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Financial News
Can you profit from inflation and higher interest costs?
28 September 2022
How you can prepare for your financial future, and possibly thrive, amid fluctuating markets.
We appear to be heading into the potentially unpleasant combination of increasing inflation and higher interest costs.
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South Africa's annual inflation rate eased to 7.6% in August of 2022, from an over 13-year high of 7.8% in July. The South African Reserve Bank also hiked interest rates by 75 basis points last Thursday. The new rate means the prime lending rate will increase to 9.75% from 9%.
In some ways, these changes are a return to past averages. The Inflation Rate in South Africa averaged 8.73% from 1968 until 2022, reaching an all-time high of 20.70% in January 1986 and a record low of 0.20%in January 2004.
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Interest Rates in South Africa averaged 11.98% from 1998 until 2022, reaching an all-time high of 23.99% in June of 1998 and a record low of 3.50% in July 2020.
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We might also take some comfort in the fact that this appears to be a worldwide phenomenon.
Last week, the U.S. Federal Reserve approved its largest interest rate hike since 1991 and index data reveals that the rate of U.S. inflation rose again in May to 8.6%, which is a 40-year high.
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How to profit from inflation
History indicates that several asset classes have performed well in past high inflationary environments.
Commodities
Commodities like gold, oil, and even soybeans should increase in price along with products that are made with them.
Bonds
Inflation-indexed bonds are designed to protect against increasing inflation. Businesses that supply necessities like food usually fare better as they are more able to increase prices.
Real estate
Property is normally a good inflation hedge as landlords are usually able to increase rents. However, the increasing interest rates and transitional period that the property industry finds itself in suggests property investment should be approached cautiously.
Investment funds
COVID19 taught us all how important it is to have an emergency fund, a buffer, but we need to be aware that we need to achieve a return of 7.6% per annum just to keep up with inflation.
Interest rates are on an upward trajectory and so long-term fixed rates are likely to go up in the future. Then we might consider investing in income funds, inflation-linked funds and even investing the excess in equities.
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Click here to view our investment portfolios and platforms.
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How to prepare for inflation and rising interest rates
A sensible first step is to review short- and long-term financial plans to see what adjustments you might need to make. Reducing or deferring costs and increasing income will assist greatly.
Higher inflation could mean deferring expenditure on capital projects or spending your holidays at home instead of travelling.
Reducing debt ahead of further increases in interest rates and pausing any increase in debt. Or it might require something more extreme, like taking on a second job or starting a side business.
Review your budget
When reviewing your budget to allow for higher interest costs and increasing inflation, here are a few important things to consider:
1. Review interest-bearing debt
Aim to clear higher interest debt first, and try to consolidate debt in lower-cost areas where appropriate. It is important to consider if further increases in interest rates are affordable. If not, consider fixing rates, consolidating debt, etc.
2. Review your home and car insurance
Investigate whether costs can be reduced (arrange a free consultation with me).
3. Complete an energy audit
Consider switching to LED bulbs, lowering the setting on your thermostat, servicing your air conditioner to make sure it is running efficiently, etc.
4. Eliminate unnecessary standing orders
For example, review any subscriptions, bank fees, etc.
5. Plan food shopping
Buying food in bulk once a week, planning menus, and incorporating more meatless meals into your diet can all reduce the impact of escalating food costs.
6. Explore opportunities to increase your income
Could you negotiate a pay rise with your employer? Change jobs for a better package? Take on a second or part-time job? Start a side hustle?
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Each option has its pros and cons, as well as its risks and rewards. But growing your income may be one of the best ways to protect yourself and your budget against the impacts of inflation over time.
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Know your options
If you would like any assistance in reviewing your financial plan please don’t hesitate to contact me at peter.hodson@liblink.co.za. Or call me directly on +21 447 9889 or 082 555 1 333.
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Financial vs Physical Emigration
13 September 2022
Should you stay in South Africa or should you leave?
Almost every meeting I am having with my clients at present turns to the question of the boiling frog.
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The concept is that if a frog is suddenly placed into boiling water, it will jump out. But if the frog is placed in warm water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death.
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We all know stories of friends, colleagues, and family members who have left or are planning to leave South Africa. The term "boiling frog syndrome” is a metaphor used to describe the failure to act against a problematic situation which will increase in severity until reaching catastrophic proportions.
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Many South Africans are asking themselves if the time has come to leave the country or if indeed it can be fixed.
Should you leave South Africa or stay?
The Finance Ghost wrote a very insightful and interesting article which I think gives a sensible framework in which to consider this question.
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1. Crime
The initial test we need to apply in considering this question is crime. No country is totally safe. In fact, we have just returned from Italy where we were constantly warned to watch out for pickpockets. However, what makes South Africa different is violent crime.
