8555 cognizant by WCPR

COGNIZANT JANUARY 2017

ENDURING QUALITY | VISA CASHING IN ON A CASHLESS SOCIETY | SPAR GOOD FOR YOU | THE ECONOMY IN 2017 IN SEARCH OF SILVER LININGS | THE QUALITY OF LIFE

TABLE OF CONTENTS INTRODUCTION 3 ENDURING QUALITY 4 VISA CASHING IN ON A CASHLESS SOCIETY 10 SPAR GOOD FOR YOU

THE ECONOMY IN 2017 IN SEARCH OF SILVER LININGS 19 THE QUALITY OF LIFE 23

COVER IMAGE — FABERGÉ EGGS Founded in 1842, the House of Fabergé was commissioned by the Russian royal family to create jewel-encrusted eggs for Russian Tsars as a gift for their wives. Known for their intricate detail, impeccable quality and unbridled beauty, the imperial eggs took a year or more to make and involved a team of highly skilled craftsmen. Today, the House of Fabergé produces a range of quality jewellery and timepieces that cater for the elite.

INTRODUCTION CHRIS POTGIETER — HEAD OF PRIVATE CLIENT SECURITIES

hat a tumultuous year 2016 has

crystal ball at our disposal, it does appear

model portfolios – one local (Spar) and

been! The surprises ranged from

fairly certain that the world is moving from

one global (Visa) – to explain in practical

unpleasant to pleasant and mostly left us

monetary stimulus to fiscal stimulus and that

terms how a quality-focused investment

asking “what next”? In South Africa, we

this shift will be led by the US. The market

philosophy plays out. We have invited

faced a troubling start to the year and

is expecting the Trump administration to

economist Roelof Botha to give us insights

an uncertain future path, but as the year

spend up to US$1 trillion repairing and

into the local economy and an overview

progressed we slowly came to terms

building the US infrastructure, which

of the economic outlook for the year

with the factors that led to our collective

should boost the real economy in a

ahead within the global context. The title

confidence collapsing at the start of the

way monetary stimulus could not. If this

of the article does give something away:

year. All three ratings agencies gave SA

happens, it should benefit equity and

“The economy in 2017 – in search of

the benefit of the doubt and our investment

commodity markets and lead to a gradual

silver linings”.

grade status was maintained – a rarity

normalisation of interest rates. Locally,

among commodity-exporting emerging

stable politics coupled with a strong rand

So, we are still facing many uncertainties

market countries. On the global front, the

will help SA navigate the risks that the

in the markets over the next year. But there

big surprises included the results of the

global economy still presents. On the risk

will also be many excellent investment

Brexit vote and the divisive US presidential

side, the world faces the demise of old

opportunities. Herein the words of John

election. Another (positive) surprise was

orders and alliances – both politically and

F. Kennedy ring true: “The Chinese use

the resilience of markets in the face these

economically. New orders and alliances

two brush strokes to write the word 'crisis'.

events. Despite short-term volatility, markets

still need to be tested and that will take

One brush stroke stands for danger;

mostly recovered to their long-term trends

many years. These developments could

the other for opportunity. In a crisis, be

– even in the global fixed income market

be good or bad depending on where

aware of the danger — but recognise

tentative interest rate normalisation can

you stand. It is in such an environment

the opportunity.”

be seen. It is during these (often brief)

where one would want to be invested

times when negative sentiment weighs

in quality companies.

on markets that investors have the best opportunity to acquire quality companies

In our feature piece, we unpack what

at a better price.

“quality” means and why it should be

Wishing you a prosperous 2017!

considered, together with valuation, as As we enter 2017, what can we expect?

the bedrock for long-term investments.

While none of us have the proverbial

We then look at two companies from our

ENDURING QUALITY SAMEER SINGH — RESEARCH ANALYST “Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skilful execution; it represents the wise choice of many alternatives.” - William A. Foster Most investors know about the traditional Value and Growth investment strategies. However, ‘Quality’ as an investment strategy has been gaining traction due to its success in adding long-term value in the context of increasingly volatile and uncertain markets. Quality investing is based on a deep understanding of the factors that influence a company’s performance over the longer term. However, quality means different things to different people and unlike other investment strategies such as Value and Growth, there is no universally agreed upon definition of Quality.

ENDURING QUALITY

RESEARCH AND QUALITY

The strong focus on earnings in the criteria

Other practitioners and academics have

FACTORS

emphasises the importance Graham placed

extended beyond a single quality measure,

Putting aside the lack of consensus, decades

on profitability. This emphasis is a common

opting rather for multi-metric definitions. The

of research provide us with a notable body

thread through academic literature on

F-score, developed by Joseph Piotroski5,

of knowledge to draw from. Interestingly, it

this topic. Examples include Fama and

was the father of Value Investing, Benjamin

French, who chose equity income to book

Graham, who in 1949 introduced the

value, and Dimensional Fund Advisors'

importance of recognising the quality of a business in addition to the price (valuation) being paid for it. In Graham’s seminal work, The Intelligent Investor1, he highlights that an investor should “apply a set of standards to each purchase, to make sure that he obtains a minimum of quality in the past performance and current financial position of the company, and also a minimum of quantity in terms of earnings and assets per dollar of price”. He

direct profitability ratio2. One of the most influential proponents of quality investing has been Jeremy Grantham of GMO3.

uses nine metrics, while the MSCI and S&P indices also maintain investable quality indices and rankings. Looking through the historical context, we are reminded that quality investing at its core is a defensive investment strategy

He defines a quality company as one

– one that aims to limit volatility (risk

that has high profitability, low leverage

of capital loss) through predictability

and low earnings volatility.

(earnings growth track record) and stability (strong financial position and

Another recently popularised ratio is return on invested capital (ROIC), espoused by investor and Columbia Business

stewardship). The combination of the above is that quality companies are less affected by negative market and economic cycles. This is what makes a

further outlines seven quality and quantity

School Professor Joel Greenblatt4. ROIC

criteria by which purchases should be

is often seen as a quantitative measure

evaluated. These include: adequate size

of profitability and management’s skill.

of enterprise; strong financial position;

Greenblatt also suggests combining ROIC

HOW WE DEFINE QUALITY

earnings stability; dividend record; earnings

with free cash flow yield. This is used to

We believe the mainstream value and

growth; moderate price to earnings ratio;

introduce an element of valuation into the

growth investment styles have inherent

and moderate price to book ratio.

screening process.

deficiencies. Value managers are often

quality investment strategy attractive to a long-term investor.

