out of production and because there was no business, never to return. new investment from 2015 onwards, Already coming into this crisis, shale oil the last decent wells coming into shareholders started pushing for returns production will be in 2021. Even before to be positive and producers had begun the coronavirus-induced price drop, the slowing the expansion of wells at any cost. In fact, many producers had begun focusing expansion of shale oil production slowed and no new big, proper supply was on cash flow becoming positive and drilling coming online. Oil was poised for a large in a more economical way, which would increase as a lack of supply was coupled have meant less output per well. with continued growth in demand. When we look at global oil production Capital expenditure at conventional oil and strip out the number of oil barrels that wells has collapsed and this has a lagged are produced at a loss at different price effect on new production of five to seven levels of Brent Crude, North American oil

GRAPH 6: RIG COUNT IN US

1 800 1 600 1 400 1 200 1 000 800 600 400 200

Back to shale oil. Most of the production basins had peaked before the coronavirus outbreak, so oil was getting ready for a real rally when the pandemic hit and killed demand. That situation has now gotten worse. Demand has temporarily declined, but the supply decline will get worse over the long term. Electric vehicles also threaten oil prices, although sales sunk 25% year-on-year (see graph 9). SUV sales are, however, growing, meaning that oil demand from these gas guzzlers is growing. There is a great risk of a large shortage of oil in a year or two. Supply has been constrained with no real investment and Opec, which has traditionally had a lot of spare capacity, only carried about 2m barrels a day of spare capacity. This may seem like a lot, but in a world market that

10 9 8 7 6

2018-19 4-week average

2019-20 4-week average

5 2012

2014

2016

2018

2020

SOURCE: Trading Economics, Baker Hughes

@finweek

A rally that didn’t happen

GRAPH 7: US GASOLINE DEMAND

Million barrels per day

Photo: Shutterstock

33%

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May

Aug

Nov

Feb

May

SOURCE: US Energy Information Administration

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cover story oil price

When to buy

Decisions to buy shares in oil producers have historically hinged on oil prices “contangos”. This is the difference between the price of oil for immediate delivery (spot oil) and that of oil bought today but for future delivery. The bottom of graph 10, which is a logarithmic scale, shows the different “turning points” of contangos that could trigger a buy signal. When contango is this extreme, oil prices tend to bottom. Thus, now is the time to buy. A key question for investors when deciding whether to take the plunge into oil is whether oil prices can stay low for long. Anything is possible, but Opec countries and Russia rely heavily on oil revenues to fund their government budgets and they will eventually do all they can to raise oil prices, even if they need to start a war. As an example (see graph 11), Saudi Arabia needs oil to be at least $80 per barrel to pay its bills, whereas Russia needs it to be about $45. Another reason for an expected strong rebound in the price can be found in other commodities. A recent example where supply shortages of a commodity were forecast due to underinvestment is palladium. Once the supply shortage became real, the spot price of palladium

ETFs that track oil producers

SPDR S&P Oil & Gas Exploration & Production tracks the equally-weighted S&P Oil & Gas Exploration & Production Select Industry Index and consists of 56 stocks. Its top-five holdings include EQT (6.3%), Range Resources (5.8%), Southwestern Energy (5.4%), Cabot Oil & Gas (5.2%) and CNX Resources (3.5%). It is traded on the New York Stock Exchange’s (NYSE’s) Arca Exchange. The ETF has $2.1bn under management. It’s currently trading at all-time lows since inception in 2006 and is 80% off from its all-time high (see graph 12). The ETF’s dividend yield is 3.13%. Energy Select Sector SPDR Fund holds 27 stocks and tracks the Energy Select Sector Index. The biggest holdings are Chevron (23.6%), Exxon Mobil (21.5%), Phillips 66 (5%), ConocoPhillips (4.9%) and EOG Resources (4.6%). It is also traded on the NYSE’s Arca Exchange and has $9.7bn under management. It is trading at 10-year lows and has a dividend yield of 6.1% (see graph 13). The VanEck Vectors Oil Services ETF invests in companies supplying oil producers with equipment such as rigs and piping, among others. The ETF is traded on the NYSE’s Arca Exchange. It tracks the MVIS US Listed Oil Services 25 Index and its top-five holdings are Schlumberger (17.7%), Haliburton (10.2%), Baker Hughes (6.5%), Core Laboratories (5.7%) and National Oilwell Varco (5.4%). The fund has $344m under management and its dividend yield is 5.7%. It is currently trading at less than a tenth of the all-time highs and it is at a 20-year low (see graph 14). An investment in any of these three ETFs over a period of two years should yield a significant outperformance to the rest of the market. ■