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The article suggests that if we can mitigate the crime risk to a point that we feel safe then we can stay, but if we cannot then we really must consider relocation.
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I moved from Johannesburg to Cape Town in 1997 because I found myself attending dinner parties and being the only person who did not have a story connected with crime. I realised that if a violent incident happened to me or one of my family members, I would probably relocate. Therefore, it made sense to move before the incident happened.
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We have mitigated the risk by living in Cape Town behind an electric fence with security cameras and armed response, etc. We love the Cape Town life but if the day comes when we cannot mitigate the risk and live a full life, we will have to review our position.
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2. Financial vs Physical Emigration
The next step is to understand the key differences between financial and physical emigration.
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Financial Emigration
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It is important to realise that you don’t have to live where your money is. If you’re feeling uneasy about where South Africa is headed then building up hard currency assets or income streams is a sensible plan. Even if you feel positive about the long-term future of South Africa, geographical diversification of investments makes sense, as does access to hard currency.
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Should the value of the Rand continue to devalue, we risk becoming prisoners who cannot travel to hard currency areas. Current exchange control rules allow us to move R1 million offshore without SARS approval, and another R10 million per annum can be invested with SARS permission (this is usually given provided the taxpayer is in good standing). Offshore unit trust platforms and hard currency offshore endowment wrappers all facilitate investing offshore.
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I have spoken to two families who chose to stay in Zimbabwe. They love the country and never plan to leave. However, when they saw the political changes coming, they reduced their fixed assets (property investments, etc.) in Zimbabwe to a minimum, transferred the majority of their investments offshore into hard currency, and arranged their income stream to be in USD.
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Physical Emigration
There are 2 important variables to consider when making the decision to physically move or not. They are: proximity to family and income prospects in South Africa.
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Of course, these prospects differ from person to person according to the makeup of your personal and professional life. But the idea is this: if you are unable to mitigate your safety risks and your income prospects in South Africa are unfavourable, then considering physical emigration might be the solution.
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In our own family, all four sons made the decision to leave. Each of them is married and lives abroad with their family. Our eldest lives in Washington, the second in Brisbane, the third in Northern Ireland, and the youngest in London. They all miss Cape Town and love to ‘come home’ to visit, but for them, the decision was about career prospects.
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One of our closest friends has all their children living in London and has bought an apartment there with a view to spend part of the year in London with the family while making frequent visits home to see friends and family.
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The brighter side
I had the privilege of attending the Liberty Executive Consultant Conference in Sun City earlier this year and came away greatly encouraged by what many of the speakers had to say.
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Pravind Gordhan urged us to act on data, not on rumour. He pointed out that the judiciary and NPA are making arrests, seeking the extradition of the Guptas, fighting syndicates in Eskom, and lifestyle audits for public figures are coming.
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He referred to the conversations countries were having at The World Economic Forum Annual Meeting in Davos earlier this year. Africa has the resources and arable land that the world needs. However, each country must decide if they are pro-Putin or pro-democracy.
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Pravind challenged us to think differently about the current model of capitalism that is not working for many people around the world. He insisted that if each of us is committed to doing what we can to uplift our communities then a bright future is possible for all of us.
South African entrepreneur and founder of Isizwe.com, Alan Knott-Craig, calls this rethink ‘profit with a purpose’. He maintains an optimistic mindset and challenges us to consider if we can really be happy anywhere else.
Bruce Whitfield spoke about moving from ‘just in time’ to ‘just in case’ – a move towards localisation of production that should bode well for increasing manufacturing in South Africa.
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Stay or leave – a final thought
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I have been through a number of these cycles since I moved to South Africa in 1990. I believe each of us must make our own call and respect other people’s decisions even if they are different from our own. I hope that this framework will help you in your thinking.
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For me, building up hard currency assets offshore makes good sense regardless of the long-term future of our beloved country. We are all in danger of becoming overwhelmed by bad news and false narratives.
Although the world is facing many challenges at the moment, I choose to focus on what I can control and how I can avoid negative influences that are based on rumours rather than facts. Overall, I aim to be prepared to mitigate risk where I can.
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Know your options
If you would like to explore your options for financial or physical emigration, book a free appointment at peter.hodson@liblink.co.za. Or call me directly on +21 447 9889 or 082 555 1 333.
A few important practical tips to help safeguard your income during the current financial crisis.
27 June 2022
How to secure your income
There is no doubt we are living in challenging and uncertain times that are having a tremendous impact on our finances and investments.
With COVID-19, rising unemployment, inflation, the Ukraine-Russia conflict, political instability, and devaluation of the Rand, the only thing certain about the future is how unpredictable it has become.
In light of this, how secure is your income and what can you do to safeguard it until long after the dust settles?