TABLE 1: SNAPSHOT OF QUALITY MEASURES QUALITY DEFINITION

CRITERIA

Benjamin Graham

• Adequate size of enterprise • Strong financial position • Earnings stability • Dividend record • Earnings growth • Moderate price to earnings ratio • Moderate price to book ratio

Fama and French

• Equity income/book value

Dimensional Fund Advisors' Direct Profitability

• Operating income before depreciation and amortisation less interest expense scaled by book value

Jeremy Grantham — GMO

• Low leverage • High profitability • Low earnings volatility

Joel Greenblatt

• Return on invested capital • Free cash flow yield

Piotroski F-Score

• Return on assets • Net income • Operating cash flow • Leverage • Liquidity • Issuance • Gross margins • Asset turnover • Stability of earnings

MSCI Quality Indices

• Return on equity • Debt to equity • Earnings volatility

S&P Quality Rankings

• Using earnings per share and dividends over the last 10 years. A score is created based on changes in the growth profile, stability with long-term trends and cyclicality

Graham, Benjamin. 1973. "The Intelligent Investor" (4th Rev. ed.). Harpers & Row, New York, New York. Robert Novy-Marx, “Quality Investing” (2014) 3 GMO. 2004. “The Case for Quality—The Danger of Junk.” GMO White Paper. 4 Greenblatt, Joel. 2010. “The Little Book That Still Beats the Market.” John Wiley & Sons, Hoboken, New Jersey. 5 Piotroski, Joseph D. 2000. “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.” Chicago GSB, Selected Paper 84 1 2

classed as contrarians, purchasing stocks

into particular industries and sectors for

most successful investor of all time, Warren

that they believe are trading below their

attractive stock selection opportunities.

Buffett, stated that, “It’s far better to buy a

intrinsic/net asset values. Sometimes,

Our bottom-up selection focuses on strong

wonderful company at a fair price than a

this is done in the face of falling share

fundamentals combined with quality

fair company at a wonderful price.” While

prices. This results in "lumpy alpha" or

characteristics.

there are historic analyses that show quality

outperformance being concentrated in short periods of recoveries in those stocks. The problem with this strategy is that it is difficult to pinpoint when sentiment shifts and negative market momentum turns positive, resulting in the potential of holding ever-cheapening stocks (i.e. catching a falling knife). Growth managers, on the other hand, seek out strong share price and earnings momentum resulting in periods of excess returns. However, these returns may come under pressure over the longer term as trends reverse. At PCS we build resilient portfolios, with the objective of generating attractive long-term returns while minimising risk. We do this

investment strategies deliver favourable We seek companies with high returns

performance over time, there are also

on invested capital, strong free cash

studies that demonstrate the investment

flow generation, operating margin

returns generated by quality are actually

expansion (increasing profitability),

quite small. However, when quality is

long-term earnings and dividend growth

combined with value, investment returns

prospects, balance sheet and financial

improve substantially.

strength, exemplary management quality, an economic MOAT and

A study released recently by MFS

reasonable valuations. The value of

Investment Management6 showed that

a good quality management team must

investing in a portfolio of inexpensive stocks

not be underestimated, as they have the

(low valuation) would have outperformed

ability to enhance a company’s brand

investing in high quality stocks by a small

and reputation, protect it against risks,

amount. However, when investing in

increase its efficiency and boost its profits

a portfolio of stocks that are both

and position.

high quality and inexpensive, the investor would have outperformed the

by combining a top-down methodology with bottom-up stock selection. Top-down

THE IMPORTANCE OF

market by almost 5% per year over the

analysis is long term and secular in nature,

VALUATION

38-year analysis period. In addition,

incorporating analysis of economies

Going back to Graham, valuation pays

the study found the level of persistency

and markets. We use these findings to

an important role in quality’s attractiveness

of returns to be greater in the high quality

highlight themes that then warrant research

as an investment strategy. Arguably the

group of stocks.

TABLE 2: THE PCS QUALITY METRICS

METRIC

MEASUREMENT

Return on Invested Capital

Assesses a company's efficiency at allocating the capital under its control (equity and debt) to profitable investments

Free Cash Flow Yield

Gauges a company's ability to generate cash and essentially self-finance. Also used as a valuation metric similar to a dividend yield

Operating Margin

Indicator of profitability of a company, measuring how much earnings are generated per dollar of sales

Balance Sheet Strength

Multiple measurements including solvency ratio, activity ratio, degree of leverage and capital structure — measures a company’s resilience to downturns

MOAT

Measures a company's ability to maintain competitive advantages over its competitors in order to protect long-term profits and market share from competing companies

Management

Management depth and experience, a solid track record of delivering on key metrics and clear articulation of future strategy and targeted results

“Quality and Value; The Essence of Long-Term Equity Returns”; MFS Investments; White Paper Series, June 2015

ENDURING QUALITY

CONSTRUCTING QUALITY

Stalwarts are companies with long-term

For example, our Equity Income Model

PORTFOLIOS

track records of profitability, low leverage,

Portfolio is primarily focused on providing

We build concentrated portfolios of quality

sound financial and business management

stable income streams, so our process is

companies, aiming to own between

and established, strong market positioning.

geared towards identifying companies

20 and 25 companies at any given

Examples of these are Visa, Johnson &

that have shown an ability and willingness

time. It is not enough to simply identify

Johnson and Nestlé. Growth opportunities

to consistently return cash to shareholders

a quality company. Investors need to be

are companies that we believe are on

through meaningful dividend payments.

discerning as to the price paid, as this

their way to becoming great. Some

Our flagship Core Equity Model Portfolio,

sets the base for future returns. Some

examples of these are Starbucks, Nike

on the other hand, blends a mix of growth-

have argued that quality stocks always

and Alphabet (Google). Maintaining a

oriented quality companies with mature

trade at a premium to the market. While

mix contributes to portfolio diversification

stalwarts with high revenue and earnings

some quality companies do generally

(risk mitigation) and provides a “value

bases that return cash to shareholders via

trade at a higher value than the market,

unlock” element as good companies

dividends and stock buybacks.

we believe there is enough opportunity

rerate to great companies, and this is

to find quality companies at

reflected in share price appreciation.

It is important to emphasise that reaping the rewards of quality investing requires

an opportune price through active portfolio management. This same approach is

REAPING THE REWARDS

patience and perseverance. Ultimately,

needed to determine when to sell a quality

At PCS, we manage a range of model

we believe that owning high quality

company. We mitigate the risk of holding

portfolios and consistently apply our

businesses over the long term is the best

only “expensive” quality companies by

quality investment process across these

route to achieving outstanding investment

applying a portfolio approach to quality

portfolios. These portfolios are used as

returns. In the words of author Leo Tolstoy,

stock selection. This is achieved by splitting

reference points to implement our clients’

“The two most powerful warriors are

investments into groupings of stalwarts and

investment strategies, which are tailored

patience and time.”

growth opportunities (future stalwarts).

to their particular investment objectives.

