A collection of clips, scripted for the finweek: Money Matters show which airs on CNBC Africa (DStv channel 410).
Despite the past challenges facing the war-torn country, the impact of lower commodity prices and the loss of development gains by the deadly Ebola outbreak, President Ellen Johnson Sirleaf describes Liberia as a well-endowed country.
Speaking at the Johannesburg Chamber of Commerce and Industry on 11 June, Sirleaf, who became the first female democratically elected head of state on the continent in 2006, promoted Liberia’s natural resources as investment opportunities. The mining, agriculture, forestry and marine sectors all have potential for growth, she says. “We’ve been trying to build on the strength of our natural resources… and that endowment is still there.”
Liberia’s geography supports its attractiveness for investment. The flow of goods across international markets is made easy via seaports along its 579km shoreline, explains George Wisner, executive director of the National Investment Commission (NIC). Opportunities to develop infrastructure of airport facilities gives Liberia a comparative advantage over neighbouring countries as it is in close proximity to Latin and North America, and Europe and the Middle East, says Wisner.
The long-term Vision 2030 plan for transformation will see Liberia become a middle-income country. This would include addressing its long-standing infrastructural problems, says Sirleaf. In the past, the country did not have the diversity to withstand economic shocks and the largest constraint to achieving diversity has been the lack of infrastructural development, she says. One of the issues that will be addressed within the next 18 to 22 months is the need for energy and sources including renewable energy such as solar and hydro-electricity.
We believe that we are now on the road to recovery and we can use the experience of the past to achieve the diversity and transformation goals.
“We believe that we are now on the road to recovery and we can use the experience of the past to achieve the diversity and transformation goals,” says Sirleaf. Through the proper use of resources and partnerships for financing, the country can address poverty and ensure sustainable economic growth, she adds.
If investors take advantage of the “huge potential” that exists in Liberia, it will benefit job creation, says finance minister Amara Konneh.
Liberia has incentivised investors by making the environment conducive for business, he says. The efficiency of the environment ensures that it takes 10 days to register a business, he explains. “We also have an attractive percentage in our revenue growth for investors,” he adds. The NIC allows easy repatriation of profit, making it easy for investment to grow, says Wisner. “Investors find it easy to invest and find it easy to get profits,” he says.
“The biggest guarantee we have is the stability in the country, which we have demonstrated in the past two election cycles. Our country is on an irreversible path to sustain growth and development,” says Konneh.
It will be ideal if investors “set up shop” in Liberia, says Konneh. “We want to make our economy a three-ship economy. Right now we are only one ship,” he says.
Liberia’s major trade partners are Europe and China. There is a trade deficit between Liberia and South Africa. Past efforts to establish trade partnerships between the two countries failed, but there are still hopes to establish business partnerships with South African entities, says Sirleaf. MTN is the best-known local company with operations in Liberia.
The impact of Ebola
Liberia, which was declared Ebola-free in May, is still counting the economic cost of the outbreak, which slowed investment and cut economic growth. The outbreak, the largest in history, killed more than 11 000 people in West Africa since it started in February last year. New cases continue to be reported in neighbouring Sierra Leone and Guinea.
“The children were not in school, we almost lost an entire year because of Ebola,” says Konneh. Economic growth for 2014 is estimated at 0.7%, down from 8.9% in 2013, according to the International Monetary Fund (IMF). Estimated GDP losses in 2015 are $240m (R3bn) for Liberia, a major impact if considered that GDP in 2013 was estimated at just under $2bn.
In addition, the steep decline in iron ore prices curtailed planned investment in the mining sector, the IMF said. Other industries, such as the services and agricultural sectors, also declined. “Restaurants were virtually empty,” says Konneh.
However, the disease brought together members of parliament, the private sector and civil society to work on a solution, says Konneh. The economy is expected to grow 3% this year, according to the latest World Bank estimates. Besides relying on external support, such as debt relief and trade facilitation from the World Bank, the rebuilding of Liberia starts from within, he says.
I met a ravished country and we kept it peaceful and had it develop and we left it better than we found it.
The Ebola outbreak served as a reminder for the continuous investment in institutions for human development such as education, health and social protection, says Konneh.
Since its eradication, the country has started to re-engage the investor community and investors’ confidence is picking up again, says Wisner.
“When there is a common threat, a nation puts aside all of its differences – political, religion, ideological – and can come and confront that threat and win,” says Sirleaf. The silver lining in the situation is that the international community recognises the importance of forming partnerships to prevent any global catastrophe, she says.
Of her legacy, Sirleaf says: “I met a ravished country and we kept it peaceful and had it develop and we left it better than we found it.”
Low oil prices and Kenya’s increasing economic activity and strong global market performance is drawing the interest of international investors towards East Africa.
Gyongi King, chief investment officer at Caveo Fund Solutions, has visited the region over five years and has made observations across banking, telecoms and power sectors. Being ‘on the ground’ gives investors insight to make better investment decisions, says King. “There’s lots of opportunity.”