GRAPH 12: SPDR S&P OIL & GAS EXPLORATION & PRODUCTION ($)

GRAPH 8: ANNUAL AVERAGE NON-OPEC DECLINE RATE

Non-Opec decline rate

consumes about 100m barrels of oil a day, this is roughly 2% of supply and not enough to stave off a risky event from the supply side. This situation will become a problem once demand normalises (which may take a year) and the supply of shale drops (see top of graph 10).

0 -1 -2 -3 -4 -5 -6 -7

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17

’18 ’19 ’20 ’21

-3.6% -4% -3.8% Sharp increase in 2015 -5.1% -5.1% -5.1% -5.1% -5.3%-5.6% -5.7% -5.7% -5.7% Decline rates plateau to 2020 -6.3% -6.5% -6.5% ■ October 2015 analysis ■ Decline rate SOURCE: Wood Mackenzie, Upstream Data Tool Q2 2017; excludes North America tight oil GRAPH 9: SALES OF ELECTRIC PASSENGER CARS IN ’000 UNITS AND YEAR-ON-YEAR CHANGE

250

300% 250% 200% 150% 100% 50% 0 -50% -100%

200 150 100 50 0

Sep ’17

Mar ’18 ■ BEV sales

Sep ’18 ■ PHEV sales

Mar ’19

Sep ’19

Total EV sales y/y (3mma, rhs) SOURCE: NBS, Bloomberg, Barclays Research

surged 400% in 24 months, resulting in some palladium mining stocks jumping ten-fold in the same period. Oil demand has been hit badly in April and is expected to normalise after June with a full-year loss of about 10%. This will keep the price of oil subdued for most of the year, but once demand recovers and shale production cannot return in the medium term, the supply shortage will cause a price spike. ■ editorial@finweek.co.za Petri Redelinghuys is a trader and the founder of Herenya Capital Advisors.

GRAPH 13: ENERGY SELECT SECTOR SPDR FUND ($) 104

320

96 88 80 72 62 54 46 38 37.09 32 24

280 240 200 160 120 80

50.65

40

Sep 2015 May Sep 2016 May Sep 2017 May Sep 2018 May Sep 2019 May Sep 2020 May SOURCE: TradingView

40

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Sep 2015 May Sep 2016 May Sep 2017 May Sep 2018 May Sep 2019 May Sep 2020 May SOURCE: TradingView

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advertorial IG Markets

By

GRAPH 10: OPEC SPARE PRODUCTION CAPACITY

7

The outlook for retailers through the lockdown

Spare capacity < 2.5 million barrels per day

6 5 4 3 2 1 0

t

Due to its food business being able to operate at all lockdown levels, Woolworths remains a strong counter compared with its peers.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 SOURCE: US Energy Information Administration, Thomson Reuters

he general retail sector had fallen 49% since the beginning of the year by 11 May. Retailers of apparel such as Truworths and TFG had fallen more than 60%, while unlisted peer Edcon, has been forced to file for business rescue proceedings. The sale of clothing and merchandise by these retailers was not permitted during level 5 of the lockdown. The move to lockdown level 4 has permitted the sale of winter and childrens’ clothing to provide some (marginal) relief to these counters. Woolworths would have found the diversity of its food business to help support earnings over this difficult period. TFG sees roughly 30% of its sales coming from sports fashion, a division which is not permitted under the current level of lockdown. Mr Price’s sports division accounts for roughly 7% of group sales.

HISTORY OF OIL PRICES CONTANGOS WTI oil prices

100 40 30 20.50 10 2.0000 1.6376

WTI future curve 6 months out

1.0000 0.9000 0.8000 1985-1989

1990-1994

1995-1999

2000-2004 2005-2009

2010-2014

2015-2019

JSE listed retailers of apparel – Broker ratings and client views

SOURCE: Bloomberg

The table highlights how major apparel retailers are currently viewed on both an institutional (analyst) and retail (trader) level. It highlights current analyst ratings (as polled by Thomson Reuters), and how IG clients who are trading these counters were placed at the time of writing.

