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Market highlights and industry trends for 2016

| Market Forces, Market News

By Carl Roothman, CE of Retail, Sanlam Investments
South Africa suffered a severe blow in the dying embers of 2015 when there were no less than 3 successive Finance Minister in the space of a weekend; a political action that would the cause the South African economy to loose R500bn. That event, evidently, set the tone for 2016 a year that would see a series of unprecedented and unpredictable global shocks, coupled with geopolitical uncertainty.
These global political events rattled investors and the asset management industry, with global equities in particular, faced one of their worst years. The global macro-economy has remained muted with lowered return expectations across all asset classes.
We highlight the main events of 2016 below:
SA markets face a potential downgrade
Locally, the political arena including surprise municipal elections outcomes has been as eventful as ever. Pravin Gordhan’s Mini-Budget Speech in October showed fiscal slippage with the outlook for the South African economy remaining glum, worsened by increasing debt. The most worrying data came from the SA Reserve Bank (SARB), as it revised its growth forecast for 2016 down to 0%. With this zero-growth outlook, the SARB decided once again to keep rates on hold at 7% in both July and November, despite drought-induced inflation figures.
Meanwhile, allegations around Nkandla, the Guptas and the controversial State Capture Report by retired Public Protector Thuli Madonsela continued to take centre-stage. For some months markets have been awaiting rating agencies’ decisions on a downgrade, particularly Standard and Poor’s, whose negative outlook implied a high risk of a downgrade. The most recent decisions to leave South Africa’s sovereign credit rating unchanged was a welcome reprieve, providing an extended window to rebuild confidence in the country and improve its economic prospects before next year’s reviews.
The good news is the South African economy is re-balancing (painfully and slowly). In the wake of cost-cutting, including employment growth restraint, the decline in corporate profits appears to be coming to an end. Even so, the expected economic upturn is tepid and yet to be confirmed. It remains imperative that South Africa demonstrates its ability to reform its economy to lift the country’s long-term potential growth rate meaningfully. The apparent emerging consensus between government, labour and business is a step in the right direction. But, it’s not a game changer yet.
Global markets trumped by the unexpected
On 23 June in a historic moment, British citizens voted that Great Britain should leave the European Union, a community they’ve been a member of for over 40 years. The surprise pro-Brexit announcement rocked global equity markets and resulted in a large amount of volatility in currencies. The fear is that other members of the EU such as Italy, France and Germany may follow suit, resulting in the end of the EU. Italians recently voted against Prime Minister Matteo Renzi’s proposals for constitutional reform, leaving the country facing political and economic uncertainty. Outside of EU membership, the UK will now have to renegotiate trade agreements globally.
Donald Trump’s surprise election win in November triggered a re-pricing of risk across asset classes and sectors, and saw a resurgence in the flight of capital to safe haven assets. Trump rhetoric, suggesting increased infrastructure spend and boosting growth, implies that the era of fiscal restraint is coming to an end, and long-term rates may start normalising in the US, with inflationary consequences. Both Brexit and the outcome of the US elections speak to a mercantilist agenda, where free trade is likely to take a back seat to local interests. This does not bode well for global trade, which has been growing at 6% p.a. for the past decade. It is these decisions about free trade and the movement of people which appear to have significant long-term implications for the US and the global economy.
Unit trusts continue attracting large inflows
ASISA has not yet released its data for Q4, but during the first three quarters of 2016 net inflows into the industry amounted to a phenomenal R98bn (excluding money market funds). The majority of these flows went into multi asset funds, but we noticed a surprising and marked increase in the choice of local equity funds during the third quarter of 2016. We are surprised by the decrease in net inflows into funds of funds in the third quarter relative to the first two quarters of the year.
Vertical integrators and traditional asset managers did particularly well in capturing the inflows and, if you combine the statistics for Satrix, Graviton, SMMI and Select, Sanlam Investments was one of the three main asset gatherers over one year in terms of flows up to the end of the third quarter of 2016 (excluding money market and third-party funds.)
Investors benefit from more reforms and regulation
