Three investments curveballs - and what investors can do about them

We are in the fortunate position of speaking to hundreds of advisors and thousands of investors every month, which gives us an opportunity to read the pulse of the investing psyche of the nation. So what are investors thinking, what are they most concerned about and how should they react? There seem to be three big issues many investors are grappling with:

The South African political and macro-economic environment

The avalanche of negative news, accelerated by the damning revelations of the #guptaleaks, has been the primary topic of many a headline and dinner party conversation. It was inevitable that the political shambles and lack of principled leadership would erode both business and consumer confidence. This has resulted in subdued economic growth which is simply insufficient to address the country's many challenges. Worryingly, this has been coupled with a lack of fixed investment which is in itself a warning sign for the future growth of the economy. 

Many investors have been surprised by the relative resilience of the Rand and there has been a noticeable increase in interest as to where and how to invest offshore. Whilst predicting the currency has proved to be a notoriously difficult and mostly futile exercise, having a well-diversified global portfolio aligned to your long-term goals managed by outstanding managers is without doubt a sensible strategy.

In this newsletter we provide detailed insights from a number of our international portfolio managers, many who have managed successfully through numerous business cycles.

Slow, steady increases in taxes

The second major issue investors face is the slow but steady thief of rising taxes. With each new budget, taxpayers seem to be faced with an increased burden either via rate or tax-creep changes (when allowances do not keep up with inflation) of both income and capital gains tax. Sadly, this trend shows no signs of abating as politicians battle with slower growth and increasing inequality.

The combination of these factors, together with below-inflation wage growth and sluggish employment means that investors have a dwindling pool of discretionary money to invest and must also contemplate the effects of lower after-tax returns when they model future expectations.

A sensible response is for investors to ensure they structure their investments in the most tax efficient manner. This can be done by making maximum use of the various tools available. These include tax-free investments (invest up to R33,000 per person per year), deductions for retirement (up to 27.5% of income), allowances such as the annual CGT and interest allowances and assessing all investment opportunities on an after-tax basis. Having a tax-efficient investment portfolio can also add significant value by locating tax inefficient assets (such as fixed income and property) in vehicles that do not attract tax.

Low return environment

The third major challenge is that recent years have seen investors realise much lower returns than they had become accustomed to in the prior decade. On top of this, many investment managers are warning that future return expectations should be tempered because of relatively high valuations and lower potential economic growth. 

This is even more difficult to respond to as there is no easy solution. Investors should revisit their plans and ensure that their long-term return assumptions do not include overly optimistic expectations. The earlier one is aware of potentially inflated assumptions; the sooner one can make any required adjustments such as saving more, working longer or drawing less in retirement. It is also crucial to ensure one has optimised one’s portfolio in terms of asset allocation, tax-efficiency and costs.

These are three topical questions that raise real challenges. We hope this and future newsletter(s) provides some insights to help address them.

Happy investing

Nic