GRAPH 11: OIL PRICE REQUIRED TO BALANCE GOVERNMENT BUDGETS

160 140 120 100 80 60 40 20 0 ria

or

THOMSON REUTERS ANALYST RATINGS

TFG Mr Price

Iran

Alge

Nige ria

Ecua d

Liby a

Ango la

UAE

rabia

Saud iA

Iraq

it

Russ ia

r

Kuw a

Qata

Norw ay

2019 average $65

Truworths Woolworths Holdings

SOURCE: Bloomberg, Nedbank CIB

GRAPH 14: VANECK VECTORS OIL SERVICES ETF ($) 840 760 680 600 520 440 360 280 200 120 101.33 40

Apr Aug 2016 May Sep 2017 May Sep 2018 May Sep 2019 May Sep 2020 May SOURCE: TradingView

Strong buy 0 2

Buy 2 1

Hold 7 3

Sell 1 3

2 2

3 3

2 3

3 3

IG CLIENT SENTIMENT

Strong sell Average rating 0 Hold 1 Hold 0 0

Hold Hold

Long 67% 47%

Short 33% 53%

71% 94%

29% 6%

These retailers all carry an average long-term analyst rating of “hold”. Truworths and Woolworths have the most “buy” (2) and “strong buy” (3) recommendations (3). Mr Price is the only one of the four securities covered to have a “strong sell” analyst recommendation, while TFG has no analysts recommending a “strong buy”. In terms of IG client sentiment data, Woolworths, followed by Truworths, has the most “long” open interest and the least short open interest (as of 11 May). Mr Price is the least favoured by IG clients, being the only one (of the four listed) with more short interest (53%) than long interest. ‘Long’ means that traders with open positions on the company expect the price to rise in the near term, while ‘short’ means that traders with open positions on the company expect the price to fall in the near term. ■ Shaun Murison is a senior market analyst at IG Markets.

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indepth in depthxxxxxxxxxxxxxxxx economy

SOUTH AFRICANS’ GOOD OF LOCKDOWN REGULAT

s

While private citizens and businesses initially bought into government’s decisive response to the Covid

upport for South Africa’s lockdown, one of the world’s most stringent, has waned dramatically since it was imposed on 27 March, with business and the public urging government to ease restrictions quickly in the face of mounting evidence of the magnitude of its impact on the economy and people’s livelihoods. President Cyril Ramaphosa’s decision to take the step to protect South Africans from the spread of Covid-19, following the example of a growing number of countries, was initially met with goodwill. But this was undermined by the complex, often irrational web of regulations which accompanied the move to a less onerous level of lockdown on 1 May and the heavy-handed tactics adopted by police and the military to enforce them. Because SA’s lockdown was imposed so soon after Edward Kieswetter the first cases of the virus were detected in the country, Commissioner of the SA Revenue Service it curbed the pace at which the disease normally spreads, and gave the health system time to prepare hospitals and staff for an expected flood of patients. But the onslaught has yet to emerge, giving the public a false sense of security and fanning perceptions that the severity of the disease has been overstated and the response overdone. This suggests that people will be careless as restrictions are eased further, and less likely to stick to the responsible behaviour and social distancing that are intended to replace the regulations. The combined impact of an Perceptions have also been growing already faltering economy and the lockdown could lead to among South Africans that the disease will only seriously affect older people and those with underlying health conditions, known as co-morbidities. Until loved ones become gravely ill and there is a large number of in tax revenue losses during the fatalities, it is unlikely to change. 2020-2021 financial year. “As someone who has experienced the virus, I get extremely frustrated and exasperated by people who have this idea that it’s just a light flu – they have no right to do that unless they’ve actually gone through it themselves,” says political analyst and former ambassador Melanie Verwoerd. Verwoerd and her entire family were infected with Covid-19 after spending time with overseas visitors in early March. They all got sick, but it was her healthy

