Ban these financial products

I met with a new client recently who came to see me because she has two retirement annuities that mature this month. She does not want to take income from them at this stage and certainly does not want to continue them with the company concerned. Who can blame her, the annual compound return on one of them is around 5% since 1983. But that is not the issue here.

What really irks me is that when she presented me with the documents that she had received from the insurance company, I noticed that firm had included a quote for a life annuity, without any escalation on it! Who (with any sense of morality) offers a 55-year-old a non-escalating life annuity? There is surely only one reason that the company would do this and that is because it’s trying to hide its poor annuity rates and the fact that the initial income would look really poor if it had an escalation on it.

National Treasury has a lot to say about annuities – and is very critical of living annuities, but surely, if it is serious about improving the annuity market, it should ban non-escalating annuities! In fact, if insurance companies were more honest, they would refer to this kind of annuity as a “decreasing annuity”, as your income is effectively decreasing by inflation each year. In the above instance, if inflation is 6%/year then by the time the lady turns 75, her income would be equivalent to 30% of the current income and at 80 it would be around 22% of the current income.

So how about it, if Treasury and the insurance industry insist on keeping these kinds of annuities, perhaps we should push for them to be renamed as “decreasing life annuities”. Somehow I don’t think there would be a market and if they won’t ban these products, then at least lack of demand would ultimately result in their demise!

What you need to know about annuities:

There are essentially two kinds of annuities available to you when you retire, namely a life annuity and a living annuity. Both of these are what are referred to as compulsory annuities (ie you have to use part or all of your retirement funds to buy one or more of them).

Life Annuity: You purchase an annuity from an insurance company and it guarantees to pay you the annuity until your death, when the capital “disappears”. Simplistically, the annuity you will receive is a function of your age, sex and interest rates. Women tend to live longer than men and so a 65-year-old woman is likely to receive a lower initial annuity than a 65-year-old man. You are also likely to receive a lower income when interest rates are low (like now). Annuity rates change on a regular basis, and quotes would have to be obtained at the time of purchase.
You have the following life annuity choices:

1. A single life annuity, where the capital dies with you. Very often this kind of annuity will have an initial guarantee period such as five or 10 years, which means that even if you die in the first month of receiving the annuity, your estate (beneficiary) will continue to receive an income for the remainder of the guaranteed period.
2. An assured annuity, where an insurance policy is purchased to pay out the capital on your death. While this might sound appealing, as a rule, the insurance product is quite expensive and you could see a significant percentage of your annuity being used up to pay for the insurance.
3. A joint life annuity (with your spouse), where the annuity would cease on the death of the second annuitant (and the capital as well). This form of annuity is often structured so that annuity decreases by a third on the death of the first person (this allows for a greater initial income).

Beware: Most quotes do not show an escalating income and it’s essential that there is an escalation on the income taken – you do not want to have the same income in 20+ years’ time!

Living Annuity: you purchase an annuity from a (linked product or unit trust) company – your money is invested into a few unit trust funds (that you can choose) and then you have to draw an income from these funds. The minimum income is 2.5% of the capital and the max is 17.5%. This amount can be amended once a year on the anniversary of the annuity. With this annuity, the income is a function of the remaining capital amount and if the capital is badly invested, you could erode your income. The theory (and practice in my experience) is that as long as you have growth at a greater rate than the income drawn, you will get an ever-increasing income (ie if you get 9% growth and you draw 5% income, then your capital should grow each year). On your death, any remaining capital passes on to your beneficiaries who can use it to provide an income for themselves. This process is then repeated until all the capital is depleted.

You can move from a living annuity to a life annuity if you ever change your mind, but you can never ever move from a life annuity to a living annuity. It is also possible to split your capital (subject to certain minimums) and purchase both a life annuity and a living annuity thereby guaranteeing some income as well as providing the possibility of some growth.

Things to consider before purchasing an annuity:

1. Do I really need to purchase an annuity at this stage or can I defer drawing an income until a later stage? Just because your RA or preservation fund has matured does not mean that you need to draw an income from it – you may be able to defer drawing an income until a later date (eg if you are still working you might want to defer it until you are no longer drawing a salary).
2. Is there any tax difference between the two annuities? No, both are taxed as income… except that you can determine the amount of income you receive by using a living annuity. So if you are still earning an income (salary) then you could draw a lower income from the living annuity and thereby decrease your taxable income.
3. Make sure that you get quotes for both a living annuity as well as an escalating life annuity so that you can compare the incomes (initial and on-going). As a rule, you probably want to stay away from life annuities when interest rates are low or if you have financial dependants that you need to provide for at your death.
4. Find out what the fees on the annuity are. As a rule, the maximum upfront commission on the annuities is limited to 1.5% of the capital. There are no on-going fees on life annuities but there are on living annuities – one of these fees is the on-going adviser fee. The “norm” used to be 0.5% per annum, but this seems to have crept up to 1% a year… make sure you know what you are paying and why you are paying it (the 0.5% difference in fees could reduce the longevity of the annuity by around three to four years).
5. Be realistic about the income level you draw – make sure that you draw a lower income in the first few years. As a rule, this should not be more than 5% – we know, on balance of probability, that if you draw 5% income that your capital should last for around 30 years (conservatively). If the income is 8% then this drops to around 16 years and at 10% you have about 12 years income.
6. Make sure that if you opt for a living annuity and if you are using an adviser, that he/she is suitably qualified and experienced to advise you (as a minimum, I recommend that you use a certified financial planner). Ask to speak to a few of their existing annuity clients to find out what their experience has been. Also, find out how they choose the underlying funds and how often they will report to you about them and then, as far as the fees are concerned, what are you paying them and why are you paying this amount?
7. There is no reason that you can’t go direct when purchasing an annuity – if you opt the living annuity then remember this: your biggest enemy in mitigating against the success of the annuity is going to be you and your emotions. As such, it makes sense to have someone that you can turn to when the markets get volatile and who can help you to stick to the plan. Financial planners who do this are more than worth the fees you pay them.

Gregg Sneddon is a certified financial planner with The Financial Coach in Cape Town.

Investing in Art as an asset class

Investing in art is very different from buying a painting that matches your lounge suite. While some investable art may be visually beautiful, like a Claude Monet hanging over a fireplace, more often art is there to provoke a reaction, to question and challenge, and to put a spotlight on the darker side of society. 


Edvard Munch’s The Scream, which recently sold for $120m (R955m), is not exactly a painting for the bedroom wall, but it is possible to blend aesthetics with investment.


Art is not an investment in the true sense of the word. It does not generate dividends or interest and, in fact, costs you money to maintain.


The value is often only truly recognised when it is sold. The capital value is the only upside and is therefore a store of value rather than an investment.


However, art is certainly an asset class that can provide significant returns, but usually over a long period of time – the average collector holds on to their artwork for about 27 years.


So while it may not be ideal for your basic retirement plan, it certainly can over 30 years develop into a very valuable asset.


The best way of approaching this asset class is to see art as an interest that has the potential of becoming a very valuable asset class.


It is one of the few interests or hobbies where you can educate yourself while at the same time create an asset base of great value.


While there is nothing wrong with buying a piece of art because you like it, it is not the same as investing in it.


One needs to learn about the world of arts just as one would investigate and read up about a share or a unit trust before investing.


Most of us will buy an artwork in our life time, but we seldom take the time to do our homework.