QUALITY BEYOND THE RATIOS

Considering our clients’ goals of long-term

largest index providers, MSCI and

and sustainable competitive advantages.

wealth creation, we believe investing in

S&P, produce investable quality indices

Companies that tend to have high return

and rankings allowing for meaningful

on equity (ROE), stable earnings that are

comparisons to market returns.

uncorrelated with the broad business

quality companies that endure over time presents a good fit. From an academic point of view, there have been numerous studies showcasing quality’s merits as an investment strategy. Two of the world’s

cycle, and strong balance sheets with According to MSCI, quality growth

low financial leverage, are targeted for

companies are characterised as

quality growth.

companies with durable business models

CHART 1: CUMULATIVE INDEX PERFORMANCE

were A-rated encompass large

22000

2000

insurers and firms with fee-oriented

MSCI World Quality

business models.

MSCI World 19000

• 16000

Consumer staples feature prominently among A-rated companies. These businesses typically enjoy stable

13000

demand for their products, which leads to more consistent earnings.

10000

• Jan-16

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

7000

Healthcare companies feature across both A- and C-rated companies. The larger pharmaceuticals, medical device and care companies comprise

MSCI use their three factors (ROE, stable

It is during periods of slowing growth

earnings growth and debt to equity ratio)

that quality factors display the strongest

to create quality indices, including the

relative performance, further validating

MSCI World Quality Index1.

quality as a defensive investment strategy.

MSCI highlight that their factor indices are

S&P rate companies on quality metrics

highly cyclical. So while the MSCI World

with a focus on earnings and dividend

Quality Index has outperformed the generic

criteria. In “The Case for Quality”2,

World Index over the long term, there are

Gevorgyan and Orr conduct holdings-

sub-periods where investing in the quality

based analysis using components of the

factors result in relative underperformance.

Russell 3000 Index. They split the index

products which may still be in trial

The difficulty for investors is to resist

according to the S&P Quality Rankings,

or development phases.

capitulating during these periods of relative

A-, B-, C-rated and unrated companies.

underperformance. In a recently published

From their analyses, there are some

Typically, the above companies are large

edition of their Research Insights, MSCI

noteworthy highlights:

capitalisation businesses. These findings

conducted a bi-variable analysis of the

•

There are fewer A-rated financial

inform the holdings within our Global

MSCI World Quality Index, the MSCI

companies – most of them are

Equity Model Portfolio, which has a

World Index and MSCI’s World Sector

C-rated. This could be owing to

preference for quality companies with

Indices. Their findings are presented in

leveraged balance sheets and

stable earnings, strong balance sheets

the table below:

inconsistent earnings. The few that

and competitive market positioning.

the majority of high quality healthcare companies. As with staples, these larger firms maintain relatively stable demand for their products and services. This is in contrast to lower quality healthcare companies, which mainly contain small biotechnology companies where economic success is usually linked to one or a few

This portfolio maintains an overweight

ECONOMIC CONDITIONS

QUALITY FACTOR PERFORMANCE

SECTOR COMMENTS

Rising Inflation/Rising Growth

Moderate outperformance

IT sector outperforming, financials and telecommunications underperform

Falling Inflation/Rising Growth

Moderate underperformance

Energy and materials outperform, healthcare and consumer sectors underperform

Falling Inflation/Slowing Growth

Strong outperformance

Healthcare and consumer staples outperform, materials, energy and industrials underperform

Rising Inflation/Slowing Growth

Strong outperformance

Healthcare, energy and consumer staples outperform, consumer discretionary and materials underperform

exposure to the information technology, consumer discretionary and consumer staples sectors.

Source: Market Vectors, Gupta et al, 2014 Gupta, Abhishek, Altaf Kassam, Raghu Surtanarayanan, Katalin Varga. 2014. “Index Performance in Changing Economic Environments.” MSCI Research Insight Arman Gevorgyan and Amy Orr. "The Case for Quality."

1 2

VISA − CASHING IN ON A CASHLESS SOCIETY VICTOR MUPUNGA – RESEARCH ANALYST Former IMF chief economist, Dr Kenneth Rogoff, recently published his latest book titled "The Curse of Cash". In the book, Dr Rogoff argues that society would be better off phasing out paper money as it is making us "poorer and less safe". His contention centres on his findings that the primary users of large denominations (and sums) of cash are tax evaders, terrorists, human traffickers and generally the underground economy (the recent, drastic move to demonetise the 500 and 1 000 rupee notes in India is a case in point). An additional argument put forward is that part of central banks’ policy arsenal, specifically negative interest rates, would be more effective if there was no paper money for individuals to hoard. From his arguments, it is clear that we are fast approaching a time in economic history where terms such as "a cashless society" will not be idealistic expressions used by futurists, but rather a reality that defines how we transact daily. However, until we reach that point, cash remains the most widely used payment method. In the US, it is estimated that over US$1.4 trillion in cash is currently in circulation. This is not unique to the US, as over US$3 trillion of Europe’s personal consumption is still transacted with cash and cheques.

EVOLUTION OF THE ELECTRONIC

Within developed markets and largely

in card use include enhancements to

PAYMENTS INDUSTRY

banked countries, like South Africa, the

the card, such as contactless cards

Despite cash still being king, the

most reliable and secure payment solution

and superior security features. Outside

electronic payments industry has evolved

remains the bank card. According to BNP

of the aforementioned technologies,

rapidly over the last two decades. The

Paribas, payment cards are the leading

the likes of PayPal, an online payment

trends in both emerging and developed

non-cash instruments used globally and

platform, and even virtual currencies

markets are well entrenched. Within

increased by 12% over the past year.

(Bitcoin) have all emerged as contenders

emerging economies, mobile payments

Factors that contributed to the growth

to replacing cash.

have been the main beneficiary. With formal banking in emerging markets

CHART 1: GLOBAL NON-CASH TRANSACTION VOLUMES

reaching only 40% of the population

160 000

compared to 90% mobile phone

140 000

penetration, the preference for mobile

devices. The relatively low cost of mobile money infrastructure (no ATMs or point-of-sale terminals are required) has endeared the technology to emerging market consumers.

Debit Card

Direct Debit

100 000 Millions

population and the high usage of mobile

Credit Transfer

120 000

payment technologies has been driven by the high percentage of an "unbanked"

Cheque Credit Card

80 000 60 000 40 000 20 000 0

2008

2011

2015

Source: Celent

VISA — CASHING IN ON A CASHLESS SOCIETY

CHART 2: MOBILE PAYMENT USERS BY REGION

of their operating models and brand equity that draws users to their offering.