Photos: Gallo/Getty Images

R285bn

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29-year-old daughter who became severely ill and eventually went to hospital. Her 27-year-old asthmatic son had the lightest symptoms of the four of them. “From personal experience I have now seen how possible it is even for someone with no underlying conditions, good nutrition, and a good immune system to get really sick, extremely sick,” she says. “When all of a sudden you have to drop your child off at Mediclinic and can’t even go in with them – when they are collected by people in space suits and you don’t know if you’re ever going to see them again, it’s a very unpleasant feeling. You see also the panic in your child’s eyes and their struggle to breathe – it’s a horrible thing.” Verwoerd’s daughter and the rest of the family have recovered, but she says that two months later, they are both still feeling the effects of the virus. Lockdowns have become controversial globally, although two of the most sceptical leaders – US President Donald Trump and UK Prime Minister Boris Johnson – both changed their tune when thousands of their citizens started dying and Johnson himself became gravely ill with the virus. The consequences of shutting down economies, particularly in developing countries with limited finances to address the fallout, are undeniably catastrophic. South African corporates have already begun to fold, including large entities like Comair, Edcon and Associated Media Publishing. But all reflect the uncertain futures of their industries globally because of the coronavirus – clothing retailers, airlines, and print media. Restaurants and hotels in SA and in other lockeddown countries have been forced to shut, and the closures are likely to be permanent for many as their sectors are prime infection sources and will be the last to reopen. Edward Kieswetter, the commissioner of the SA Revenue Service (Sars), sounded alarm bells on 5 May with a warning that the combined impact of an already faltering economy and the lockdown could lead to R285bn in tax revenue losses during the 2020-2021 financial year. “A major concern that we have from a revenue perspective is not only a downward trend of economic www.fin24.com/finweek

in depth economy

DWILL WANES IN WEB ATIONS

By Mariam Isa

id-19 threat, this support is dwindling as restrictions seem to be increasingly complex and irrational.

India Egypt Italy Morocco Mauritius France South Africa Netherlands Spain Mexico Nigeria New Zealand Canada Singapore Turkey United Kingdom Mali Malaysia Philippines Brazil Ghana Israel Hong Kong Germany Austria China Malawi Zambia Iran Sweden Russia Japan Australia Tanzania United States

Index

activities, but a loss of economic capacity due to COVID-19 GOVERNMENT RESPONSE STRINGENCY INDEX businesses closing and job losses. The full impact of 94 92 92 100 this will manifest over the next few months, and also 89 81 90 depend on how government manages the phasing-in of 80 economic activities,” he said. 62 70 Attention has turned to opening up the economy, with business leaders urging government to shift its 60 strategy from one of drawing up complicated lists of 50 38 what is allowed to occur, to clearly defining what should 40 not occur, and allowing businesses themselves to 30 decide on how to implement social distancing. 20 Forcing companies to operate with only half their 10 staff and requiring many businesses and individuals to 0 apply for permits to work were also unhelpful, Busisiwe Mavuso, CEO of Business Leadership SA, said in a weekly newsletter on 11 May. SOURCE: The Oxford Stringency Index “Red tape is bad for business at the best of times, but right now is yet another source of pressure in the crisis. It need not be done this way,” she said. that have successfully controlled Covid-19 A ban on the sale of cigarettes and tobacco, infections and now just retain restrictions There is also concern which brought in R15bn in excise taxes for on public-facing businesses such as sports, that lockdowns may be concerts, nightclubs and gyms. Sars last year, has become emblematic of restrictions that are difficult to understand, This would mean that the number of tightened again as especially given that Professor Salim Abdooladditional people who could in theory return to Karim, an epidemiologist and the chair of the Covid-19 infections move onsite work when the lockdown moves to level Covid-19 Ministerial Advisory Committee, told three would come to 4m, bringing the total journalists on 6 May that it had had no input or back at work to two-thirds of those who were closer to their peak, given any advice on the decision. employed in December, she said in a recent sometime between July research note. The fact that the tobacco ban was lifted and then reinstated without a clear explanation One of the biggest issues at present is that and September. has fuelled public anger, as has the ban on it is unclear how and when the country – or alcohol – although this has some logic as it separate metros that are Covid-19 hotspots led to a sharp fall in trauma cases at hospitals, – will move between the five lockdown levels. which will in theory free up hospital beds and There is also concern that lockdowns may be staff to attend to Covid-19 patients. tightened again as Covid-19 infections move closer to A decision to open schools, which was later reversed, their peak, sometime between July and September. reinforced perceptions that policy was not being But once again, SA is not unique. The UK’s Johnson thought through. The ban on e-commerce has probably introduced a policy of easing lockdown restrictions in inflicted the most unnecessary damage as it was the UK on 10 May, with a 50-page dossier which was imposed out of stated concern that it would be unfair to sharply criticised for its complexity and lack of clarity. ■ companies which are not online – despite the fact that editorial@finweek.co.za the trend was rapidly gaining momentum even before Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial the pandemic. correspondent for Reuters news agency after working in the Middle East, the UK and Neva Makgetla, senior researcher at the Trade and Sweden, covering topics ranging from war to oil, as well as politics and economics. She Industrial Policy Strategies think tank, suggested that joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK. SA open the economy using the model of countries @finweek