A good starting point is to visit galleries and art auctions. Stephan Welz, founder of Stephan Welz & Co auction house, which represents Sotheby’s interests in South Africa, says when starting an art collection you should stick to the recognised artists, in much the same way as a share portfolio should be made up of blue-chip companies.


A good auction house or gallery will be able to advise you on who the recognised artists are and what they are worth. But you should also be doing your own homework by attending auctions and seeing what prices certain artists are commanding.


It is only in an auction that the true market value of an artist or specific artwork can be determined because art is only physically worth what someone else is prepared to pay for it.


There is, however, also room for a new artist in a collection.


As one may invest a small portion of one’s portfolio in newly listed companies, a well-chosen newcomer can increase significantly in value.


However, this is not for novices and it is, as with investing in a small company, even more important to do homework. New artists also create opportunity for the small-budget collector.


If you are buying into the blue-chip league, you need a starting investment of R50 000.


For half that amount, you could pick up a new artist.


However, the risks are far higher.


The risk with new artists is that sometimes their prices can be overinflated as they are still to be tested in the auction environment and they are harder to resell.


But when it does, the payoff can be immense. For example, a William Kentridge etching in his early days went for R8 000.


Today that is worth about R500 000. But not every new artist is a Kentridge and is far more likely to remain in obscurity than to succeed.


If you have a smaller budget and want to buy into more established artists, you can start with collecting limited edition signed lithographs (prints) of well-known artists.


You don’t need to be rich to be an art collector, although it does help. There are many famous collections by people of ordinary means.


For example, a book-keeper built up a collection worth many tens of millions of rands, yet he never owned a car because he could not afford it. His investment was his passion.


Some people would rather buy an artwork than take an overseas trip.

- City Press

Asian shares 7 month high as U.S., China data eases worries

Asian shares struck a seven-month high on Thursday as worries about a sharper slowdown in global growth eased after a slew of Chinese data signaled stabilization in the world's second largest economy, and the U.S. produced positive economic news.

China's third-quarter gross domestic product grew 7.4 percent from a year earlier, the slowest pace since the first quarter of 2009 and the seventh straight quarter of slower growth, but matching expectations.

Other Chinese data such as fixed asset investment, retail sales and industrial output slightly exceeded forecasts.

"This is within expectations, the economy is showing signs of stabilizing, that is good news," said Dong Tai, economist at Credit Suisse in Hong Kong. "We think that with rebounding property markets, stabilizing export orders, resuming consumption, we probably have seen the bottom of the economy."

The MSCI index of Asia-Pacific shares outside Japan .MIAPJ0000PUS gained 0.5 percent, rising for a third day in a row, with its energy .MIAPJEN00PUS and materials .MIAPJMT00PUS leading the increase.

Hong Kong shares .HSI rose 0.7 percent and Shanghai shares .SSEC advanced 1.2 percent. Australian shares .AXJO were up 0.7 percent at a 15-month high, supported by the resources sectors which drew strength from signs the slowdown is drawing to an end in China, Australia's largest export market.

"Investors are adding more risk to their portfolio right now, with funds trying to improve their performance as the year comes to a close," said Alan Lam, Julius Baer's Greater China equity analyst.

European shares will likely edge higher, with financial spreadbetters expecting London's FTSE 100.FTSE, Paris's CAC-40 .FCHI and Frankfurt's DAX .GDAXI to open 0.2 percent higher. U.S. stock futures were steady. .L .EU .N

The commodities-sensitive Australian dollar touched a two-week high of $1.0397 after the Chinese data, and last traded at $1.0380.

The benchmark Thomson Reuters-Jefferies CRB index .CRB has recovered less than one-third of its drop from its recent peak in September, offering more scope on the upside.

"The data for September suggests China's economy likely bottomed in July-August and is set to recover, and this will help ease fears about further downside risks to the Chinese economy," said Hirokazu Yuihama, a senior strategist at Daiwa Securities. "There aren't clear signs that demand from China is picking up but sentiment for commodities is improving and this should eventually support growth-sensitive assets," he said.

Japan's Nikkei average .N225 jumped 2 percent to its highest in nearly three weeks on a weaker yen. .T

YEN SLIPS

The dollar rose to a one-month high of 79.22 yen, with traders keen to see if it will test its 200-day moving average, which stands around 79.40.

"The broad USD is battling between its use as a funding currency to invest in emerging markets, and a rise in its value linked to higher yields and growth expectations," Societe Generale said in a research note.

"For now this translates into a higher USD/JPY as the most yield sensitive currency," the note said, explaining the dollar's advance against the yen

While both the yen and the dollar tend to weaken when the tone for risk assets brightens, the yen's fall against other currencies such as the Australian dollar and the euro helped deepen the Japanese currency's loss against the greenback.

Osamu Takashima, chief FX strategist at Citibank in Tokyo, said the yen's weakness is also related to concerns that Japan's exports may suffer due to a sharp fall in sales in China following after a territorial row between the two countries.

The dollar's appeal increased as benchmark 10-year U.S. Treasury yields jumped to a one-month high of 1.81 percent on Wednesday for its biggest two-day rise since late July, after data showing U.S. housing starts surged 15 percent in September, the fastest pace in over four years.

The housing report followed a fall in the U.S. jobless rate and strong retail sales, lifting Wall Street despite concerns that sluggish world economic growth would curtail corporate America's year-long streak of profit growth.

The euro inched down 0.2 percent to $1.3096, after reaching a one-month high of $1.3140 on Wednesday.

While hopes for highly-indebted Spain to ask for aid remain intact, investors were cautious ahead of a meeting of European leaders in Brussels on Thursday and Friday, eyeing possible discussions over bailouts for struggling Spain and Greece.

European leaders will try to bridge deep differences over plans for a banking union at the summit, but no substantial decisions are expected, reviving concerns about complacency in tackling the three-year-old debt crisis.

Clear decisions on helping Cyprus, Greece and Spain may also only come at a finance ministers' meeting next month, officials say.

Asian credit markets firmed, tightening the spread on the iTraxx Asia ex-Japan investment-grade index by 4 basis points.

U.S. crude futures were steady at $92.14 a barrel while Brent inched up 0.3 percent to $113.56. <O/R>

(Additional reporting by Hideyuki Sano in Tokyo and Clement Tan in Hong Kong; Editing by Richard Borsuk)

(Reuters)

Tait Brands: R400m venture fund launched in SA

Tait Brands are proud to announce that Business Partners Limited, a specialist risk finance company for formal small and medium enterprises (SMEs), has announced the launch of the R400m Business Partners Limited Venture Fund, one of the largest SME financing funds in South Africa.

According to Gerrie van Biljon, Executive Director at Business Partners Limited, SMEs are key drivers of wealth in South Africa and it is reported that SMEs contribute 40% of GDP and employ 60% of the workplace in formal employment.

He says that although South Africa is ranked 37th out of 144 countries for venture capital funding by the Global Competitiveness Report 2012 / 2013, small businesses, particularly those in the concept or start-up phase, struggle to find funding as financiers are reluctant to enter this high-risk arena. This is due to the high failure rate of start-ups and the lack of security available for financiers to compensate risk and the high gearing required for seed capital.

“This limited funding and support for SMEs often results in innovative business ideas, many of which are developed at tertiary institutions, incubator programs, innovation hubs and industry groups, never getting off the ground. The Business Partners Venture Fund can now plug this hole,” says van Biljon.