200 163.6

2012

2016

Visa’s dominant market position can easily

150

Millions

be confirmed by the evidence that about 100

101.3

50% of all the credit cards around the

90.7

85.0

world are Visa-branded. Furthermore,

64.0

57.8 32.8

around 70% of all global debit cards

26.7

Asia/Pacific

Africa

North America

Europe

are Visas. Despite this and the fact that

22.3 8.5 Latin America

1.5 6.0

consumers interact with Visa’s offering

Middle East

numerous times a day, Visa does not regard the consumer as its client. Instead,

Source: Statista

Visa’s client relationship is with the banks

VISA — OUR FAVOURED

Despite the proliferation of alternative

EXPOSURE

payment systems, we believe that the

cards to consumers. Essentially, Visa’s

Our preferred exposure to this dynamic

incumbents (Visa and Mastercard) retain

offering is the network or technology that

and fast-growing sector is through Visa Inc.,

strong positions primarily due to the

connects a consumer, a merchant, the

the global leader in payment technology.

arduous barriers to entry, network effect

consumer’s bank and the merchant’s bank.

that issue Visa-branded credit or debit

CHART 3: PROCESSING STEPS INVOLVED IN A TYPICAL TRANSACTION ON VISA’S NETWORK, VISANET

OCESSING

NETWORK PR

ISSUER PROCESSOR

ACQUIRER PROCESSOR

AUTHORISATION Authorisation request messages are switched between acquirers and issuers.

ACQUIRER

FRAUD AND RISK MANAGEMENT Real-time transaction monitoring, alerts and encryption.

MERCHANT Source: Company reports

DAILY CLEARING & SETTLEMENT Clearing files sent from acquirers are processed for final settlement between issuers and acquirers. VALUE-ADDED SERVICES Account level processing, loyalty, commercial reports and dispute resolution.

ACCOUNT HOLDER

ISSUER

THE VISA TRANSACTION

perspective, they would need to know

CYCLE

that their card is accepted everywhere,

A typical transaction begins when a

even when transacting across borders.

consumer presents a Visa-branded

Given how pervasive the scheme is, all

card to a merchant for payment. The

banks want to be part of the network,

transaction information is conveyed

so that they can easily settle transactions

through VisaNet to the merchant’s bank

with other banks across the globe. In

(acquirer) and then to the consumer’s

our opinion, this strong network effect is

bank (issuer) for authorisation. Once

a significant moat that any noteworthy

authorised, a clearing file containing

entrant into the electronic payments

the final transaction data is submitted to

industry will have to overcome if they are

the acquirer and is processed for final

to compete with the incumbents. Visa’s

settlement. All these stages, with the

partnerships with PayPal, Apple Pay,

exception of the settlement which usually

Swatch and Android Pay corroborate

happens at the end of the day, occur in

our view that it is much easier for new

a matter of seconds. In exchange for the

technologies to leverage off Visa’s network

use of its network for authorising, settling

rather than circumvent it.

"ABOUT 50% OF ALL THE CREDIT CARDS AROUND THE WORLD ARE VISABRANDED. FURTHERMORE, AROUND 70% OF ALL GLOBAL DEBIT CARDS ARE VISAS."

and other value-added services, Visa earns a fee from the merchant.

KEY RISKS Despite the decidedly favourable theme,

The gatekeepers to the payment network

it would be remiss of us to ignore

are the issuing banks, who ultimately

the inherent risks of our large holding

decide which card (Visa or Mastercard)

in Visa. Chief amongst our concerns

to issue to their clients. Visa, along with

are the litigation and regulatory risks

its major competitors, pay about 20%

that payment networks and companies

of their gross revenues as incentives for

within the financial sector contend with.

banks to issue their cards and thereby

Like many dominant businesses, Visa

use their network. The incentives paid

attracts the scrutiny of regulators. Our

by payment networks to banks are the

expectation is that adverse changes to

primary source of funds for banks’ loyalty

regulation in different geographies will

programmes. This symbiotic relationship

continue to act as a ceiling on Visa’s

between the banks, consumers and the

pricing for the usage of its network. An

payment networks is one reason why

additional risk that payment networks are

the barriers to entry are so high – each

exposed to is the threat of new entrants.

additional user of the Visa network

A marvel within the technology sector

increases the value to others. From a

is how quickly businesses emerge and

merchant’s point of view, they want the

dominate, but also how quickly they

assurance that they will receive the funds

can shrink due to new trends. Our view

in their account and that they can trust the

regarding new technologies within the

card that the customer uses in their store.

electronic payments industry is that they

This explains why merchants will only

present both risks and opportunities for

accept certain branded cards, regardless

Visa. We have seen new entrants like

of the issuing bank. From a consumer’s

Apple and Android enter the payment

VISA — CASHING IN ON A CASHLESS SOCIETY

space by partnering with Visa and

from one-off litigation expenses and the

leader in a growing sector, has strong

Mastercard. On the other hand, the

recent Visa Europe acquisition.

fundamentals and has a deep moat in

advent of mobile money has sidestepped

the form of a strong brand and benefits

the banking and payment network sectors.

Visa is highly cash generative, it

from the network effect. This, together

However, on the whole, we believe

consistently converts all of its accounting

with management’s good record of

that Visa’s trusted brand and extensive

profits into cash. The group’s high free

capital allocation, give us conviction

global network afford the group time to

cash flow has afforded it the ability to

to retain Visa as the largest holding in

adapt to new technological changes

return most of its profits to shareholders.

our Global Equity Model Portfolio.

by partnering with the new entrants or

In fact, in 2013 and 2014, the

acquiring them. Regarding pricing and

group returned all of its net income to

regulation, we believe that the growth

shareholders through share buybacks

in electronic payments at the expense

and dividends. Group debt to equity

of cash usage will outweigh the pricing

for the 2016 fiscal year rose to 58%,

pressure from merchants and regulators

as a result of the debt-funded acquisition

over the coming years, although it is a

of Visa Europe. Prior to the acquisition,

dynamic worth watching closely.

Visa’s balance sheet was debt free, a clear indication of a solid balance sheet.

SOLID FUNDAMENTALS Payment network operators are highly

THE QUINTESSENTIAL QUALITY

profitable businesses. Revenue growth is

COMPANY

driven by strong tailwinds of increased

Despite the regulatory concerns alluded

numbers and volumes of transactions.

to, we believe that Visa presents one

Outside of staff costs, marketing is Visa’s

of the most cogent investment themes

single largest operating expense. Over

in our global universe.60.0% A key attribute

decades, the group has spent billions

52.5% 52.3% shift supporting this view is the secular

of dollars to build its brand. Owing to

towards electronic payments, which is

high operating leverage, Visa’s margins

evidenced by the consistent growth in

compare favourably to related peers.