Despite the positive performance of Kenya’s equity markets, there are risks. This includes security (Al-Shabab attacks have heightened tensions), cheap imports (in the cement, cabling and materials sector due to the lack of price competition) and drought impacting the agriculture sector (half of the Kenyan population works in agriculture; the poor rainfall will impact food prices and security).
People are not necessarily keen on traditional banking. They want things that are more easy, convenient, and easily accessible.
Countries in the region are integrated due to trade agreements, with the resulting tax benefits making it easier for capital to flow across borders. There are opportunities in the banking sector, and cement companies are also well positioned for distribution. Rural areas are being urbanised as a result of technology. There is consumer growth and increasing efficiency in markets.
King notes four major trends in the region:
1. Financial inclusion (using technology to formalise banking)
Banks are using technology to draw people into the formal banking sector, which has scope for expansion. Mobile phone network operators like Safaricom have developed mobile money.
Economies are still cash driven. “M-Pesa is three times the volume of [customers that] credit and debit cards [have] in Kenya. It is much better known and used than traditional banking methods,” says King. “People are not necessarily keen on traditional banking. They want things that are more easy, convenient, and easily accessible.”
Safaricom conducts various transactions and collects data on people’s mobile money histories. In this way, mobile money service providers can keep track of customers that the traditional banking sector does not have access to.
However, there are security issues when it comes to mobile banking. A small film can be placed on top of a Safaricom SIM card, creating a double SIM for a phone. This allows consumers to use the airtime rates of a cheaper competitor. Such dual SIMs compromise the security measured put in place by Safaricom and information of transactions can be copied onto the film or second SIM. Safaricom is raising the matter in court.
2. Power – problems differ across the region.
Power is an issue for developing markets but countries have developed unique solutions.
In Kenya, different independent producers rely on renewable energy sources like hydro, wind and steam, says King. Geothermal energy projects in Kenya are proving successful. “It’s one of the few countries in the world that geothermal works and works in bulk,” says King. The Kenyan government’s goal is to increase power generation from 1500MW to 5 000MW by 2017. Despite the country’s abundant power-generation capacity, King says distribution is a problem as there aren’t massive industries like mining to consume power.
In Uganda there is a “greater distribution network” to businesses, but there is no power. The Ugandan government is looking to renewable energy sources like hydro and gas, but at the moment there is no “cohesive solution”. Uganda does not have geothermal energy. There is a low electrification rate, where less than 20% of the population have access to electricity. Household electrification is at 14%, but growing. Distribution points need to be built out to rural areas to urbanise them.
Tanzania has both distribution and generation problems. “It’s all a bit of a mess,” says King. Most businesses have to generate their own electricity because the national grid is unreliable. The country is looking to import gas from the south.
3. Technology is pervasive.
Technology impacts various sectors beyond just banking. There are improvements to the technical capabilities and efficiencies of corporates, businesses, retailers, and logistics companies. For example, Safaricom doesn’t have a mobile banking licence and can’t give loans, insurance policies and other traditional financial services. By partnering with banks like KCB in Kenya, mobile companies can provide different financial products.
4. Traffic – congestion is a constraint in big cities.
“Congestion in Dar es Salaam and Nairobi is on another level,” says King. This is a big constraint as most business activity takes place in those hubs. Poor infrastructure is one of the reasons behind the heavy traffic flow, she says.
Byron Green, managing director at Caveo, says traffic isn’t always a bad thing and indicates there is growth. “It would be much worse to have no cars visible on the road because that means there’s no economic activity,” he explains.
King says currently there’s a lack of alternative transport. For example, the train network is poor. In Kenya, the government has decentralised responsibilities to local councils, so infrastructure development will gain prominence across the country, reaching rural areas faster than in the past.
This article was featured in Finweek magazine.
The debate whether active portfolios perform better than passive portfolios has been ongoing for the past 50 years. Even though investors have favoured passive portfolios more recently, active portfolios dominate 89% to 90% of the world’s assets market, even in US equities, according to Alan Wood, head of Institutional Business at Investment Solutions.
However, in 2014 and the first quarter of 2015, passive portfolios outperformed active portfolios. The wide divergence of passive portfolio returns means the choice of passive provider is important. The performance of a range of comparable risk profiled passive portfolios for the year ended 31 December 2014 are displayed in the table below:
Considering the past year’s performance, with a limited track record, Wood says that meaningful comparisons can’t be drawn on the portfolios. However, he observed: “Not all passive portfolios are created equally and there are important active decisions that need to be taken when you construct a passive portfolio”. The results show a dispersion of returns in the one year performance during 2014, the lowest performer around 12% and the best performer close to 16%.
Investors have a “flawed” perception that passive portfolios are commodities, simple to invest in, explains Wood. Given the “inferior results” of past years and high fees of active portfolios, investors prefer passive portfolios. Passive providers primarily compete on costs, however, anyone choosing to invest in a passive portfolio needs to dig a bit deeper and understand the make up of the portfolio and not just make a choice based on fees.
Active or passive?
Investors often make decisions based on past experiences, which destroys value as they chase past performance, says Wood. Investors need to have a long term view and invest with a clear objective in mind, not to simply earn the highest possible return. It is like taking a trip to Durban and on the way deciding to change the route to avoid traffic, he explains. Sometimes you’re lucky with your decision. “At the end of the day we all get to Durban, and we all get there within five hours to six hours,” he says.