The fund will consider first round finance deals up to R10m, with the focus on the venture’s viability and high potential for growth. Consideration will be given to early stage investments after the research and development phase.

“We recognise the potential benefit that innovative and high growth enterprises can bring to the country. It is for this reason that the company is launching the fund – to finance exactly this type of high impact entrepreneur.”

Van Biljon says that often, the majority of financing deals are made available to SMEs in typical lifestyle businesses, such as coffee shops or small manufacturing outlets, which are considered the ‘safer’ option.

“We feel that all businesses with the potential to reach ‘blue sky’ should be considered for funding, as SMEs within all sectors have the potential to flourish. We currently see great potential and opportunity within clean energy, agri-processing, bio-tech and ICT sectors, and want to give entrepreneurs the opportunity to develop new products or to take existing businesses to a new level.”

He says that in order to achieve the goal of 5 million jobs created by 2020 set by government in the New Growth Path, businesses and in particular, SMEs, need to expand and provide more job opportunities for South Africans.

Finweek

Lessons for SA in growth elsewhere in Africa

IT is no secret that African manufacturing output has roughly doubled in the past 10 years and that Africa could be on the brink of an economic takeoff, much like China was 30 years ago, according to the World Bank. The bigotry of low expectations is fading away and a new expectation of African creativity and technical prowess is gaining hold across the world.

What’s less well known is the effect innovation and development in other African economies are having on SA’s entrepreneurs, workers and policy makers. I am constantly travelling across Africa, meeting everyone from factory workers to CEs, and what is remarkable is how much we South Africans can learn from them. For too long we have held a bigotry of our own: we have looked to Asia and the West for the best ideas and viewed them as our natural competitors, as opposed to our African neighbours.

Nothing could be further from the truth: moving across the continent, I am struck by the creativity, vigour and sheer ambition of Africa’s growing middle class.

Ethiopia is the perfect example. Its economy is expanding by 7.5% a year and it is not just traditional industries such as farming and mining that are growing, but also manufacturing. Just outside the capital, Chinese shoe maker Huajian has built a factory employing about 500 workers. An economist at the World Bank who recently wrote a report on light manufacturing in Africa cites this as an example of how Africa could overtake Asia to potentially become the world’s next manufacturing hub.

Low labour costs, readily available natural resources and preferential (duty-free and quota-free) access to the US and European Union markets are among the advantages of operating in Africa.

Africa’s demographic trends are also extremely positive. By 2035, its labour force will be bigger than any individual country in the world. Nigeria and Ethiopia will add a total of 30-million workers by 2020, while SA is expected to add 2-million. As opposed to western economies, which are struggling with an ageing population, a younger population gives Africa a huge boost, especially in the form of reduced entitlement spending.

A more developed manufacturing base is also likely to reduce the costs of some products that are currently cheaper to import from China than Africa. The boom is waiting to happen: Africans already spend more each on goods and services than Indians, according to some reports.

However, it’s not just manufacturing at which Africa is excelling and challenging SA. The Economist recently named Nairobi an "African tech hub" because of hundreds of start-ups in the past few years — quite an achievement given that the magazine labelled Africa "the hopeless continent" a decade ago. Kenya’s exports of technology-related services have risen from $16m in 2002 to $360m in 2010. It is also a world leader in mobile payments — far ahead of China and India.

Although mobile payments are used widely in other developed countries, Kenya has — to its credit — "leapfrogged" the traditional stages of economic development to get there. This readiness and ability to implement new technologies is encouraging and it is this attitude of ambition that we can learn from our African neighbours. Within a few years, Kenya could emerge as a world leader in mobile payments and export the technology to countries across the world.

SA can also learn a lot from some of Africa’s creative industries, such as the Nigerian movie industry, which has overtaken SA’s to become the strongest in Africa. The Nigerian movie industry — known as "Nollywood" — is now worth $500m and produces more films than Hollywood every year. The films may not be international blockbusters, but they have huge appeal across Nigeria and the rest of Africa and prove that Africans have the creativity to compete in nontraditional industries.

This innovation across Africa is having an effect on SA in two ways. Most obviously, it’s an opportunity for us to export our products and knowledge and generally expand trade with other African nations, which in turn will generate jobs for the youth of our country.

SA has some great assets — its infrastructure, a well-developed services sector, the JSE — that give us the opportunity to provide a range of goods and services to help grow our own economy, but we can work harder to maximise these advantages.

The second effect is psychological. The reality is that countries such as Ethiopia, Kenya and Nigeria are tearing ahead and emerging as serious competitors for foreign capital. In short, this is forcing our government and business leaders to look more closely at their policies and approach to business and consider an extra dimension in their policy making. If SA is to retain its position as the leading economy in Africa, it can’t for a minute rest on its laurels.

We are not in competition with the rest of Africa, but we can learn from each other, which is why it is essential that we share technologies and collaborate to build strong regional industries that bolster intra-African trade. In the past I have called for the creation of a pan-African Brics as a way of achieving greater collaboration and working towards our collective economic interests.

Despite the growing confidence of our neighbours, SA is still an economic leader, coming up with ground-breaking ideas that challenge conventional thinking. But we mustn’t get complacent, which is why learning from our African neighbours, and adopting a more mature concept of the competition we will face from them, will ultimately enable SA to remain the economic leader.

• Ichikowitz is the executive chairman of defence and aerospace company Paramount Group and founder of the Ichikowitz Family Foundation.

BdLive

Stay ahead of the financial scamsters

BANK robbery has come a long way from the brazen operations of the Stander gang in the '80s. Things are a lot more subtle these days and attacks are more personal - it's your money they're after.

Scams abound, and despite the banks' efforts to educate customers about how to avoid them, people are taken in regularly.

Here are some of the more common ones and what you can do to safeguard yourself.

ATM FRAUD:

How it happens:

THERE are a few ways people can rob you at an ATM. They can physically take the money you have drawn or they can copy your card and enter your pin to draw the cash themselves. The card needs to be taken from you for a mere moment to copy the salient details, which can then be cloned on to another card. Your pin, a vital detail, also needs to be discovered. Card-copying or skimming machines can be hidden in a person's palm and pins worked out through looking over your shoulder, or with a well-positioned camera. Also, your card can be stolen from an ATM that appears to have jammed or "swallowed" it.

How to prevent it:

Take the time to assess who is in the vicinity . Try to choose an ATM you are familiar with and that is well lit and make sure you are visible to people in the area. Have your card in your hand so you don't have to fiddle in a bag or wallet and possibly be distracted.

Don't let anyone stand too close to you while you are at the ATM. Also, don't ask strangers for help, not even a security guard.

Shield the keypad when entering your pin. Don't ever force your card into an ATM. If it's jammed for any reason it might have been tampered with. If you think the ATM is faulty, cancel your transaction immediately and contact the bank.

Don't ever write down your pin.

When you've finished transacting put the card and money away before you leave the ATM.

Check your balance regularly and report discrepancies immediately.

Don't let your children, even teenagers, use your card because they are often soft targets.

PHISHING

How it works:

THERE are hundreds of variations, but essentially you get an e-mail that appears to be from a familiar bank, using recognisable and apparently legitimate logos and payoff lines. You might be told a debit order has gone off - one you didn't authorise - and if you have any queries you should "click on the link"; you might also be told your account will be frozen in the next 12, 24 or 48 hours if you don't open an internet banking session and update your details. The e-mail might also tell you the bank has installed new security software and they need you to log on to the banking site to test the functionality. Once you click on the link you are taken to a dodgy website where your details are recorded.