30.0% volumes. In electronic transactions and

Chart 4 highlights the consistency of

many respects, Visa is the quintessential 20.0%

Visa’s high margins, barring the distortions

quality company — it is the market

50.0%

41.3%

40.0%

25.1%

23.8%

28.3%

15.8%

10.0% 0.0%

CHART 4: LAST REPORTED FY OPERATING MARGINS

Visa Inc.

Mastercard Inc.

PayPal Inc.

American Express

Discover Capital One Synchrony Financial Financial Financial

CHART 5: VISA’S STABLE OPERATINGServices AND NET MARGINS

60.0% 52.3%

52.5%

80%

50.0% 41.3%

40.0% 30.0%

23.8%

20.0%

Net Margin

Operating Margin

70% 60%

25.1%

28.3%

50% 40% 30%

15.8%

20%

10.0%

Source: Thompson Reuters

Sep-16

Mar-16

Sep-15

Mar-15

American Discovery Capital One Synchrony Financial Express Financial Financial Services

Sep-14

PayPal Inc.

Mar-14

Mastercard Inc.

Sep-13

Visa Inc.

Mar-13

10% 0.0%

SPAR GOOD FOR YOU VICTOR MUPUNGA â&#x20AC;&#x201C; RESEARCH ANALYST Spar barely needs an introduction. The group has been operating in South Africa for over 50 years and globally since 1932. Since obtaining the right to use the Spar brand in Southern Africa in the early 1960s while servicing about 500 small retailers, the business has grown and now operates six Spar distribution centres and one Build It centre in the country. Recent forays into Ireland, England and Switzerland complement the local operation and present a compelling investment. Our investment case for Spar centres around three core attributes that we believe differentiate the retailer from its peers: the businessâ&#x20AC;&#x2122; attractive operating model, its global diversification and its favourable financial metrics.

DIFFERENTIATED MODEL

wholesaler with scale and a recognisable

The independent retail model is also

Various retail models exist around

brand. The tough operating environment

appealing in that it easily allows for

the world. Among these are chain,

that South African retailers have faced

diverse store formats. The success of this is

franchise and independent retailers. Each

over the past few years has further put

evidenced by Spar Southern Africa trading

operating model has its pros and cons.

this model to the test. Some independents

under nine different store formats, ranging

Spar Southern Africa largely employs

have struggled and received assistance

from the large layout SuperSpar to the

the independent retail model, where

from the wholesaler, which allowed them

smaller Spar Express and Tops. Each brand

each store is owned by an entrepreneur

to survive. Some store owners could not

and store is unique, tailored to its specific

who essentially partners with Spar (the

keep their doors open, in turn allowing

location and consumer preferences,

Spar to purchase distressed stores with

culminating in a well-balanced portfolio.

the expectation that when the market

The group currently services over 2 000

turns, new entrepreneurs will be able to

Southern African stores providing them

repurchase those stores from Spar, which

with groceries, fresh produce, liquor,

lets the group retain key locations. We

pharmaceuticals and building materials

favour this long-term thinking by the group.

across the LSM spectrum.

wholesaler) to the mutual benefit of both parties. Spar Group, in effect, acts as a warehousing and distribution business that serves retailers under its brands. Importantly, there is a voluntary trading arrangement between the individual stores and the group, which means that there is no obligation for any of the independent

CHART 1: SPAR'S EXPOSURE ACROSS THE LSM SPECTRUM

retailers to source from the group. Yet,

100%

despite this provision, about 90% of the

80%

goods in the Southern African stores are sourced from the group. We believe that this high percentage is a strong

40%

indication that the model works. A key

20%

attraction of the model is the complement of entrepreneurial drive and flair at store level coupled with the support from a

60%

16%

23%

25%

33%

45%

44%

51%

53%

25%

22%

51% 33% 2004

2009

40%

2011 LSM 1-4

Source: Macquarie Research

15%

LSM 5-7

2014 LSM 8-70

2016

SCALE & BARGAINING POWER

of its 2017 revenue outside Southern

As a diverse warehousing and distribution

Africa. Apart from the obvious benefits of

business, Spar’s key performance driver

currency diversification, the dynamics in the

centres around its ability to use its trading

European food retail market are notably

power to competitively price the products

different to South Africa. For example,

that it warehouses and distributes to its

the Irish retail landscape is dominated by

retailers. Scale is vital in this quest. The

small owner-managed shops, convenience

footprint of its retailers is the largest in the

or forecourt stores, as we refer to them.

country, nearly twice as many stores as the

Spar Ireland is estimated to have about

benefiting from bulk procurement. The scale of the group’s operations enables them to negotiate drop shipments, i.e. suppliers delivering directly to stores instead of via the warehouse. This represents about 30% of turnover and allows the group to streamline logistics. To give context, Spar’s trucks travelled in excess of 31 million kilometres during the 2016 financial year.

market and between 15% and 18% of

301 stores across three brands and 11 cash and carry outlets. The business owns 53 of the 301 stores and expects to reduce this over time, as the group focuses on distribution and warehousing. The Swiss retail market is highly competitive

the total Irish food market. Similar to

and contends with a macro backdrop

Southern Africa, Spar Ireland operates

of deflation, stable salaries and private

distribution centres, which service six

consumption that is growing just below 1%.

varied grocery brands (1 340 stores in

Naturally, this is a challenging environment

total). Over the last few years, the Irish

for retailers. Yet, we are confident that in

economy has been recovering from

time, this will turn out to be another well-

the devastating effects of the financial

timed acquisition. Plans are underway to

crisis. Spar’s entry into Ireland was at an

grow the Swiss business’ retail offering

opportune time, and we expect the Irish business to continue to recover along with the rest of the economy. We anticipate

GLOBAL DIVERSIFICATION

the group. The Swiss business services

that the benefits of cross-learning from the

(increasing product depth), improve and increase the number of stores. This will go some way to increasing the group’s market share in Switzerland from the

In 2014, Spar Southern Africa launched its

variegated geographies that the group

global strategy with an acquisition of the

operates in, coupled with increased focus

BWG Group (Spar Ireland and South West

on supplying perishables, will aid in the

England). Subsequent to that purchase, the

group’s quest to grow the Irish business.

grocery spending power across European

group has added ADM Londis, Gillett and

Chart 2 shows the growth across various

countries. Switzerland, England and

Spar Switzerland. We estimate that the

retail channels in Europe. Convenience

Ireland rank highly on spend per capita,

foray into these three European countries

and forecourt formats are expected to

highlighting the attraction in the European

will result in Spar generating about 40%

grow well ahead of competing3.7formats at

markets Spar operates in.