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on the money personal finance By Timothy Rangongo

Thy will be done

d

Death is inevitable. A will is an opportunity while one is alive to decide what is to become of your assets and liabilities when the time comes, including sophisticated assets like intellectual property.

rafting a will is a person’s final say on how their belongings, also called their estate, are to be divided. It holds implications for those that are financially dependent on the late testator and requires careful consideration while someone is alive. A person’s death can also have consequences if they own a business. During your lifetime you have absolute control of your estate and can therefore exercise any intention you wish to, says Donice Perkins, estates administrator at law firm Van Deventer & Van Deventer. When you pass on, this ability falls away.

instructions or having the intent to execute a will, but never actually doing so, is insufficient.

When to draft

Photos: Supplied

The importance of getting a will

A will is an opportunity for testators to decide exactly what is to become of their estates (assets and liabilities) upon their death, explains Simon Dippenaar, managing partner at law firm Simon Dippenaar & Associates. A will is a basic estate planning tool which, together with suitable insurance policies, is the best way to protect a testator’s assets and ensure that dependents are taken care of after their death, he says. A will allows its testator to list other wishes in addition to setting out how their assets should be divided, says Wernher Bock, senior partner at Hannes Pretorius Bock & Bryant Attorneys. These wishes could include bequeathing certain assets directly to persons or organisations and who will take care of the testator’s minor children. It could further include measures for the management of the financial affairs of minor children or grandchildren until they reach an age at which the testator feels they will be able to manage their own affairs. Or it can include disinheriting individuals who would otherwise stand to inherit if you had no will (for example, ex-spouses). This leads us to the question of what happens when someone dies without a will? This will result in your estate being wound up according to law, which may not be the result you had intended when you were alive, says Dippenaar. When a person dies without leaving a valid will, says attorney Shaun Benater, “the estate will devolve in accordance with the Intestate Succession Act. This essentially takes away one’s freedom of testation.” Freedom of testation is something that most people don’t know about, says Elmarie Neilson of Neilsons Attorneys. She highlights that in South Africa, we have “freedom of testation”. This means that you are entirely free to decide to whom you want to leave your assets. Perkins cautions, however, that leaving verbal 44

finweek 21 May 2020

Elmarie Neilson Sole practitioner at Neilsons Attorneys

Claire Thomson Director at Witz Inc.

As soon as a person has assets to their name or they have children, they should consider drafting a will, or having a will drafted by a professional on their behalf, advises Claire Thomson, director at Witz Inc. She says the amount of assets does not need to be substantial or large – it could be an amount of money in your first savings account or it could be something much larger, such as a house or a car. Jennifer Fung, director at Fluxmans, says when a life event like marriage happens, it is important to take one’s marital regime into account (in or out of community of property and with or without accrual) as it may be that the immovable property does not only belong to the testator. “If spouses are married in community of property, then they will only be able to bequeath their half share,” she says. “They should also consider, if they are married or living with someone, what will happen to that other person when the homeowner dies.” A will must also make provision for the event of both spouses dying simultaneously, or in commorientes. Fung says that if the surviving spouse was to be the heir, then the will should make provision that a substitute beneficiary is appointed. “This is another reason why a will is important.” In terms of movable property, it is important to consider which beneficiaries may have a sentimental attachment to certain items, according to Fung. She is of the view that if one beneficiary is much wealthier than the others, it may be more equitable to consider giving the other beneficiaries more.

What to bequeath?