How to prevent it:

Assume unsolicited e-mail correspondence from your bank is a scam and check with them before you reply or otherwise respond. Don't ever enter your personal banking details into an e-mail or website - no bank will ever ask you for these to be sent through an online platform or on a telephone.

Delete suspicious e-mails immediately. Just opening the site might expose your computer to a virus.

There are differing views about how to access your online banking site most safely. Some banks say you should type in the web address physically rather than saving it as a favourite or bookmark, as phishers are able to reprogramme aspects of your browser with the right virus. Similarly, don't go to internet banking via a saved page or a hyperlink - a URL that often appears underlined and in a different colour to the rest of the page and which you click on to go to a new site.

You can ensure a site is legitimate by checking for the padlock icon in the lower right-hand corner of the banking site. By clicking on it you can verify who operates the site.

Also check the web address of your internet banking site before you enter your details. Make sure it is prefixed with https and not http, a sign the site is secure. If the address looks overly long there might be a problem.

Because of the virus threat don't ever access your bank from a public computer such as an internet cafe.

When you finish your online banking session, click the log off tab and close the browser window.

Most banks offer antivirus and anti-spyware software free to online customers. Make sure you have yours installed and up to date.

CARD SKIMMING

How it works:

AS with ATM fraud, your card needs to be taken from you for a moment so it can be passed through a skimming device. Skimming might happen when you voluntarily hand over your card to make a payment or when your waiter carries your card to the point-of-sale device in another part of the restaurant. Common scenarios are where the cashier moves the card below counter height to where the POS device - and the skimmer - are kept, or where they appear to be cleaning your card by rubbing it on a piece of their clothing. In a matter of seconds the information on the magnetic strip is copied, allowing your card to be replicated.

However, most cards nowadays require a pin to be entered before funds are released, and getting this detail often requires a second person to watch what you key in, or a camera might be positioned to record your pin.

How to prevent it:

Never let your card out of your sight. If the POS device can't be brought to you, get up from your table or out of your car and walk to it. Shield the keypad when you key in your pin and make sure you aren't distracted and that no one is peering over your shoulder.

Most banks now send you an SMS every time a transaction occurs on your card. It's a facility worth getting if you aren't already on this system so you are immediately aware of transactions not effected by you. Also, regularly and diligently assess your posted or online bank statements for anything you don't recognise. Get hold of your bank immediately if this is the case.

SIM-SWAP FRAUD:

How it works:

THIS scam is usually used in conjunction with phishing because your banking details are vital for the operation to succeed. Once fraudsters have your cellphone number they can approach your service provider and request a replacement sim card. Once they have this they are able to get the security messages and one-time passwords your bank sends to your cellphone when you add beneficiaries or transfer money out of your account.

How to prevent it:

Unless you are a rock star it's virtually impossible to limit the people who have access to your cellphone number, especially with companies actively selling our personal information to each other. But you can make sure you are alert to information coming in on your phone and immediately opt out of unsolicited advertising. Just SMS a reply using the words "quit" or "stop".

If you get an SMS warning that a sim swap has been conducted on your cellphone number and you have nothing to do with it, immediately contact your cellphone service provider and your bank.

If you suspect illegal activity is going on, change your internet banking log-on credentials on your internet banking site. This will make access to your account virtually impossible.

Never disclose your ID or cellphone numbers on a website unless you have verified the legitimacy of the site. Your bank already knows this number and won't ask you to give it again unless they need to verify your identity for an activity you have specifically requested.

Make sure your contact details are up to date at your bank and on your internet banking profile.

419 SCAMS

How it works:

YOU get an e-mail or fax, or even a posted letter, asking for your assistance in the movement of funds, for which you will be compensated.

The content of the correspondence can differ but essentially you are offered money to provide access to your account.

You might be asked to travel to meet the person, possibly even to a neighbouring country.

How to avoid it:

Use your common sense: if it sounds too good to be true, it probably is.

Never travel to meet the person. According to the South African Banking Risk Information Centre, victims who have been lured to foreign countries have been robbed, held for ransom and even murdered.

Never provide blank letterheads, invoices or your banking details unless you are sure of the recipients.

Be careful with your pin

Choosing a pin you can remember isn't easy, which is probably why thieves have about a one-in-11 chance of guessing it.

The Guardian newspaper reports that a study by cryptographers at Cambridge University found that one in 20 people use numeric patterns such as 4545.

One in 10 use a pattern on the entry keypad, like 2580 or 0852 (down or up the centre of the keypad). About 23% of users choose an important date, a third of these choose their own birthday. Since most of us keep evidence of our birth date somewhere in our wallets or bags, this sequence of numbers is clearly not a great choice.

Cambridge researcher Joseph Bonneau said if a thief finds the cardholder's date of birth, the chances of successfully guessing the pin are about 9%.

Another study reported by the Daily Mail revealed that nearly one in nine of us goes for 1234, with 1111 and 0000 close behind. These three make up nearly 20% of all pins.

The rarest code of all is 8068.

* This article was first published in Sunday Times: Money & Careers

Costs eating your retirement savings?

Government is correctly concerned about the high costs of saving for retirement – some products provided by the financial services industry, particularly life assurance retirement annuities, have among the highest costs in the world.

Although the costs of occupational retirement funds sponsored by employers, industry sectors and trade unions tend to be lower, because of the economies of scale, these funds are not immune to the grasping clutches of avaricious service providers.

This column highlights some of the unacceptable practices to which National Treasury (and trustees of retirement funds) could turn their attention.

DOUBLE-DIPPING ON ASSET MANAGER FEES

There is a pervasive use of perfidious performance fees that, in the main, are charged on top of annual asset management fees.

An annual asset management fee based on a percentage of the assets under management is, in fact, a performance fee. The better an asset manager does, the greater the value of the assets under management, so (to quote one of my daughters) duh, the more the asset manager earns.

So why is it regarded as necessary to charge separate performance fees on top of this, particularly when the fees reward performance above carefully selected benchmarks but do not severely punish under-performance? The other problem with “performance fees” is that they reward market performance, as well as any skill that an asset manager may or may not add.

What makes performance fees even more unacceptable is that retirement fund trustees should not be seeking to shoot the lights out when it comes to performance but to provide returns that will meet long-term objectives.

For example, the trustees of a defined contribution retirement fund should tell you upfront that, based on your belonging to the fund for 40 years, they aim to pay you out a capital lump sum at retirement that should provide you with a pension equal to 75 percent of your final pensionable salary.

The trustees then need to take account of the contributions that you (and your employer) will make to your fund and calculate the investment returns required to achieve the targeted pension. The fund’s asset manager should be instructed to create a risk/return portfolio that, over the long term, will provide the desired outcome. It is definitely not necessary for the asset manager to be paid twice over for this.

HIGHLY COMPLEX INVESTMENT STRUCTURES

A number of important issues have emerged as a result of the placing under provisional curatorship of the Rockland Targeted Development Investment Fund (TDIF) in August.

TDIF is a private equity fund that, in the main, invested R518 million of retirement fund assets in barren sand dunes, which it claims are worth an astounding R848 million because of the potential to develop an urban centre and mine sand.