A passive investment strategy is a good idea for investors focused on costs or are not able to pick stocks or fund managers that can consistently outperform the market over longer periods, explains Shaun le Roux, portfolio manager at PSG Equity Fund.
Investing based on past performance is like driving while looking in the rear view mirror. It causes a lot of accidents.
The problem with an index-based passive strategy is that you buy a basket of stocks, without considering the price you are paying, says Le Roux. After a period when large capitalisation stocks have had a good run, the investment can be skewed towards a small sample of very expensive heavyweights, he explains.
Active portfolios are not a “slamdunk” decision either, but past performance shows it produces “significant value”. In South Africa, when measured over the long term, good active managers handsomely outperform their passive counterparts; the trick is finding those good managers. ”
Wood’s main concern is that when investors make decisions solely based on past performance they ignore critical information that could impact future performance. “Investing based on past performance is like driving while looking in the rear view mirror. It causes a lot of accidents.”
No such thing as passive investing
To throw a spanner in the works, Wood explains that there is no such thing as “passive investing”. Firstly, this investment decision requires strategic asset allocation, which is not a passive decision. There’s no way an investor can make that decision blindly. Secondly, choosing the right passive provider can also materially impact the performance outcome, which in many cases is not understood. “We’re in a situation where internationally huge assets are being transferred into passive portfolios and active managers are struggling internationally and in South Africa,” says Wood.
In South Africa, active managers are taking strain. The true test comes when uncertainty or risk creeps into the system. History has shown us that active managers generally protect as equity markets re-rate downwards.
“Stop chasing returns. Ask yourself what you want to achieve and then decide on the best way to get to what you want to achieve,” advises Wood.
*This article was featured on Finweek.com.
An initiative by National Treasury to encourage household saving will see financial service providers gearing to launch tax-free savings (TFS) products on 1 March 2015.
Treasury proposes that increased saving will assist households in reducing financial vulnerabilities. “The household saving rate in South Africa is extremely low,” says Rene Grobler, head of Investec Cash Investments. In the past, savings accounted for 25% of GDP, the average has settled at 15% which is low according to international standards, she says.
FinScope Survey of 2013 shows 42% of adults save. A 2014 report by Treasury states that South Africans do not save sufficiently due to low levels of employment, low household income and easy access to credit which spurs on impulse purchases for instant gratification.
Current tax incentives for savings include the annual interest tax exemption of R23 800 and R34 500 for retirees over 65. This incentive only applies to interest earned. It is limited and lacks transparency, says Grobler. TFS will replace the existing interest tax exemption, which will be gradually phased out as it won’t be adjusted with inflation.
How TFS works
Individuals can invest in multiple products, provided investment contributions do not exceed the annual limit of R30 000. The lifetime limit is R500 000 and will take 16 years and eight months to reach. After approximately 17 years, an investment of R30 000 a year (assuming 7% return) could be worth over R1m, explains Grobler.
Contributions of more than R30 000 will incur a tax penalty of 40% from SARS. In the first year, transfers between product providers are not allowed but transfers between products from one service provider are permitted, explains Grobler.
Products include retail savings bonds, collective investments, ETFs and bank deposits. Products should be transparent, simple and suitable for the market. The use of derivatives is restricted and performance fees are not allowed. Direct share portfolios are excluded. Product providers include banks, long-term insurers, unit trusts and government.
It’s a virtuous circle. Savings create investment, investment creates growth and growth creates income.
TFS work as investment accounts only, debit orders and the issuing of guarantees are not permitted. Accounts are ideal for medium to long-term savings. The returns are greater if left for a longer time for compound interest to grow, says Grobler.
Funds are accessible within seven days in emergency cases. However, to discourage erratic withdrawals, withdrawn amounts are not allowed to be replaced immediately. The maximum allowed for exit penalties charged by providers (for premature withdrawals) set by Treasury is R300. The accessibility of funds makes TFS accounts more attractive than Retirement Annuities (RA). RA funds are only accessible at retirement, contributions are tax-free but returns are taxed. As for TFS, after-tax money is invested and returns are tax-free.
A report by Daniel R. Wessels states that RAs are exempt from estate duties and are protected from creditors’ claims. TFS accounts have no creditor protection and will form part of the deceased’s estate. Amounts within TFS can’t be transferred directly to an heir’s TFS. Transfers are deemed as contributions and are “subject to the annual and lifetime contribution limits of the recipient”.
Grobler advises individuals to consider the first-mover advantage. At a rate of 7%, waiting a year to invest translates into a loss of R150 000 that could have been earned over 17 years.
It is still to be determined if TFS will change savings culture. Considering similar TFS products adopted in the UK, the initiative didn’t incentivise new savings; it only moved money around the market. “It’s hard to say what impact it will have in SA,” says Grobler.
Incentivising household saving benefits economic growth. By increasing fixed investment, there is less reliance on foreign capital and government debt, says Grobler. “It’s a virtuous circle. Savings create investment, investment creates growth and growth creates income.”
*This article was featured in Finweek magazine.