NFB FINANCIAL UPDATE

Issue70 Oct2013

FROM THE DESKCEO’s

Being away, I thought that coveringseveral varied themes might make foran interesting change.

We humans are really quite complex. Weprobably take ourselves and our relevancefar too seriously. Part of this relates to ourselective amnesia. As a recent example, aBritish cricketer stood his ground inaccordance with the rules, having noisily andobviously ( everyone but the umpire)tonicked the ball into the awaiting hands of anAussie slip fielder. The and reactionfurorefrom the Aussies, their media and most othercommentators and aficionado's (in facteverybody other than the collective SA andEngland supporters) was deafening. We aresuch cynics! Broad should have walked, butto be hung, drawn and quartered by theAussies, who had made some premature badcalls and had run out of reviews! After all, itwas they who invented the habit of standingtheir ground and making umpires earn theirkeep years before.

I am currently reading the book writtenabout the untimely death of Brett Kebble. Hewas initially lauded as a change agent in thesometimes grimy world of mining. His deathand the extraordinary events which led to it,make interesting reading. If the opinions andfindings of our top investigative journo's andprivate eyes are anything to go by, we shouldbe taking a good look at business and peoplein civil society, not only taking pot shots atgovernment and the corrupt civil service!

Traveling in Italy, as we are as I write thiseditorial, I asked a friend about Zimbabwe,post the recent general election (or sham, asyou prefer). He noted the opportunity whenMr Mugabe was about to retire two electionsback. The then powerful Morgan Tswangerai,grabbed the opportunity to mention warcrimes, fraud, etc. wrestling defeat from thejaws of victory, not only for the MDC, butZimbabwe as a whole, crystallizing thegovernment and its security services intoholding on at all costs, allowing Zim todeteriorate into what has become anintransigent mess. The recent election hasbeen followed by a cabinet shuffle indicatingBob is going nowhere and is intent to keep

those around him weak and respectful of hissupremacy. Perhaps South Africa needs topay careful attention to this chain of eventsand manage its own future carefully and withlots of diplomacy.

I note the subtle and not insignificantmovement around 'fracking' in South Africa.The government is now finessing the rules asopposed to considering the viability of thisgame-changing source of power.Interestingly, the USA becomes a powerexporter in a few years' time and thegeopolitical impact of this is not to be underestimated. The Middle East's survival and thetactical position around the moderate Arabstates might undergo change in the eyes ofthe USA in years to come, as the strategicimportance of Middle East oil wanes. Thiswarrants ongoing attention. As far as oureconomy is concerned, the vast gasresources trapped between rock particles inthe Karroo could be the catalyst of significantgrowth and also the saving of massive foreignexchange, once developed. There arevarious views surrounding the Eco impact offracking, but listening to Bonang Mohale,Chairman of Shell in SA, has changed myrather 'greenie' take on the subject.

Last but not least, I had the pleasure andprivilege to listen over dinner to KingsleyHolgate the adventurer and unofficial Ministerof Rhinos! An interesting and well-read man,he challenged the audience with a thoughtprovoking idea. He presented seven stones,each he said representing ten effective yearsof our lives. He then said to keep only the onerepresenting the decade you currently are in,in your pocket. The idea was to ensure youtook full advantage of the time with thestone. Many of our clients, who we haveknown for almost three decades, are alreadybeyond seventy. This is OK! Remember, weare all living longer, but this does not meanyou can elect to worry about trivia, fail tosmell the roses and love your life, andparticularly, those near to you.

Our job is to support your efforts to ensureyour investments are appropriately positionedto allow this to happen in a secure way. Manythanks for your support and custom.