Although the issue is not related directly to the Rockland affair, it has come to light that some of the affected retirement funds have an enormous and complex variety of investment mandates. One of the affected funds is the Telkom Retirement Fund.

According to a Financial Services Board inspection report, the Telkom Retirement Fund claims it invested R60 million in TDIF on the recommendation of its asset management consultant, RisCura.

It has emerged that the Rockland investment is one of about 50 mandates held by the Telkom fund. I believe that one of the mandates was not even with a registered asset manager.

Keeping tabs on 10 – let alone 50 – different investment mandates would seem to me to be a trifle difficult even for the most astute retirement fund trustees and their asset management consultants. I would suggest that the Rockland affair confirms my contention.

Many of the Telkom Retirement Fund mandates were/are with asset managers that provide alternative investment strategies, in particular private equity (companies that are not listed on a stock exchange) and hedge funds.

I have yet to be convinced that there is a need for any retirement fund to invest in a hedge fund, particularly in a hedge fund that seeks to gain from short-term differences or swings in the market.

Among other things, hedge funds claim they can protect you from downswings in the market. In 2008, about half of the hedge funds in the world disappeared because they got it so wrong.

Then there is the crazy argument of the local hedge fund industry that these funds are aimed at institutional investors, such as retirement funds, and not at individuals. As one of my daughters would say: duh! Aren’t retirement funds the savings of many individuals, with the added admonition that they should be looked after with extreme care?

There are far stronger arguments in favour of investing in private equity. There are major and small companies with great potential, the shares of which are not available on stock markets.

The biggest problem with hedge funds and private equity is obtaining accurate valuations. If you want the job done properly, it is extremely difficult and expensive to value these investments.

It seems to me that all too often retirement funds are taking all the risks, while the managers of alternative investment products and various advisers are creaming off the profits. The managers of alternative investments charge far more than do the managers of traditional assets.

It is not only the costs of the product provider that have to be taken into account, but also those of a retirement fund’s service providers that assist with the investments, both their selection and after-care. And then there is the very real danger of greater losses if something goes wrong.

DOUBLE-DIPPING ON INVESTMENT OF ASSETS

In recent years, the retirement fund services industry has created a new job for itself (that is, a new way to make profits from retirement fund members). It is called transitioning.

An example is RisCura, which, in its promotional material, says it has the skills to ensure the transition of assets from one asset manager to another when a fund decides to switch asset managers.

RisCura claims the outgoing asset manager “is required to sell all the assets into cash by month end”. This is simply not true: the underlying assets can be retained and transferred to the new manager, unless, of course, they are assets in a private equity fund or, in some cases, a hedge fund.

Investments in private equity funds are, by their very nature, long term. The initial decision to invest should be made very carefully to avoid having to switch in mid-stream.

RisCura claims that every time a fund switches asset managers there is a fire sale that sees assets liquidated at “six to seven percent below market value”.

Medium to small retirement funds need, at best, only one or two asset managers to run the bulk of their portfolios; larger retirement funds may need a few more. These appointments should be long-term, well-considered decisions.

When there is a switch of assets between asset managers, retirement fund trustees should:

* Instruct the outgoing asset manager that, wherever possible, the actual underlying assets must be transferred to the incoming manager; and

* Ensure that the investment mandate given to the incoming manager includes the orderly restructuring of the investment portfolio.

The fund’s asset management consultant must play policeman to ensure that the trustees’ instructions are carried out – that is its job.

The transition management costs charged by companies such as RisCura are about 20 basis points (0.2 percent) of the value of the assets transferred.

It is an unacceptable conflict of interest where a retirement fund’s asset management consultant advises on asset switches and also plays the role of transition manager.

RisCura claims the transition manager is the only functionary that has an overall picture – well, I doubt anyone has “an overall picture” with a fund such as the Telkom Retirement Fund.

It would be interesting to know how many transitions that fund has made over the years. I can’t tell you, because the Telkom Retirement Fund is not answering my questions. Perhaps it is time the fund’s members asked their trustees a lot of questions.

Remember, the Telkom fund issued a statement to its members after news of the Rockland provisional curatorship broke implying that R60 million is a trivial amount of money. Perhaps it also regards transition fees as trivial.



COMMISSIONS, ADVICE FEES ARE HIGH RELATIVE TO PENSIONS

Since the publication three weeks ago of National Treasury’s discussion documents on saving for retirement and pension products, Personal Finance has received a number of letters from investors and financial advisers about the commissions and fees charged for advice on pensions bought with savings accumulated in a tax-incentivised retirement scheme, be it an occupational fund or a retirement annuity fund.

Obviously, the advisers think what they are paid is reasonable and well deserved, but those who do the paying think otherwise.

The big gripe is advice fees that are based on a percentage of the assets rather than the income generated – a no-lose method of charging for advice that could range from excellent to appalling.

The problem is that commissions and fees are paid almost by default. Take guaranteed pensions, where the life office pays three percent of the amount as a commission. The once-off three percent is supposed to be the regulated maximum, but it has become the default charge.

In the case of investment-linked living annuities (illas), the percentage is being pushed ever higher by devious little schemes designed to camouflage the default charge.

For example, there is practice called all-in pricing whereby – in co-operation with various unit trust management companies – a single amount is deducted for all costs at unit trust fund level.

Generally, illa advice fees seem to range from 0.5 percent to about one percent a year – and this can be a lot of money.

Let’s use retirement capital of R10 million as an example and see the effects. With guaranteed annuities, the commission of three percent equals R300 000, which is a huge amount considering the work actually involved.

With illas, the situation over the longer term is even worse. If we use 0.5 percent as an example, it means the adviser earns R50 000 a year. This may seem considerably less than the R300 000 paid on the guaranteed annuity, but, as one of our readers put it, the commission should be seen in relation to what the pensioner receives.

If the illa pensioner draws down an income at the minimum rate of 2.5 percent, he or she receives an annual pension of R250 000. In other words, the adviser earns a commission that is 20 percent of what the pensioner receives.

Remember that it is the pensioner who sweated, went without and saved over his or her working life to receive the pension. The question is whether an adviser is now doing work equal to one-fifth of what the pensioner did to earn that money? I doubt it.

We can safely assume that a financial adviser will earn fees from a number of pensioners. If we are conservative and assume that the adviser has 10 illa pensioner clients, it means the adviser earns R500 000 a year. These fees are paid year after year, so the fees paid on an illa will soon exceed the three percent on the guaranteed annuity.

Although government is right to recommend that retirement fund trustees provide members with lower-cost annuity choices that exclude commissions and fees, it is also up to you, the fund member, to negotiate a rand-based advice fee, particularly on a large lump sum.

Most product providers and advisers avoid quoting fees in rands, because they know it is easier to get away with quoting percentages. Ask for the figures in rands and you will quickly realise how much you will pay, particularly in relation to what you will receive as an income.