Simon Dippenaar Managing partner at Simon Dippenaar & Associates

“You simply need to decide who is either most in need of any particular asset, or who would be best able to utilise it and who would possibly value and appreciate it most,” advises Aidan Fayle, partner at Goodrickes Attorneys. Neilson always advises clients to make a special provision that any immovable property that they own at the time of their death be sold and the cash divided among their heirs. Any of the heirs will have first option to purchase the immovable property. “The reason for this is to avoid disputes with the future of the property: Disputes arise as to whether the property should be sold, or one heir wants to move in but cannot pay rent, etc.” www.fin24.com/finweek

on the money quiz & crossword As soon as a person has assets to their name or they have children, they should consider drafting a will. It would be prudent to know the location, extent, and value of all assets and the liabilities, if any, to each and to keep a list for the will, advises Dippenaar. In terms of sophisticated assets such as intellectual property (IP), Neilson and Thomson advise that intellectual property should be left to a specific heir who will deal with it intelligently. Thomson says that IP is unfortunately often overlooked in wills and could be lost if dealt with inappropriately. “IP is an important aspect to include in a will, especially in respect of copyright, which often vests in the author of the work automatically in terms of the Copyright Act.”

Who to nominate as the executor of your estate?

“When choosing a trusted person to be the executor of your estate, considerations to take into account include whether the chosen person will be able to handle the estate during a challenging time and whether the chosen person is [capable of taking] on the appointment,” says Bock. This must be someone you trust and who will have the sense to refer your will to a trusted professional, says Dippenaar. “Invariably, the Master of the High Court will insist that the person you nominated as the executor appoint a professional person as an agent if they are not a professional themselves.” Even if the executor is a relative or friend, they would still need to appoint an attorney or an accountant to administer the process, says Fung.

How up to date are you with current affairs? Find out by completing our latest quiz online via fin24.com/finweek from 18 May. 1. What is the current repo rate in South Africa? 6. True or False? Uber Eats delivers books in ■ 4% South Africa. ■ 4.25% ■ 4.5% 7. South Africa’s state arms and technology company announced that it will design and 2. Virgin Media will merge with O2 in a deal that develop medical ventilators to help treat will create a new giant in which country’s coronavirus patients. What is the name of telecommunications industry? this entity? 3. True or False? South African doctors who studied overseas do not have to write any exam to allow them to practice in their home country. 4. South Africa operates the continent’s only nuclear power plant, which is located near Cape Town. What is the name of the plant? 5. In May Comair announced that it had entered into voluntary business rescue. Which of these airlines is not operated by Comair? ■ Safair ■ Kulula.com ■ British Airways

8. True or False? Bill Gates is stepping down from the boards of Microsoft and Berkshire Hathaway. 9. A May 2020 study reported a triple star system containing a black hole, making it the closest-known black hole, and the first one located in a stellar system visible with the naked eye. What is the star system called? ■ Spica ■ Eta Boötis ■ QV Telescopii 10. True or False? Vodacom has rolled out a 5G network in South Africa.

CRYPTIC CROSSWORD

ACROSS 1 8 9 11 12 13

Somewhat foolish and over-the-top (1,3,5) Say nothing on conscious subject (3) Rabid fanatics are from Kenya, for one (4,7) Braves ruffians in Paris (7) Picture not in persona (5) Smile, you hear, makes healthy start to the day (6) 15 Back qualified person in history of lizards (6) 17 Get new warning (5) 18 Now I’m back at the end without a follower (7) 20 Acute accent? (5,6) 22 Exclamation of surprise at topless Winnie (3) 23 Resident’s suffering a temporary loss of energy (9)

NO 753JD

DOWN 2 3 4 5 6

Bar unruly supporter (3) Time ahead for show (5) Overwhelming flood at Indiana plant (6) Alive companion is striking (7) Common for one to accept weapon that is with police force (11) 7 Cover rent laid out for electricity storage device (9) 10 Fear of acting? (5,6) 11 Granting right to enter (9) 14 Forgiving fellow, that is by the book (7) 16 Fascinated by gold bird (6) 19 Mum and daughter downbeat (5) 21 It’s average, ending off in an appeal for help (3)