IN THIS ISSUE

Front Page:EOF C drom the ’s esk

Center Page:A Strange World:Great Expectationsmeets Reality Check

Back Page:Our contribution toMandela Day

f i n a n c i a l s e r v i c e s g r o u p

Mike Estment BA, CFP®

CEO - NFB Financial Services Group

fortune favours the well advised

meets Reality Check

A Strange World:Great Expectations

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By Director/PrivateAndrew Duvenage,

Wealth Manager NFB Gauteng-

Non-resident buying of South African bonds

Source: Citi Research, Datastream

meets Reality Check

A Strange World:Great Expectations

The storyso farThe last 5 years have

seen incredible

performance figures

coming out of local

markets. After the

financial crisis of 2008, investors have

benefited from significant recoveries

in asset values, despite the great

uncertainty that the world has been

living with. At the height of the crisis,

and given the massive structural and

financial system problems that existed

in America and in Europe, not many

investors would have predicted the

extent to which markets have

recovered.

As gratifying as the recovery has

been for investors, it does come with

concerns due to what can only be

described as a large disconnect

between market performance and

economic reality. In a South African

context, we have seen a massive

equity and property market surge, yet

we are sitting with anaemic

economic growth. With the JSE flirting

with its all-time high, the conclusion

that can be made is that South

African businesses (on aggregate) are

worth more than they have ever been

worth. Logic would dictate that for

this to be true and sustainable, these

businesses must be operating in very

good conditions – economic

conditions that support the businesses

operations, revenue streams and

consequently their valuations.

But is this the case? South Africa's

GDP growth (rate of growth of the

economy) has been sluggish (around

3 %). Labour relations in South Africa

are not in a good way resulting in

significant disruptions in the economy

as well as unsustainably high wage

increases which negatively influence

the profitability of businesses (in fact in

this regard, South Africa was rated as

the worst of

148 countries in

the World

Economic

Forum's most

recent Global

Competitivene

ss Survey). On

a macro level,

high levels of

unemployment

(officially at around 25%, but in reality

probably a fair bit higher) are of

concern. Similarly, the continued

underperformance in the education

outcomes of the country (where we

rank an abysmal 146/148

countries in the same WEF

survey) represent massive

headwinds to economic

performance. While there are

certainly bright spots in terms

of the South African economy,

the economic reality which we

currently face, is not an

environment in which we

would normally expect equity

valuations to be at all-time

highs.

UnintendedConsequencesA logical question would be to

ask why we have seen such strong

performance in our markets in the

context of soft economic conditions.

The answer is to a large extent

explained by the concept of

unintended consequences. After the

2008 economic crisis, central banks

across the world aggressively cut

interest rates (close to 0% in the US,

and 0.5% in the Euro Zone) and

pumped money into the financial

system. The aim was ultimately to

stimulate economic activity and to

promote recovery. While we are

seeing signs of this strategy

succeeding (specifically in the US

context), there was a somewhat

unintended consequence that arose.

Huge volumes of money found their

way into financial assets as opposed

to into economic activity. The so

called “carry trade” is a great

example of this. Investors began to

take very large sums of money out of

the low interest rate environments in

the US, Europe and the UK, and

started deploying these assets into

markets with higher interest rates.

Similarly, large amounts of money

found its way into equity markets.

Emerging markets were major

beneficiaries of this set of

circumstances resulting in material

increases in equity prices, property

prices, and bond markets and in the

currencies of these countries. South

Africa too benefited from large

inflows of foreign money, which

helped buoy most market sectors,

despite the lack of good, strong

economic fundamentals to support

the new levels being created.

The risk of a disconnectThe disconnect between financial

markets and economic performance

represents a challenge for investors. If

the logic is accepted that certain

“abnormal” factors (extremely low

interest rates and huge amounts of

liquidity being pumped into global

markets) are influencing the

performance of markets, one has to

consider what will happen when

these factors are removed. The risk

here is that when global interest rates

start to increase, and when the so

called “Quantitative Easing” program

starts to taper off, we could

potentially see significant reductions

in asset prices as the tide of global

money realigns itself to reflect a new

reality.

At this point, the focus will in all

likelihood shift back towards

economic fundamentals and whether

the performance of specific assets

justify the prices that they are

currently trading at. The concern is

that the economic fundamentals may

not be supportive of the valuations. As

an example, the JSE (on aggregate) is

starting to look somewhat expensive

when comparing its PE ratio to

historical averages. Thus, very strong

earnings will need to come out (in a

soft economic period) in order to

support these valuations.