Source: IOL

TWO INVESTMENT TIPS FOR TODAY

1. Always Invest with a Margin of Safety: 

Margin of safety is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities, but also to minimize the downside risk of an investment. In simple terms, Graham's goal was to buy assets worth $1 for $0.50. He did this very, very well. To Graham, these business assets may have been valuable because of their stable earning power or simply because of their liquid cash value. It wasn't uncommon, for example, for Graham to invest in stocks where the liquid assets on the balance sheet (net of all debt) were worth more than the total market cap of the company (also known as "net nets" to Graham followers). This means that Graham was effectively buying businesses for nothing. While he had a number of other strategies, this was the typical investment strategy for Graham. This concept is very important for investors to note, as value investing can provide substantial profits once the market inevitably re-evaluates the stock and ups its price to fair value. It also provides protection on the downside if things don't work out as planned and the business falters. The safety net of buying an underlying business for much less than it is worth was the central theme of Graham's success. When chosen carefully, Graham found that a further decline in these undervalued stocks occurred infrequently. While many of Graham's students succeeded using their own strategies, they all shared the main idea of the "margin of safety."


2. Expect Volatility and Profit from It: 

Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Graham illustrated this with the analogy of "Mr. Market," the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. At other times, he is depressed about the business's prospects and will quote a low price. Because the stock market has these same emotions, the lesson here is that you shouldn't let Mr. Market's views dictate your own emotions, or worse, lead you in your investment decisions. Instead, you should form your own estimates of the business's value based on a sound and rational examination of the facts. Furthermore, you should only buy when the price offered makes sense and sell when the price becomes too high. Put another way, the market will fluctuate - sometimes wildly - but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued.

Poll: Business Owners Under Age 40 More Optimistic USA

With the USA election just four weeks away, two different small-business polls have contrasting takes on the optimism levels of the country’s entrepreneurs.

The National Federation of Independent Business Tuesday released its optimism index for September, which fell 0.1 points to 92.8, which is still a recession-level reading. Job creation plans fell 6 points, and job openings fell one point, with more firms reporting decreases in employment than those reporting increases.

However, the outlook for expansion did see some improvement, with those who view the current period as a “good time to expand” gaining three points, and the number of business owners expecting conditions to be better in six months gained four points to a net 2%.

According to the NFIB index, of those (51%) businesses who did try to hire in the past three months, 41% reported few or no qualified applicants for open positions. The percent of owners reporting hard-to-fill openings also fell one point to 17% of all owners.

The NFIB index is based on the responses of 691 randomly-sampled small-business members.

Meanwhile the National Association for the Self-Employed, Small Business Majority and the Association for Enterprise Opportunity, Tuesday released a poll which found businesses with 10 employees or less are feeling quite optimistic about the future of their business and the economy. In addition, more than half reported an increase in sales or revenues in the past two years, and 50% plan to hire in the next two years.

The NASE poll of 470 small-business owners was conducted by Greenberg Quinlan Rosner Research. More than two-thirds report access to credit is an issue, and four-in-ten who applied for credit last year were denied. In addition, three-in-five said they need up to, or more than, $50,000 in the next three years to sustain and grow.

However, in the NIFB index, only 2% of businesses report credit is a top problem, compared to 21% each citing taxes, regulations, red tape and poor sales as the worst enemy. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past quarter was unchanged at a -13%. The net percentage of owners expecting higher real sales was unchanged at 1% of all owners (seasonally adjusted) and down from the year high of net 12% in February.

Fifty-percent of those in the NASE poll said their business is doing well, compared to 10% who said they are not. More than half employed a contractor or 1099 employee in the past year, and nearly one-third have hired a full-time employee in the past year.

Those business owners under age 40 were even more optimistic, with 67% reporting they are doing well.

Many of those surveyed for the Small Business Majority and NASE were micro-businesses, and refute the notion that this group is made up of merely “hobbyists,” the poll said. Instead, nearly 75% of those surveyed report their micro-business as their sole source of income, and 57% said they have been in business for a decade or more.

Major issues for the businesses in NASE’s survey include a need for marketing and sales services (48%), tax preparation services (27%) and technology (21%). Finally, nearly half (49%) identified they are Republican or lean Republican. Thirty-five percent said they are Democrats or lean Democratic, while 1% said they are independent, and 7% identified as “other.”

Four ‘typical’ investor types. Which one are you?

DIFFERENT clients have different needs and stockbrokers have different specialities. Here are the ‘typical’ investor archetypes.

The young Saver

Jabulani has recently landed his first decently paying job after completing his articles at a law firm. With his increased salary he’s decided he is going to invest in the stock market.

He thinks he can make some money by reading research and making a few trades every month of a few thousand rand each. He enjoys attending courses and learning more about how to trade but wants to work in the online world without having to use old school telephones.

Jabulani does one or two trades a month of R5 000 each. Based on the cost, his research and education needs, trading behaviour and preferred tools, Standard OST comes out tops.

Lump-sum investor

Suzie recently received a lump sum from a trust fund left to her by her parents. She has no need for the cash any time soon and has decided to invest it directly on the stock market. She knows the stock market provides the best avenue for long-term wealth creation but is somewhat wary of the risks.

She wants someone to give her advice, but still wants to be in control of the ultimate investment decision. She is going to sell some of her portfolio every year to fund a holiday for her family and will want advice on which shares to sell.

Suzie’s needs will best be met by a stockbroker able to give substantial advice and guidance. This is the specialisation of “old school” brokers who mostly operate over the telephone and in person. BJM comes out tops, but is closely followed by BoE.

Active day trader

Gerhard recently sold his insurance broking business and has decided to actively trade the market to make a profit. He wants to speculate on indices and certain shares he knows well, but close out his exposures every day. He will risk only a small portion of his capital but wants leverage to maximise his exposure. He needs direct market access to execute rapid trades.

Gerhard is directly in the target market of CFD providers with his need for short-term, low-cost quick trading. IG Markets, Saxo Capital Markets and Global Trader could service him well, but we’ve also given credence to PSG and Standard OST, which provide a wider range of instruments and good CFD services.

Sophisticated Exec

Judy is a senior executive at a listed company. She has accumulated significant wealth through shares and share options she holds in the company. When she is allowed to in terms of JSE rules, she likes to limit her concentration risk by using derivatives such as zero-cost collars and puts.

She is financially sophisticated but does not have the time to pay attention to her portfolio and wants a reputable broker who will advise her.

Judy needs a broker that can provide sophisticated over-the counter equity structures and always be available to provide advice. In our view, Investec remains the best positioned broker for this service, with SPI and BJM also very capable.

Source: BD Live *This article was first published in Investors Monthly

Rand firmer on strike resolution news

THE rand was firmer in late trade on Friday as a result of an agreement being reached regarding the truck driver’s strike, and a firmer euro. The local currency now awaits the Chinese trade balance data, due this weekend, that will possibly give some further direction.

At 4.20pm on Friday, the rand was bid at R8.6097 to the dollar from Thursday’s close of R8.6631, Wednesday’s close of R8.7328 and Monday’s worst level of R8.9945.

It was bid at R11.1725 to the euro from its previous close of R11.1998 and at R13.8437 against sterling from R13.8999 before.

The euro was bid at $1.2970 from Thursday’s close of $1.2925 and $1.2853 at Wednesday’s close.

"It has been a relatively quiet trading day today," said Tony van Dyk, currency dealer at the Iquad Group. "We expected the rand to strengthen a bit more than what it did, but we have seen a resistance level at R8.60.

"It will probably trade between R8.50 and R8.75 in the short term."

Absa Capital said if China’s demand for SA imports proved yet again to be uninspiring it would highlight South Africa’s deteriorating fundamentals such as the trade balance. "We thus remain of the opinion the rand remains vulnerable in the near term and our scenario has now shifted up to within an R8.60 to R9.00 range to the greenback

"This trading band could well persist until this month’s medium-term budget policy statement on the October 25 and until (the ANC’s) December elective conference is out of the way."