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Multiple income streams
Depending on your life stage, most people tend to have one major source of income. During your working life that tends to be a salary, and in retirement a pension. The first way to secure your financial future is to increase the number of income streams. This might mean developing a side hustle, renting out a room on Airbnb, building an investment portfolio, taking a second job, etc. The more income streams the greater the sense of security.
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Our ability to work
Where the ability to work is a major source of income, we can secure our monthly income against ill health. Employers in South Africa are only obliged to pay 30 days of sick leave in a 36-month cycle, thereafter employees need to claim from the UIF which has financial caps. However, it is possible to insure against loss of income due to health reasons using income disability insurance.
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Diversify your investment income
Numerous studies have shown that asset allocation is the most important indicator of long-term investment returns. Don’t throw all your financial eggs into one investment basket, rather diversify your investments to safeguard your income if one fails. Too much money invested in volatile asset classes can cause losses but too little leads to underperformance. Inflation will eventually eat the buying power of a portfolio that has been too conservatively invested.
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Geographic diversification
South Africa represents less than 0.5% of the world economy. Investing 100% of your wealth in RSA means missing out on investing in global industries like biotech and renewable energy, and world-class businesses like Facebook, Amazon, etc. If all your income and assets are denominated in Rands you miss the opportunity to diversify and reduce the long-term risk to your portfolio.
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Inflation
We appear to be entering a period of higher inflation in South Africa. A fixed income in an inflationary environment can be a recipe for disaster. This is why it is crucial to secure your income.
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Tax
Planning your income streams in the most tax-efficient manner is vital to ensuring long-term financial growth. After all, you can only use your after-tax income so you should plan accordingly.
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Medical cover
The increase in medical costs combined with the incredible pressure on the public health system has made cost-effective medical aid a necessity for most people. After all, no one wants to get sick, but how much worse to have to choose between your money or your life. One of the quickest ways to destroy a person’s savings is a large medical bill.
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Retrenchment cover
COVID-19 has resulted in massive retrenchments of staff in certain industries. Insurance companies are offering retrenchment cover for certain categories. For example, assistance in paying a bond during times of retrenchment.
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Book an appointment
If you would like to stress test your financial plan to see how secure your income really is, please don’t hesitate to book an appointment with me.
5 highlights from Enoch Godongwana's first Budget Speech
23 February 2022
A quick take on the South African Finance Minister's Budget Speech to parliament focussing on 5 key points.
On Wednesday 23 February 2022, South Africa's Finance Minister Enoch Godongwana addressed parliament to give his very first Budget Speech.
With the South African economy struggling in the grip of the global pandemic, South African taxpayers, investors, and businesses were eager to hear what plans the Finance Minister had in store to rebuild the economy.
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Here are the key highlights of Mr Godongwana's Budget Speech.
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5 key highlights
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1. Tax reprieve
This year’s budget brought some welcome news, with the corporate income tax cut from 28% to 27%. Personal income tax brackets have also been adjusted. There will be no hike in the fuel or Road Accident Fund levy. Hikes in excise duties on alcohol and tobacco were kept in line with inflation.
2. Reduced borrowings
The good news was that tax revenue collected for the past year was R182 billion more than budgeted, mostly due to mining companies that benefitted from a boom in commodity prices. He warned that government debt was dangerous: it has reached R4.3 trillion and is projected to rise to R5.4 trillion over the medium term On average, 20 cents of every rand collected in government revenue is now being spent on debt repayments, which is crowding out spending on health and basic education. However; for the first time since 2015, South Africa will reduce its borrowings. This year, it will borrow R135.8 billion less than planned.
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3. Spending priorities
Education and culture will again receive the largest share of the government budget (24%), with the bulk of the spending going towards basic education. Social development (18%) and health (14%) are the other large allocations. R44 billion is being made available to extend the social relief grant for another 12 months. Some 42% of South Africans receive the social relief grant.
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4. "Tough love" for SOEs
Godongwana persisted with his "tough love" stance towards state-owned enterprises. He said that there will be no blanket support for SOEs and that they will have to demonstrate that they are meeting specific requirements and serious about cost containment. Government wants to encourage more public-private partnerships (PPPs) – which has declined from R10.7 billion in 2011/12 to R5.6 billion in 2019/20.
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5. Bounce-back scheme
A new Bounce-back scheme for small businesses will be launched. It will consist of two parts, small business loan guarantees of R15 billion will be provided through participating banks and development finance institutions. Government will underwrite the first 20% of loan losses. Secondly, by April this year, Treasury wants to introduce a business equity-linked loan guarantee support mechanism.
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Source: News24
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Further analysis
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STANLIB chief economist Kevin Lings has provided a detailed analysis of Mr Godongwana's Budget Speech. You can find it by clicking the button below.