2016 has brought more opportunities to decrease our clients’ tax liability through ongoing advice and involvement in retirement planning. The retirement reforms regarding the equitable tax treatment of contributions to provident, pension and retirement annuity funds legislated during 2015 came into effect on 1 March 2016. Investors can now contribute up to 27.5% of their earnings (with a R350k cap) to a retirement fund and deduct these from their taxable income.
In terms of further regulation of the industry, the Financial Services Board (FSB) has announced a delay in the RDR Phase I timelines originally communicated in November 2015. RDR Phase I has been postponed until 2017, and we’ll be keeping you up to date as the new timelines unfold.
For many years now the South African investment industry has been progressive in terms of its self-regulation. This year, after a long period of collaboration with industry stakeholders, the Association for Savings and Investment SA (ASISA) reached finality on the Effective Annual Cost (EAC) measure to eliminate the confusion around the different cost measures currently in use, e.g. reduction in yield (RIY) and total expense ratio (TER). The measure was created in the spirit of treating customers fairly (TCF), specifically outcome 1, where the fair treatment of customers is central to the corporate culture, and outcome 3, where clients receive clear and appropriate information. The EAC Standard replaced the Code on Policy Quotations on 1 October 2016.
The industry is becoming more inclusive and accessible
2016 was also the year in which some industry players became really innovative in their efforts to make investing more accessible to the broader spectrum of South Africans. One such innovation was fractional shares. We are very proud of the ground-breaking offering by SatrixNOW and EasyEquities. Their pioneering share-trading platform allows investors to buy fractions of shares at a low cost and with an exceptionally easy interface. For this SatrixNOW and EasyEquities received the overall award for Best African FinTech Company 2016 at the Finance Indaba Africa in October.
2016 has been a great year for our business
Good performance and a range of solutions that spoke to investor need and demand, translated to substantial new business for us. For the year to 30 June 2016, the SIM Inflation Plus Fund garnered the most assets of any specific active unit trust in the industry, with flows in excess of R5 billion. These are noteworthy especially in the context of the challenging markets we are operating in.
A sincere thank you to everyone who supported our business in 2016. We do not take this for granted and remain committed to giving you every reason to make us your investment partner of choice.
Mandatory disclosure
All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate advice after a thorough examination of a particular situation. We endeavor to provide accurate and timely information but make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information or opinions. Any representation or opinion is provided for information purposes only. Unit trusts are generally medium to long-term investments. Past performance of the investment in no guarantee of future returns. Unit trusts are traded at a ruling price and can engage in borrowing and scrip lending. Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Radius Administrative Services (Pty) Ltd (“Radius”), Blue Ink Investments (Pty) Ltd (“Blue Ink”), Sanlam Capital Markets (Pty) Ltd (“SCM”), Sanlam Private Wealth (Pty) Ltd (“SPW”) and Sanlam Employee Benefits (Pty) Ltd (“SEB”), a division of Sanlam Life Insurance Limited; and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”) and Satrix Managers (RF) (Pty) Ltd (“Satrix”). Although all reasonable steps have been taken to ensure the information in this document is accurate, Sanlam Collective Investments (RF) (Pty) Ltd (“Sanlam Collective Investments”) does not accept any responsibility for any claim, damages, loss or expense; however it arises, out of or in connection with the information. No member of Sanlam gives any representation, warranty or undertaking, nor accepts any responsibility or liability as to the accuracy of any of this information. The information to follow does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision. Sanlam Group is a full member of the Association for Savings and Investment SA (ASISA). Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments, and a registered and approved Manager in Collective Investment Schemes in Securities. The maximum fund charges include (including VAT): An initial advice fee of 1.14%; initial manager fee of 1.14%; annual advice fee of 1.14% and annual manager fee of 1.14%. The most recent total expense ratio (TER) is 1.25%. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002. International investments or investments in foreign securities could be accompanied by additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios is outsourced to financial services providers authorized in terms of the Financial Advisory and Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme.

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