With regard to labour strike issues, it was reported on Friday that the National Union of Mineworkers (NUM) said intimidation prevented it from communicating with all its members ahead of further wage talks with the Chamber of Mines. "We are hoping to reach more of them during the course of the weekend‚" NUM’s Lesiba Seshoka was reported as saying.

Meanwhile, the Labour Court on Friday interdicted South African Transport and Allied Workers’ Union members from embarking on secondary strike action in support of the primary one which underway in the road freight industry.

Johan Botes, director in the employment practice at Cliffe Dekker Hofmeyr, said Judge Anton Steenkamp held in a detailed judgment that Transnet satisfied the requirements for an interim interdict.

A wage deal was signed at the road freight bargaining council offices in Johannesburg on Friday ending a three-week long truck drivers strike. The agreement was announced by the Road Freight Employers’ Association after wage talks resumed on Thursday evening.

Elsewhere, the NUM said it would march to Impala Platinum headquarters on Saturday to present a memorandum of grievances. The marchers would start gathering at 9am in Rosebank, Johannesburg.

Strikes at Petra diamond’s Koffiefontein and Finsch mines in the Northern Cape had now been resolved, the NUM said on Friday.

In another development about 3,800 clothing workers in Newcastle were on strike for a "living wage", Andre Kriel, the Southern African Clothing and Textile Workers’ Union general secretary, said on Friday.

Furthermore, 3,000 municipal workers are to down tools on Monday and take to the streets in North West province over corruption. These protests would be followed by national action where all South African Municipal Workers Union (Samwu) members would bring municipal services across the country to a complete halt, Samwu said in a statement on Friday.

Source: BY MADELEINE VAN NIEKERK BD Live

Manufacturing, mining figures better than expected

MANUFACTURING and mining performed better than expected in August, official data showed yesterday, although production remained sluggish in response to slackening world demand and labour unrest in the mining industry.

The two sectors together account for about a fifth of the economy’s overall output, and there is mounting concern that their problems will significantly curb economic growth and job creation this year.

Manufacturing production rose by 3% compared to the same month last year, slower than the 6.3% rise seen in July but surpassing expectations of a contraction, according to figures from Statistics SA.

Growth is seen as unlikely to hold up in September given the fact that a key survey, SA’s purchasing managers index, showed that activity fell sharply during the month.

"While the numbers may have been surprising, and show that manufacturers are still alive and kicking, it doesn’t mean things are getting better," said Coenraad Bezuidenhout, executive director of the Manufacturing Circle, an industry body.

"We expect the numbers to deteriorate quite a bit in September. Our widening trade deficit is an indicator, and then of course we have the labour unrest."

Weakness in the rand may have given the sector some respite, but this was unlikely to last, he added.

Manufacturing has been affected by mining strikes as there are product linkages between the sectors.

Growth in mining output slowed to a meagre 0.8% year on year, down from 7.1% in July, other figures from Statistics SA showed. During the month itself, output fell by 1.1%.

Analysts had expected a sharper fall in production due to a prolonged strike at Lonmin’s platinum mine at Marikana, in which 46 people died.

Standard Bank economist Thabi Leoka said a possible reason for the more positive outcome could be the fact that the refining for the Lonmin mine takes place off-site.

"We may therefore only see a more significant impact in the September and October numbers," she said. "The mining sector outlook is bleak and the impact of strikes on GDP (gross domestic product) will be significant."

Labour unrest has spread from the platinum to the gold industry, where about 40% of mines are idle. This is worrying, and although mining accounts for only 5% of overall economic output, it generates about half of SA’s export revenue.

The mining data showed that production of platinum group metals declined by 1.9% year on year in August, after a rise of 11.7% in July.

Investec economist Annabel Bishop pointed out that capacity utilisation rates in the manufacturing sector were still low compared to pre-2009 levels and were unlikely to recover soon, given the weakness in both domestic and global growth.

BY MARIAM ISA Source: BD Live

We are predicting the Reserve Bank’s next interest rate decision

INFLATION could breach the upper end of its official target range by the year-end if the rand continues to depreciate, hitting consumers in their pockets and complicating the Reserve Bank’s interest rate decisions.

The currency has clawed back some of its losses but its slide to a three-year low of nearly R9 to the dollar this week puts it on course to push up the cost of food and fuel, which will fan inflation.

The rand also depreciated against the euro and the pound, taking a hammering from negative investor perceptions of South Africa prompted by a spate of wildcat strikes in the mining industry.

Analysts believe that after this week’s sharp plunge, the volatile currency will stabilise in a weaker range, which will nudge inflation closer to the top of its 3% to 6% target range.

But if the labour strikes which have also hit transport spread to other sectors of the economy, investor perceptions of South Africa will worsen, putting more pressure on the currency.

The gaping shortfall on South Africa’s deficit on the current account — its broadest measure of trade in goods and services — is also a threat to the rand, as the foreign portfolio inflows which have financed it so far this year have reversed.

If these factors conspire to push the rand beyond R9 to the dollar, inflation could breach its target range and the economy will be set for a painful bout of stagflation — which is a combination of sluggish growth, high unemployment, and rising inflation.

"Sentiment is very negative at the moment — there’s lots of instability in the economy and until things settle the rand is going to remain vulnerable," says Nedbank economist Isaac Matshego.

"We could see inflation getting closer to 6% if the rand stabilises at current levels. If it weakens further, going above R9 to the dollar, inflation could breach the target and remain outside of the band for most of next year."

A breach of the inflation target would normally force the Bank to consider raising interest rates, but this is out of the question in the face of a worsening global and domestic economic slowdown.

Nonetheless a pickup in inflation will make it very hard for the Bank to consider cutting interest rates again, after a surprise reduction in July. Local money markets are betting that there is more than a 50-50 chance of a rate cut by January next year.

The rand was trading at about R8.64 against the dollar late yesterday. Between May and September, the unit traded in a range between R8 and R8.50. Analysts say the rand is now likely to hover between R8.50 and R9 to the dollar for the rest of the year.

Investors will be looking towards the Treasury’s medium-term budget policy statement later this month for reassurance that fiscal discipline remains on track, which will help to support the currency. But the rand could also take a knock if the electoral conference of the African National Congress at the end of this year comes up with populist policies which would spook markets.

"A lot of bad news is already priced into the rand," says Absa Capital currency strategist Michael Keenan.

"It all hinges on how the strikes play out — clearly if they became more widespread the rand will weaken further to between R9.20 and R9.60 to the dollar," says Mr Keenan.

Econometrix Treasury Management MD George Glynos says the risks were tilted towards the rand weakening rather than strengthening. "That will tend to impact on inflation — between now and the end of the year a breach of the upper end of the target range is possible," he said.

The main conduits for higher inflation would be the rising cost of food and fuel, which together account for about 18% of the weight in the goods and services measured by the consumer price index.

If transport costs are included, the weight rises to about 25%.

Domestic petrol prices reflect the cost of importing fuel, which is denominated in dollars. Global grain prices are also dollar denominated, and affect local markets.

In its monetary policy statement last month, the Bank pointed out that the rand’s exchange rate was a "potential" risk to the inflation outlook, particularly if there was an unsustainable widening of the current account deficit.