5.3

3.8

CHART 2: TOTAL EUROPEAN FOOD RETAIL SALES 400

2008

4.0

2.0%

2.6%

4.2%

5.3%

4.4%

1.8%

150 100

5.0

2018f

1.6%

2.6%

4.5%

2.8%

0.1%

Source: Planet Retail

Cash & Carries

Drugstores

Convenience & Forecourt

Discount

Supermarket & Neighbourhood

Hypermarkets & Superstores

400

5.0

350

4.2

300

3.6

250

3.0 2.0

200

2.0%

150

1.0

100

0.0

Norway Switzerland Ireland Denmark Luxembourg UK Cyprus Sweden Finland France Austria Germany Belgium Slovenia Latvia Iceland Poland Italy Czech Republic Spain Estonia Slovakia Portugal Croatia Lithuania Hungary Bulgaria Macedonia Greece Romania Russia Serbia Bosnia & Herz Montenegro Ukraine Georgia Azerbaijan Armenia Moldova Belarus

200

1.9

6.0

€'000

Sales (€bn)

250

2013

3.5 3.4 3.3 3.2 2.8 2.6 2.5 2.4 2.5 2.1

1.1 1.1 1.0 0.9 0.8 0.8 0.6 0.5 0.3 0.3 0.2 0.2 0.2

2013 - 2018 CAGR 2008 - 2013 CAGR

300

margins. Chart 3 shows the divergent

1.8 1.6 1.6 2.1 1.5 1.5 1.5 CHART 3: GROCERY SPEND CAPITA 1.4 1PER .4 1.3 1.8

PER CHANNEL (2008 – 2018F) 350

current 3% and into improving operating

1.6%

0 Hypermarkets & Superstores

more than 5 000 suppliers, once again

40% market share in the Irish convenience

Spar Switzerland adds a different mix to

€ '000

closest competitor. The group sources from

5.3% per annum over the next three years.

Source: Planet Retail

SPAR GOOD FOR YOU

We expect Spar to continue to look

can return more cash to shareholders,

for acquisitions outside of its existing

are more defensive and have stronger

markets. The group is in the early stages of

balance sheets that can fund acquisitions.

expanding into Zambia, and has formed a

We believe that Spar fits this bill. Net

joint venture with plans to enter Sri Lanka.

debt to EBITDA as at September 2016

While we do not expect Zambia and

was 1.5x and interest cover was 24x.

Sri Lanka to be material in the short to

This is despite the distortions of the recent

medium term, we believe that management

acquisitions that were only included for

will continue to look for additional

part of the financial year.

opportunities, further strengthening the group’s appeal as a well-diversified retailer.

Unlike its local peers, Spar’s wholesale and distribution model has resulted in Spar

FAVOURABLE FINANCIAL

reinvesting significantly less capital while

METRICS

maintaining an attractive 66% payout ratio

One market feature that has stood out in

over the years. For the capital that the

the low growth environment experienced

group has employed, it has generated

post the financial crisis, has been that

returns that exceed those of its peers. This,

companies that generate high free cash

in our opinion, underscores the quality of

flows are highly rated. The reasons are

Spar. Charts 4 and 5 show Spar’s low

intuitive. When economic growth is low,

capex profile and the return on capital

companies that are not capital intensive

employed relative to peers.

THE BOTTOM LINE We regard Spar to be a well-managed, diversified food retailer. The business’

6.0

5.0

can augment organic 5.0 growth with acquisitions. The benefits of scale serve as 4.2

4.2 3.6

4.0 3.6 recent acquisitions provide broader diversity. a moat against competitors and

3.0

3.0 With the share trading at an undemanding forward earnings multiple of

2.0

15.5 times, in line with2.0 its historic average, we believe that this quality company

1.0

1.0 will contribute significantly to our clients’ portfolios.

Norway Switzerland Ireland Denmark Luxenbourg UK Cyprus Sweden Finland France Austria Germany Belgium Slovenia Latvia Iceland Poland Italy Czech Republic Spain Estonia Slovakia Portugal Croatia Lithuania Hungary Bulgaria Macedonia Greece Romania Russia Serbia Bosnia & Herz Montenegro Ukraine Georgia Azerbaijan Armenia Moldova Belarus

0.0

CHART 4: SPAR'S RETURN ON CAPITAL EMPLOYED VS PEERS (LAST REPORTED FY)

0.0 Norway Switzerland Ireland Denmark Luxenbourg UK Cyprus Sweden Finland France Austria Germany Belgium Slovenia Latvia Iceland Poland Italy Czech Republic Spain Estonia Slovakia Portugal Croatia Lithuania Hungary Bulgaria Macedonia Greece Romania Russia Serbia Bosnia & Herz Montenegro Ukraine Georgia Azerbaijan Armenia Moldova Belarus

€'000

4.0

6.0 earnings tend to be defensive in tough times, it generates strong cash flows, and

5.0

€'000

5.0

CHART 5: SPAR’S CAPEX SPEND RELATIVE TO PEERS

35000

35% 31% 30%

30000

28%

21%

20% Rm

20%

Spar

20000

15%

15000

10%

10000

5000

Spar

Source: Company reports

Pick n Pay

25000

25%

Shoprite

Pick n Pay

Massmart

Shoprite

FY07

FY08

Source: Company reports

FY09

FY10

FY11

FY12 FY13

FY14

FY15

FY16

THE ECONOMY IN 2017 — IN SEARCH OF SILVER LININGS DR ROELOF BOTHA – ECONOMIC ADVISOR TO PwC

To describe 2016 as a tumultuous year in South Africa’s modern history is probably an understatement. On the political front, it became clear that the ruling party was experiencing mounting friction between two opposing groups. One group seems to have been compromised by evidence of state capture and ongoing tender irregularities, while the other is committed to combating corruption and improving corporate governance standards in the public sector at large.

The fall-out from the axing of former Finance

DUBIOUS ENERGY POLICY

Combined with lethargic economic

Minister Nhanhla Nene in December

One of the most notable aspects of

growth, higher inflation, rising interest

2015 and the very public animosity

compromised public policy in South

rates and rising public debt, it is no

between the Directorate for Priority Crime

Africa is in the energy sector, with much

surprise that the international ratings

Investigation (the so-called “Hawks”) and

of the spat between the two camps in

agencies were making threatening

the executive leadership at National

Government emanating from the apparent

noises and that the rand exchange

intention to pursue a nuclear power deal

rate fluctuated significantly. The key

with a Russian firm that is simply not

reasons for the ups and downs of the

affordable from both a fiscal and an

rand provide a nutshell overview of

economic perspective. Numerous energy

the trials and tribulations experienced

experts have warned that the Department

by the country during the past year, as

of Energy (DoE)'s Integrated Energy Plan

depicted by Table 1 on the next page.

