The South African stock exchange ended the financial year on a satisfactory note. However, there is a significant divergence in the underlying performance between those that are rand hedged in nature and those that are South African incorporated and focused on the local business environment. As a result of the weakening Rand, internationally focused investments have buoyed the JSE but unfortunately, SA focused investments have had a very difficult environment in which to operate.  Although SA focused stocks are trading at a significant discount to their international peers, there are some good valuations and high dividend yields to be had from some of our favourite companies.

The locally focused companies are more exposed to risk as a result of multiple headwinds, such as, the volatile political playing fields, the continuation of load shedding, failing infrastructure, the collapse of State owned enterprises’ and the continued bungling of business policy as a result of the ANC’s illogical ideological oversight.  These are just a few of the serious issues being faced by businesses in the local South African environment.

This, combined with the fact that we are in an election year, creates uncertainty, particularly in the KwaZulu-Natal (KZN) region, where the ex-President, Jacob Zuma, has recently formed a new party, uMkhonto we Sizwe, to compete against the ANC in the local elections. Ironically, the Zulus have historically always contributed to the appointment of the President. In 1994, the Ingonyama Trust was given to the Zulu’s in order to coerce them into voting for the ANC. At the end of Thabo Mbeki’s reign, when the ANC was losing ground, Jacob Zuma was introduced as the preferred candidate, which ensured the Zulu vote went the way of the ANC. However, this time around, there has been a noticeable separation from this historical inclusion, which has seen KZN candidates not being included in any of the senior ANC leadership. This has created a vacuum into which Jacob Zuma has stepped. One can only pray for a peaceful and fair election.

The Rand had another volatile quarter and at the recent budget speech, the Minister of Finance, Enoch Godongwana, proposed accessing the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to bolster government funds.  This is supposed to help government reign in debt, finance public sector wage costs and keep the budget deficit stable at 4.9%.  One has to ask the question, does this warrant raiding State savings to bail out the ever-increasing bloated cabinet wage bill and State-Owned Enterprises, and will this provide the relief required to stabilize the economy and pacify government employees?  In spite of this, Enoch Godongwana did his best to present a budget that had very little material impact on tax payers, particularly given that we are in a tax year.

Most of our state-owned enterprises and municipalities are racked by rampant corruption and inefficient, unskilled personnel as a result of cadre deployment and mismanagement.  These entities are in precarious financial situations, with many under administration or bordering on being placed under administration.  This puts considerable strain on an already over-burdened and failing system and sadly, those who have been tasked with rectifying these issues, either lack the skills and knowledge or desire to make the difficult decisions needed to save and repair these institutions.

Locally, interest rates remain on hold at elevated levels which gives government the ability to cut and hopefully relieve some of the pressure on those with credit, as high living costs and increased repayments on credit facilities have certainly put pressure on the consumer.  Conversely, pensioners and savers have enjoyed a high-income return, given the elevated interest rate environment.

Similarly, global interest rates remain elevated as governments and central banks try to navigate the high inflationary environment, although there have been indications that inflation rates are under control.  We have seen some governments, in particular the United States, deliver some dovish tones in terms of reducing interest rates. If we see a decrease in interest rate levels from global super powers, one can anticipate the rest of the world will follow suit.

On the international side of things, the S&P in the United States continues to reach record highs with more than 80% of companies delivering better than expected results. The economy looks robust and earnings have been good. One does need to highlight that a significant contribution to this growth has been the so-called ‘Magnificent Seven’ tech stocks, although the general S&P and Dow Jones has also shown resilience. Europe, unfortunately, has not fared as well and there are concerns around recession in both the EU and UK regions, although they do have the luxury of being able to cut interest rates to stimulate the economies, should it be required. It remains to be seen whether political tensions, particularly in Europe, given the conflict between Russia and the Ukraine, show any signs of dissipating. It would be beneficial to all, if there is a cease fire and some sort of normality returns to the region. We have, worryingly, seen an escalation in the hostilities in the Middle East where the allies have now engaged in military campaigns in some of the regions.  This will likely increase the risk in tensions and retaliations, particularly in the Red Sea and the trade routes.

China, who was once the powerhouse of production in the global economy, continues to come under pressure both from businesses looking for alternatives in terms of production and because of their own economic policies.  Coupled with this, is their property market which has come under extreme pressure. The Chinese have gone counter flow and cut their interest rates in an attempt to stimulate their economy and navigate their way out of a recession.

Looking forward, risks abound from an economic, political and conflict point of view, but for us at Ewing Trust Company our investment philosophy remains the same and we will continue to invest in high quality, high dividend paying blue chip stocks. “It is time in the market that counts, not the timing of entering the market.” Given the fact that we only invest in companies that have a solid history of consistently delivering good growth and dividends, we are optimistic that they will in time produce good returns.

Below is a breakdown of how the International Bourses have fared:

The below graph tracks the performance of the Rand against the US Dollar over a seven-year period:

The below graphs track the performance of the JSE All Share Index over a seven-year period:

The ever-changing compliance environment and greylisting has forced South African companies to embrace Enhanced Due Diligence (EDD). We have to a great degree, attempted to deal with this within the company, but unfortunately it will require the engagement of clients to an extent. In some instances, we have to go back historically and request source of funds and job profiles of our clients, which includes sale agreements, estate documents etc. This is not something we as South Africans are familiar with and it can be very frustrating at times, but it is now a requirement within the operating environment, particularly where South Africans are attempting to do business abroad.

The role out of our Indlovu online system has proved beneficial and the security features have addressed what we believe is an area of significant concern given the prevailing cyber security threats in South Africa, at this point in time. We have seen a higher than expected number of client’s emails being compromised, as well as attempts by hackers and cyber criminals to access client’s information via email. It is incumbent upon both the team at Ewing’s and our clients, to double check any communications either way to ensure their validity is not compromised. Although we have an excellent personal relationship with our investment clients, we do encourage voice verification between the client and their appointed relationship consultant when processing a transaction i.e. if your property is being sold and you wish to deposit money into your investment account, we recommend an email as well as telephonic confirmation.

When processing payments to you, other than the usual ones, or on any request of a significant amount, we will institute a call back in order to ensure all details are correct.

As with any growing entity, we have experienced some changes to our team and I would like to take this opportunity to wish those that have left or are leaving us, Tammy Lee, Natalie van Ellewee and Alecia Ferguson-Roberts, all the very best with their future endeavours. In due course, we will be communicating with clients regarding the appointment of their new relationship consultants, who will be responsible for the oversight of their portfolios. It is always sad to say goodbye to long term team members, but equally exciting to welcome new members to our team who will add value.

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