The shortfall widened to 6.4% of gross domestic product in the second quarter of this year from 4.9% in the first quarter — its biggest in four years.

The worry is that the hefty foreign purchases of bonds which have financed the deficit so far this year will slacken — in the past 10 days there have been net sales of R6.1bn, according to JSE figures.

Source: BD Live

South Africa Reserve Bank governor revives rate cut bets

(Bloomberg) -- South African Reserve Bank Governor Gill Marcus rekindled speculation she’ll cut borrowing costs as growth stumbles, sparking the biggest decline in five weeks in securities used to bet on the direction of interest rates.

Forward-rate agreements, used to wager on rates, dropped the most since Aug. 23, signaling investors are increasing bets on a reduction in the next six months. The yield on two-year swaps, contracts used to secure borrowing costs, fell six basis points to the lowest since July 27. That compares with a one basis-point increase in the yield of similarly dated contracts in Turkey and Russia and rates that were little changed in Poland and Malaysia, according to data compiled by Bloomberg.

The Reserve Bank, which cut its benchmark repurchase rate for the first time in 20 months in July to spur the economy, held the rate at 5 percent on Sept. 20 because of rising food and fuel prices. Last month’s decision “was not an easy one,” Marcus said yesterday in a speech to the Nordic Business Chamber of South Africa in Johannesburg.

“Last week we would have thought a cut was out of the question,” Jeremy Fox, a fixed-income trader at FirstRand Ltd.’s Rand Merchant Bank unit, said by phone from Johannesburg yesterday. “When she comes out and says how close they were to cutting rates, maybe we underestimated how close they were to making that decision.”

‘Home-Grown’

Policy makers led by Marcus unexpectedly cut the benchmark rate to the lowest level in more than 30 years on July 19 to 5 percent. Since then, reports have shown that manufacturing output, which accounts for about 15 percent of the economy, contracted in the second quarter and probably shrank again in the next three months as Europe’s debt crisis sapped demand for the nation’s goods.

The yield on the government’s 6.75 percent debt due in March 2021 fell nine basis points to 6.58 percent yesterday and was unchanged at 9:35 a.m. in Johannesburg. The rand fell 0.8 percent to 8.4336 per dollar. The currency has weakened 4.1 percent this year.

South Africa is “beset by its own challenges” amid “extreme uncertainty” in the global economy, the outlook for which has weakened, Marcus said. Reaching last month’s decision was as difficult as any of the central bank’s policy announcements, she said.

Illegal Strikes

The Monetary Policy Committee cut its growth forecast for South Africa to 2.6 percent for this year at the Sept. 20 meeting, from 2.7 percent. It cited concern about Europe’s debt crisis and illegal strikes that started at Lonmin Plc’s Marikana platinum mine in August and swept across South Africa’s mines, with almost one-fifth of the industry’s 500,000 workers involved in protests.

“The probability of the MPC cutting rates has got to be 50-50,” said Mark le Roux, who oversees fixed-income investment among $29 billion of assets at Cape Town-based Coronation Asset Management Ltd. “The MPC is very focused on growth and very focused on what’s going on in the global scenario.”

Inflation quickened to 5 percent in August from 4.9 percent a month earlier, the first increase in the rate in four months. While inflation will remain within the bank’s target of 3 percent to 6 percent through 2014, rising food and fuel prices may spread in the economy, Marcus said.

Supply Shocks

“Supply side shocks in the form of higher food prices, due to droughts in the U.S. and some parts of Eastern Europe, and resilient international crude-oil prices pose potentially serious risks to the outlook,” Marcus said. “The combination of slowing growth and rising prices presents difficult challenges for monetary policy.”

The government raised the gasoline price 1.9 percent today, after increasing it 8.4 percent last month. Oil, which South Africa imports, has gained 1.2 percent in the past week. Corn rose to a record $8.49 a bushel on Aug. 10 on the Chicago Board of Trade.

The extra yield investors demand to hold South African dollar bonds rather than U.S. Treasuries dropped 85 basis points, or 0.85 percentage point, this year to 176, as investors were lured by rates higher than those available in Mexico, Brazil, Malaysia and Hungary, according to JPMorgan Chase & Co. indexes. That compares with an average yield spread of 303 for emerging markets.

Wider Deficit

The cost of protecting South African debt against non- payment for five years using credit-default swaps fell two basis points yesterday to 142, indicating improved risk perceptions, according to data compiled by Bloomberg. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to its agreements.

The current account deficit will probably end the year at 5.8 percent of gross domestic product, limiting the room the Reserve Bank has to stimulate the economy, Mohammed Nalla, an analyst at Johannesburg-based Nedbank Group Ltd. said by phone yesterday. The current account is the broadest measure of trade in goods and services. The shortfall widened to 6.4 percent in the second quarter and may increase further after the trade deficit jumped to the most in seven months in August.

“When international investors look at a country the warning flag is around the 6 percent level,” Nalla said. “We are getting pretty close to that territory and that’s going to go firmly on the governor’s agenda in terms of something she should be looking at, at the next MPC meeting.”

“The spillover of global factors to our economy can be profound, changing the size and direction of capital flows, global inflation, trade, commodity prices, and more,” Marcus said. South Africa must develop policy and regulatory frameworks and adjust its policy stance “to do as much as we can to offset harmful economic effects from abroad,” while encouraging local economic growth and development, she said.

“She certainly isn’t talking about rate hikes,” Coronation’s Le Roux said. “And that’s just rallied the bonds and the forward-rate agreements.”

Source: Bloomberg

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Moody's downgrades South Africa's credit rating by one notch

Moody's Investors Service cut SA’s credit rating by one notch to Baa1 from A3 on Thursday, citing worries about the country's institutional strength, investment climate, as well as future political stability.

The ratings agency lowered its A3 rating for government bonds in foreign currency by one notch to Baa1 and kept a negative outlook over what it described as “policy uncertainty” ahead of the elective conference of the African National Congress (ANC) in December.

“The revision reflects Moody’s view of the South African authorities’ reduced capacity to handle the current political and economic situation and to implement effective strategies that could place the economy on a path to faster and more inclusive growth,” Moody’s said.

Credit ratings help to determine a country’s cost of borrowing and affect investors’ appetite for assets. The decision by Moody’s brings its rating for SA down to the level set by Fitch and Standard & Poor’s.

The Treasury said in a statement all of the reasons given by Moody’s for the downgrade were being addressed through government programmes. “The core of SA’s policies remain stable and predictable.”

The decision came ahead of SA’s inclusion on Monday in Citigroup’s world government bond index, which was expected to add to the hefty purchases of government bonds by foreign ers seen this year.

“The government has totally underestimated the potential for a downgrade,” Nomura International economist Peter Attard-Montalto said. “We think the prospect for further downgrades from other agencies remains very high as the strikes in SA spread both within the mining industry and elsewhere in the economy.”

ANC secretary-general Gwede Mantashe said the government was capable of dealing with SA’s complex situation. But the private sector was on an “investment strike” as new jobs were only being created by the public sector.

Moody’s said ANC recommendations for “more radical policies” and “decisive action” to effect continued transformation at its policy conference in June suggested increased government intervention in the economy was likely.

South Africa's rand dipped 0.6 percent against the dollar on Thursday after Moody's cut the country's government bond rating, 24 hours ahead of its inclusion into Citigroup's World Government Bond Index.

Source: SA Commercial Prop News