Treasury continues to reverberate through society, especially via policy uncertainty. Recently, this has been exacerbated by the President’s refusal to sign the Financial Intelligence Centre (FIC) Amendment Bill into law. The Bill has been drafted by National Treasury in accordance with the recommendations of the Financial

gas as future sources of electricity.

Although some of the problems faced by the South African economy during 2016

Representatives from institutions such as

were home-grown, much of the lethargy

the Council for Scientific and Industrial

body developing and promoting policies

in output was caused by the lingering

Research, the Energy Intensive User

to combat money laundering and terror

Group, the South African Renewable

effects of a five-year commodity slump,

financing. The current stalemate could

Energy Council and the South African

have dire consequences for South Africa’s

Independent Power Producers’ Association

financial sector due to global concerns over

have also raised concerns over the

the country’s money-laundering controls.

limitations on renewables set by the DoE.

Action Task Force — an intergovernmental

overstates the costs of renewables and

which played a key role in forcing two BRICS partners (Brazil and Russia) into recession.

TABLE 1: FLUCTUATIONS IN THE RAND Since the end of 2015, the rand has been exposed to various economic and political influences, leading to unprecedented volatility against the US dollar. DATE

13-Dec 15

MAJOR REASON FOR DEPRECIATION OR STRENGTHENING

Nene dismissal

% CHANGE FROM PREVIOUS DATE DECLINE

INCREASE

-9.6

17-Dec 16

Appointment of Mr Pravin Gordhan as Minister of Finance

07- Jan 16

Reaction to the downgrade of SA's largest banks by Moody's

-5.0 -6.0

16-Jan 16

Concerns over China's economy

25-Feb 16

Minister Gordhan's Budget Speech

29-Feb 16

Conflict between the Hawks/Moyane & Minister Gordhan

04-Apr 16

US Federal Reserve decides to maintain low interest rate policy

22-Apr 16

Positive Chinese trade data

20-May 16

US economy gains momentum

24-Jun 16

Brexit (pound sterling takes a hammering)

28-Jun 16

Post-Brexit fears and stronger economic data from the US

08-Jul 16

Gold price at a three-year high and large monthly trade surplus for SA

12-Aug 16

Municipal election results and another large SA trade surplus

02-Sep 16

Conflict between the Hawks and Minister Gordhan intensifies

22-Sep 16

Rise in China's iron ore imports

12-Oct 16

Minister Gordhan charged with fraud charges

02-Nov 16

Fraud charges against Gordhan dropped and strong SA trade data

18-Nov 16

Stronger US dollar/fears over SA credit rating downgrade/gold slides

05-Dec 16

Investment grade status for SA sovereign bonds retained

6.1

8.9 -4.7 10.0 2.9 -10.2 9.4 -5.1 3.2 11.1 -9.2 8.4 -5.5 6.4 -6.9 4.9

Total % change between 16 January and mid-December 2016

21.6

Sources: Oanda; own research

DEFLATION STIFLING RECOVERY

In most of the world’s post-industrial

industries, thwarting the narrowing of the

The search for possible causes of what

economies, the policy response since

gap between demand and supply.

may be termed a form of near-global

the 2008 Global Financial Crisis has

secular stagnation reveals a common

been rather predictable: with fiscal deficits

Fortunately, the International Monetary

denominator, namely deflation, which

increasing, the burden for much-needed

Fund is cautiously optimistic that several

can be defined as a decline in asset and

economic stimulation fell squarely on

key regions and countries will gain some

consumer prices. Deflation results from a

monetary policy, with fairly aggressive

economic momentum in 2017, including

lengthy period of insufficient demand,

accommodation by central banks leading

sub-Saharan Africa, with India leading

during which unemployment rises, economic

to record low interest rates in most high-

the way among the top 10 economies.

growth is lethargic and recessionary fears

income countries and, as an inference,

are widespread. Two of the obvious

every prospect of a meaningful recovery.

RAND RESILIENCE

responses of the business community are

It was a false dawn, however, with the

Apart from the unprecedented degree of

lower production and increased price

initial recovery in most commodity prices

volatility in the rand/US dollar exchange

competition, which aggravates deflation.

having petered out again during the last

rate, the other key observation is that

quarter of 2016.

the rand is slowly but surely clawing its way back from a grossly undervalued

Once a critical mass of consumers and investors expect prices to decline in future,

The villain of the piece was lurking in an

position. Between mid-January and early

purchases of non-essential goods are

unintended consequence – cheap money

December, the rand has been one of the

deferred, leading to even lower demand

made it possible for large companies

world’s best-performing currencies, gaining

and, ultimately, a downward spiral of

to continue expanding their production

an impressive 21% against the world’s

demand and production.

capacity, especially in capital-intensive

dominant currency, the US dollar.

THE ECONOMY IN 2017 IN SEARCH OF SILVER LININGS

The role of the gold price recovery in the

GROWTH DRIVERS

gradual strengthening of the rand since

During 2016, growth in private sector credit

the beginning of 2016 should not be

extension was zero in real terms, and this

under-estimated. As a rule of thumb, for

needs to be lifted urgently for economic

more than half a century, the higher the

growth and employment creation to gain

dollar gold price, the stronger the rand

momentum. Other potential growth drivers

becomes, and vice versa. Therefore,

include the strong showing of the volume

any further improvement in 2017 in the

of mining output towards the latter part of

demand for precious metals, especially

2016, as well as a return to job creation

gold, will almost certainly assist the rand

in the formal sectors of the economy in the

in gradually eliminating its undervalued

third quarter of 2016. Furthermore, the

status, while also benefiting the economy

country’s leading business cycle indicators

as a whole.

have both recovered by more than 3% from

ABOUT THE WRITER Dr Roelof Botha has a diversified and distinguished career in management accounting, financial journalism, lecturing, consulting and economic research. He is a regular commentator and columnist on topical macroeconomic and sociopolitical issues and has authored more than 500 articles, books and research publications. In 2005, Dr Botha received the prestigious Finmedia Economist of the Year award, based on the accuracy of forecasts of key economic indicators. He remains involved with macroeconomic research and is a Senior Adjunct Faculty member of the Gordon Institute of Business

their earlier lows, while real retail sales A more stable and modestly stronger

growth continues to remain in positive

currency is certainly on the cards in 2017,

territory.