Realigning ExpectationsDespite concerns regarding the

disconnect that we see and

“abnormal” factors that could

potentially unwind, the suggestion is

not to dump market related assets

and sit in cash. What is being

highlighted is that investors must be

cognisant of risk and must understand

their ability to absorb volatility.

Unfortunately, the strong

performance of markets has resulted

in investors disregarding risk, and

looking to position themselves more

aggressively than is appropriate in

order to “get in on the action”.

Investors (and advisors for that matter)

in times of strong market

performance, should aim to capture

as much of the upside as possible, but

still be cognisant of the risk that exists

in the assets that are driving the

returns in portfolios.

The key here is to ignore historic

returns and realign ones expectations

for returns.

So what is realistic? A good

starting point in answering this

question is to look at historical returns

over an extended period of time.

Over the past 30 years the JSE has

achieved approximately 17% per

annum. Whilst historical performance

is just that – historical - it is still a good

starting point. A period of 30 years

gives a better indication of what

should be expected as it contains

performance from both good and

bad times in the economic cycle. But

this is the new South Africa – how can

our past performance be an

indication of our future prospects?

Whilst many fundamentals have

remained the same, there have been

significant changes to the structure of

the SA economy. Changes in fiscal

and monetary policy have resulted in

a significantly lower inflationary

environment, and change in political

dispensation has resulted in significant

opportunities for economic growth

and development. So

technically, to use an historic

figure as the basis for our

future estimates may not be

reasonable. Let's look at it

from a different angle to get

back to our question

regarding realistic

expectations. What are the

basic components of

determining a realistic return?

Firstly you need to get

compensated for inflation,

next for economic growth

[GDP], and then be

compensated for the risk

associated with investing.

What does this mean in numbers?

o The reserve bank has an inflation

target range of 3-6%

o GDP growth is around 3%

o A fair equity risk premium for SA is

approximately 5%

Thus, a simplistic estimate for an

expected return in equity investments

is in the region of 10-14%. Whilst this

method is by no means an exact

science, it gives us a useful

benchmark to assess our long-term

performance.

The implicationHow does having a realistic

benchmark help us? The first outcome

is that with lower expected returns,

time horizons are going to have to

change. The returns of the last 3 years

have meant that many investors have

achieved their financial goals in

record time. This situation is probably

not going to be repeated in the near

future and thus investors are going to

have to shift from a short-term mindset

to a long-term outlook. In practical

terms this means that investors who

have had great success with

strategies that can be loosely defined

as speculative will have to pay far

more attention to their long term

strategy, and to do this they will have

to focus on asset allocation. Briefly,

asset allocation is the blend of the

various asset classes [cash, bonds,

property and equity] in a portfolio. This

blend is determined by factors such

as age, time-horizon, appetite for risk,

and investment objectives.

The implementationNow that realistic expectations have

been re-established, it is important

that the investor revisit their

investment strategy. To do this, the

following framework can be used:

1. Set your financial goals

2. Calculate the required rate of

return to achieve these goals

3. Examine the thatasset allocation

would be required to reach this rate

of return

4. attached to this assetAssess risk

allocation

5. Adopt the orinvestment strategy

adjust your if the riskfinancial goals

attached to the asset allocation isn't

commensurate with your personal risk

profile

ConclusionWith the myriad range of products

and funds available in the market

that need to be thoroughly assessed

and blended to give you the perfect

mix required to achieve your financial

goals, it can be a daunting task out

there on your own. We would

recommend consulting and using a

qualified NFB financial advisor who

can give you the independent,

broad-spectrum advice that will help

you come to an informed decision

that will enable you to have the

quality of life for which you have

worked so hard. The perfect reaction

to this opinion, is not to rush out and

cancel all your investments and start

again, it is the careful assessment,

preferably with an advisor who you

feel comfortable with, of every

product, cash flow, and portfolio as

well as life policies you have. Quite

often, institutions can, and will,

accommodate simple changes to the

product or portfolio and these can

make an incredibly positive change

to your investment outcome.