Executor fees

From experience, Perkins says that “an executor skilled in the field of deceased estate administration will save much time and hassle and can be well worth the fee”. In terms of the Administration of Estates Act, an executor is entitled to remuneration, which is payable from the estate. An executor is entitled to charge a maximum of 3.5% of the gross value of the assets in an estate as well as 6% of the income accrued and collected after the date of death, explains Fayle. Neilson says that “it is a good idea to negotiate a reduced fee upfront with the executor. It is important to stipulate this agreement in the will.” In terms of what is excluded from fees, Bock says that the calculation of executor fees is based on the gross value of the estate. “Assets that do not attract executor fees are insurance policies with a beneficiary nomination; policies where the deceased is not the owner and payable to the estate; usufructs used by the deceased prior to passing away; and retirement fund benefits.” ■ editorial@finweek.co.za @finweek

finweek

Solution to Crossword NO 752JD ACROSS: 1 Bamboo; 4 Asthma; 9 Word processor; 10 Transit; 11 Third; 12 Digit; 14 Added; 18 Say-so; 19 Red hair; 21 In a vague sense; 22 Eleven; 23 Tourer

DOWN: 1 Bowl to; 2 Mortality rate; 3 Oppos; 5 Scented; 6 Hostile manner; 7 Abrade; 8 Aorta;

13 Isolate; 15 Aspire; 16 Argue; 17 Arrear; 20 Disco

finweekmagazine

finweek 21 May 2020

45

Piker

On margin Crying over spilt beer

This issue’s isiZulu word is izinyembezi. It means tears. As I have gone through life, I have often heard the expression, “Tigers don’t cry. They eat your husband.” I think it was coined by Carole Baskin. If you don’t know who Carole Baskin is, you have not been living your best lockdown life and I cry izinyembezi for you. Anyway, I don’t know why tigers don’t cry, or if this assertion is even true as I have never seen a tiger cut an onion. That said, I am not a tiger, so no one can judge me because I am shedding izinyembezi for the beer SAB had to dump. I shed a tear for every litre of beer they dumped. That’s 25 000 tears. Wait, I lie, I did not shed a single tear for Castle Lager. So, I shed 25 000 tears, less X litres of Castle Lager. What a sad day. The saddest. On Mothers’ Day, I came across a

mean meme, saying, “Happy Mothers’ Day to all mothers, except Bheki Cele’s mom”. When I first saw it, that meme didn’t sit well with me, but after seeing pictures of the beer being dumped by SAB, I immediately related with the people who tried to make Bheki’s mom shed izinyembezi. They wanted her to feel what we feel. Feel what her son is making us feel. I will not get into whether the lockdown is wise or even whether the various restrictions, including restricting the sale of alcohol, are wise. That I leave to much smarter people, whose surnames rhyme with “if”. I am just in mourning, and seeing as no one ever said, “don’t cry over spilt beer”, I feel no shame about my izinyembezi. Cry izinyembezi, beloved country. Cry for izinyembezi zika Faro (Pharaoh’s tears), gone to waste. – Melusi’s #everydayzulu by Melusi Tshabalala

Verbatim

I’m Obviously Jill Hopkins @Jillhopkins All of our dogs think we quit our jobs to spend more time with them. All of our cats think we got fired for being the loser they always knew we were. Paul Rabenowitz @paulrabenowitz It’s well-known coronavirus only wakes up at 9am. Jennifer Wright @JenAshleyWright Well, millennials finally stopped going out for avocado toast. Can everybody afford a house now? Jess Dweck @TheDweck 2020 sounded like the most futuristic year and now we’re all like “I traded my neighbour a handkerchief for some carrots.” Kim Congdon @kimberlycongdon Not to brag, but what a time to be childless. Jonathan Jansen @JJ_Stellies When you impose book restrictions during a crisis it speaks volumes (sic) about the kind of leaders in charge. Lady Lawya @Parkerlawyer When my son failed a math test before March 1, 2020: “Did you not study? Are you not paying attention in class? Do you need a tutor?” When my son fails a math test today: “Well, buddy, we did our best.” Trey Bowers @t_bow20 I was ready for the roaring 20s not the Great Depression.

“The difficulty lies not so much in developing new ideas as in escaping the old ones.” — John Maynard Keynes, British economist (1883-1946)

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finweek 21 May 2020

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