Science (GIBS). Over the past three decades, more than 400 companies and employer organisations have utilised his services in providing forecasts of economic indicators, mostly for purposes of strategic planning. As a seasoned veteran of the public speaking circuit in Southern Africa, Dr Botha has managed to captivate audiences with his unique style of blending the serious matters of economics and politics with the lighter side of life. His presentations are regarded as broadly motivational, in terms of highlighting research that confirms numerous positive structural changes in the Southern African economy.

on condition that the domestic political situation remains calm and that National

Now that all three of the leading ratings

Treasury is allowed to pursue pragmatic

agencies have re-affirmed the investment

measures to combat corruption with the

grade status of South Africa’s sovereign

awarding of tenders by Government and

bonds and a partnership approach towards

state-owned enterprises.

job creation is developing between the public and private sectors, 2017’s 7.5

60.0%

Further52.3% rand 50.0%

52.5% resilience,

2016 economic performance may surprise on

combined with a

recovery in agricultural output, should lead 41.3%

the upside.

40.0% to substantially lower inflation in 2017,

4.5

with 30.0% every prospect of a return to more

25.1%

23.8%

accommodating monetary policy. 20.0%

28.3%

15.8%

3.0 1.5

10.0% 0.0%

2017

6.0

0.0 Visa Inc.

Mastercard Inc.

PayPal Inc.

American Express

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-1.5

Russia

CHART 1: IMF GDP GROWTH FORECASTS

CHART 2: GOLD PRICE

7.5

1 350

6.0

2016

Sub- Saharan Africa

China

India

US$ per oz.

2017

1 300 1 250

4.5

1 200 3.0

1 150 1.5

1 100 0.0

Russia

Source: IMF

Sub- Saharan Africa

China

India

Jan'15 Feb'15 Mar'15 Apr'15 May'15 Jun'15 Jul'15 Aug'15 Sep'15 Oct'15 Nov'15 Dec'15 Jan'16 Feb'16 Mar'16 Apr'16 May'16 Jun'16 Jul'16 Aug'16 Sep'16 Oct'16 Nov'16 Dec'16

1 050 -1.5

Source: World Bank

THE QUALITY OF LIFE INSIGHTS INTO THE RANKINGS OF COUNTRIES WITH THE BEST QUALITY OF LIFE What does quality of life mean to people? For some, it may mean material wealth or access to the best education and healthcare, while for others it may be job security and political stability. US News & World Report, together with BAV Consulting and the Wharton School of Business at the University of Pennsylvania, created the Best Countries rankings report in 2016 to identify how countries are perceived on a global scale. TABLE 1 QUALITY OF LIFE

TABLE 2 EDUCATION

TABLE 3 RAISING KIDS

TABLE 4 GREEN LIVING

CANADA

UNITED KINGDOM

SWEDEN

CHINA

SWEDEN

CANADA

DENMARK

JAPAN

GERMANY

DENMARK

UNITED STATES

CANADA

GERMANY

UNITED STATES

AUSTRALIA

GERMANY

NETHERLANDS

UNITED KINGDOM

NETHERLANDS

FRANCE

AUSTRALIA

CANADA

NEW ZEALAND

AUSTRALIA

NEW ZEALAND

DENMARK

JAPAN

GERMANY

SWEDEN

AUSTRIA

AUSTRALIA

SOUTH KOREA

AUSTRIA

JAPAN

IRELAND

NEW ZEALAND

SWEDEN

UNITED KINGDOM

DENMARK

UNITED KINGDOM

RUSSIA

10 LUXEMBOURG

10 NETHERLANDS

10 LUXEMBOURG

10 UNITED STATES

10 SAUDI ARABIA

49 SOUTH AFRICA

28 SOUTH AFRICA

43 SOUTH AFRICA

27 SOUTH AFRICA

23 SOUTH AFRICA

HOW QUALITY OF LIFE WAS

• Economic stability

and third. Out of the African countries

MEASURED

• Family-friendliness

included in the survey, Tunisia was the

Quality of life not only focuses on a

• Income equality

highest-placed, at 47th.

country’s social support structures such

• Political stability

as public health and safety, but also on

• Safety

the opportunities that are available to

• Well-developed public education system

people, such as education, employment

• Well-developed public health system

and economic security. These are typically

TABLE 5 CAREERS

the factors that influence where people

TABLE 1: TOP 10 COUNTRIES FOR

want to live, pursue career opportunities,

QUALITY OF LIFE

or raise a family.

Canada was rated as the best country

HOW SOME OF THE QUALITY OF LIFE DIMENSIONS SCORED INDIVIDUALLY EDUCATION The scores were based on three equally weighted country attributes:

for quality of life and was a consistent

• Top quality universities

To determine quality of life, these were

top achiever in almost all the factors

• A well-developed public education

considered:

considered. European countries

• A good job market

also scored relatively well, with two

• Affordability

Scandinavian countries coming in second

system • Consideration for attending a university in that country

TABLE 2: THE BEST COUNTRIES FOR

•

International

undergraduate

SPECIAL CARE FOR EXPECTANT

EDUCATION

satisfaction in the UK is very high,

MOTHERS

Most of these countries place an important

at 91%. 85% of international

Before a baby is born, expectant

emphasis on government spending for

undergraduates would recommend

mothers get prenatal care through free

education. For example, Denmark,

their UK study experience, higher

or subsidised courses that help them

Norway, Sweden and Finland spend

than any major English-speaking

prepare for the delivery.

most of their money on education as a

study destinations.

percentage of their GDP. Some countries, like Canada, offer free primary and secondary education while Denmark offers free higher education. The results also showed that the lower performing countries have lower literacy and enrolment rates.

WHY IS THE UK’S EDUCATION SECTOR SO HIGHLY RATED?

•

The UK is also a world-leading

LONG, PAID PARENTAL LEAVE

research nation — 54% of the

Parents are entitled to 480 days of paid

research conducted by UK

parental leave when a child is born or

universities and colleges is classed

adopted. For 390 of the days, parents

as ‘world-leading’ and the region

are entitled to nearly 80% of their normal

ranks second in the world for the

pay, with the remaining 90 days paid

quality of its scientific and research

at a flat rate. Those who are not in

institutions. In fact, UK universities

employment are also entitled to paid

and research institutions have

parental leave. Parental leave can be

produced 107 Nobel Prize winners.

taken up until a child turns eight and the

Furthermore, researchers in the UK

leave entitlement applies to each child,

gain more citations and produce

so parents can accumulate leave from