Andrew Duvenage CFP®,MBA, B.Com. Hons

Director/Private Wealth Manager NFB-

Gauteng

Listed Equity PE RatioJSE ALL Share Index (AJ253)

MANDELA DAYOUR CONTRIBUTION TO

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The

campaign

message for Mandela Day is

“Nelson Mandela has fought for

social justice for 67 years. We're

asking you to start with 67 minutes”.

The first Mandela Day was held in

2010 and has since been celebrated

every year on Madiba's birthday, the

18th July. This is an international

celebration in honour of Nelson

Mandela with the objective being to

inspire all people “to be of service to

one's fellow human”. By taking action

in some way, no matter how small, we

are able to help others and thereby

transform the world to make it a

better place.

With this in mind, and as part of

our corporate social responsibility, NFB

took the decision this year to be

“hands on”. NVest Financial Holdings

(of which NFB is a subsidiary) has

nominated the Loaves and Fishes

Network (LAFN) as its charity. LAFN is

an award-winning, East London

based NGO that offers support to

impoverished community initiated

crèches (currently

supporting 29 crèches)

through its three year Early

Childhood Development

practitioner training

programme, by feeding the

children who attend the

crèches with two nutritious daily

meals and by trying to find

funding to improve, refurbish and

renovate general crèche

infrastructure. Through this charity,

we chose Icebo, a township

crèche and one of the

aforementioned 29 crèches

supported by LAFN, as the beneficiary

for this year's Mandela Day.

Funds were raised

through monetary

donations, company civvies

days and cake sales. Barry

Moldenhauer, from

Mdantsane Build It, very kindly

donated 40 litres of paint,

turpentine and brushes. With

the funds raised we were able

to buy much needed educational

equipment such as play dough,

books, puzzles, colouring-in books,

crayons, scissors etc. Fresh oranges

and apples were taken out, as well as

some chips and sweets. For fun we

added balls, skipping ropes and

motorbikes, as the playground only

consisted of a two-swing set and a

make-shift sandpit.

The Icebo Day Care Centre is a

shack in a rural area and the children

who attend are between the ages of

3 and 6. On any one day there can

be as few as twelve children and as

many as thirty. Unfortunately, as

transport is a scarce resource and the

children sometimes have very far to

walk, some days they do not attend

crèche at all which means that,

besides missing out on vital cognitive,

physical and emotional stimulation

provided by the dedicated and

trained childcare practitioners, it

also means that those

children will probably

not receive a nutritious

meal that day.

On the day, a large group of staff

from across the NVest companies,

was taken out to Icebo by Pat

Mtintsilana, General Manager of the

LAFN, to participate in planting some

trees and seedlings in the crèche's

veggie garden. Some staff played

with the children, painted with them

and at one stage there was an

informal “soccer” match being

played.

Unfortunately, we were unable to

paint the exterior of the crèche as the

weather did not play its part, but a

week later a small group of

enthusiastic staff again ventured out.

By lunchtime we were all done and

dusted and Icebo Day Care Centre

now has a fresh coat of paint!

We cannot change the world

overnight and it is not possible to help

everyone, but it is my belief that every

individual has the ability to impact the

life of another. And as human beings,

I believe it is our duty to do as much

as we can, where and when we can

– especially for those who cannot

help themselves.

So when July 2014 rolls around, ask

yourself....WHAT CAN I DO TO MAKE A

DIFFERENCE ON MANDELA DAY?

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Touching lives in our community‚ you too

can make a difference! y ,B Robyne Moore

NVest Holdings, East London

MANDELA DAYOUR CONTRIBUTION TO

Robyne Moore

NVest Holdings, East London

N est staff with all the Icebo DayV

Care Centre children & Pat from

LAFN

Melany Botes & Robyne Mooreplanting the little peach tree

Charl Herselman & Bryce

Wild digging a hole for

the banana tree

after the painting job is almost done