Investment Trends To Watch Out For In 2020

South Africa’s declining fiscal position is likely to impact all South Africans in the year ahead. According to the South African Reserve Bank’s Financial Stability Review released at the end of November, the country’s worsening fiscal position has been exacerbated by struggling state-owned entities such as Eskom and SAA which is pushing up contingent liabilities. The result, says the Reserve Bank, will be increased taxes, lower corporate and household income and investment, and a protracted period of low economic growth.

A sluggish economy and ballooning government debt make it highly likely that taxpayers, particularly high net worth individuals, should expect increased personal tax pressure in 2020. In order to minimise the impact of these tax increases, it will be essential to utilise all possible strategies to optimise individual tax positions via a combination of retirement products, tax-free investments, Section 12J investments, and endowments. Furthermore, the use of strategies like Section 42 transfers, where applicable, could be considered. In addition to this, estate planning is key.

The Rand, traditionally one of the most volatile currencies globally, remains vulnerable in the current environment. Somewhat ironically, further credit downgrades – which are looking increasingly likely – are only part of the problem for South Africa. While a full downgrade will cause downward pressure on the currency as index-based bond funds become forced sellers of the ZAR, a downgrade is potentially the canary in the mineshaft, pointing towards bigger structural issues. A massive budget deficit coupled with a lack of any decisive action taken by the government makes it possible that South Africa is heading towards an IMF bailout.

This will pose a significantly bigger problem to the country than a credit downgrade, as the terms and conditions associated with a bailout are imposed on the country. Given that neither the Eskom behemoth nor any other state owned entity has been sufficiently - and decisively - dealt with, there will be continue to be a risk around Rand weakness. As such, investment portfolios should be structured to mitigate this risk.

A further trend to watch out for in the year ahead are global geopolitical events including the US-China trade war, Brexit, US–Iranian tensions which threaten to destabilise the Middle East and a slowdown in global economic growth, amongst others. As South Africans, we tend to easily become somewhat myopic about local problems forgetting that the global investment arena is also currently very fluid.

Global risk sentiment and, from a South African perspective, specifically sentiment towards emerging markets, is a powerful force. Notwithstanding local developments, the global tide of money can change and this can influence a currency like the ZAR either positively or negatively. As such, it’s a good idea to be cautious of taking a binary position without factoring in macro influences, or considering your ability to absorb an outcome if your positioning proves to be wrong.

Poor investment portfolio returns for an extended period of time means that many investors, particularly those close to retirement, are gravitating towards opposite ends of the risk spectrum, either to cash or to high risk strategies. While a portion of cash should form part of a diversified portfolio, excessive allocations expose investors to the risk of tax inefficiency and sub-inflationary returns, particularly with the prospect of interest rate cuts going forward.

Conversely, adopting high risk strategies - whether intentionally or inadvertently - in order to generate higher returns, has to take downside risk and volatility into account. Given the uncertain nature of local and global economics, investors must consider whether they can absorb the volatility to which they are potentially exposing themselves to. Our advice is always to adopt a more disciplined investment approach rather than deviating from your investment strategy in desperation (or fear), which all too often results in value destruction. Long term investment principles continue to make more sense than knee-jerk emotional decisions.

As issues like asset prescription continue to concern investors, we’re seeing more and more people accessing their retirement funds early in order to avoid prescription, and to simultaneously avoid the provisions of regulation 28 of the Pension Funds Act, specifically around limited offshore allocations.

What you need to be aware of is that this can influence your retirement provisions and as such, needs to be carefully considered. Accessing your retirement products early is not necessarily a negative and may in certain instances make sense, but make sure you understand the consequences, specifically around tax and the impact on long term retirement planning.

Offshore investments have become the flavour of the year as investors seek to mitigate against uncertainty and low growth in the local market. However, not only are offshore investments complex but global markets are fraught with their own set of risks.

Many markets are trading at extended multiples as the world enters a lower growth’ period, and this is typically not supportive of equity markets. Add to this geopolitical issues and it is clear that offshore investing is not a one-way bet. Make sure you understand the tax implications of offshore investments in 2020 and are cognisant of the risks prevalent in global markets, and that the structure of your offshore portfolio is created with your risk tolerance in mind.

As a result of changing tax legislation coming into effect in 2020 regarding tax residency, financial emigration has come under the spotlight. It’s important to bear in mind that financial emigration comes with its own complexities and tax implications making it more important than ever to get good financial advice before you decide to embark on this route.

We’re currently seeing significant investment flows towards international investments. Bear in mind that this enhances tax complexity and has consequences for estate planning, including ensuring that wills are correctly structured and lodged for different jurisdictions and that issues such as SITUS and probate are understood. Again, it’s a good idea to seek expert advice to ensure you are optimising your position.

As a longer term trend, with a shrinking number of counters on most exchanges and evidence of money being made pre-listing, it’s likely that private equity will become more retail orientated and will increasingly be included in portfolios.

It is times like these when emotions run high. Fear and greed are the enemy of any investment strategy and at the moment, most people are operating at a heightened state of fear, fuelled by incessant bad news and elevated levels of uncertainty. It is within this heightened state of fear that investors are more likely to make poor investment decisions. Expert advice to ensure that you understand the full implications of any decisions and don’t fall victim to knee-jerk and fear-driven actions, is imperative in order to avoid value destruction and to ensure that your investment portfolio is optimally structured.

About NFB Private Wealth Management

Knowledge into wealth

NFB Private Wealth Management is a part of the AltX listed NVest Financial Holdings (NVE) group of companies and has a 34-year track record in providing clients with independent financial advice and a broad suite of products. The NVest Group manages in excess of R35 billion currently and continues on a material growth strategy. Everything NFB does is centred around clients’ needs, wealth, and future financial well-being. Please visit www.nfb.co.za for more information.