What if we are in for a decade of slow/low growth? Where and how should funds invest? JOSEPH BUSHA,...

What if we are in for a decade of slow/low growth? Where and how should funds invest?

JOSEPH BUSHA, BSc, BSc. Hons, MSc, MPhil

What if we are in for a decade of slow / low growth? Where and how should funds invest?

• Gross Domestic Product (GDP) is value of all officially produced & recorded goods / services within a country

• Primary measure of a country’s financial strength / health

• Main drivers of GDP growth ratesProduction (mining, manufacturing, ..)Sales (services, consumption, etc)

Troubled global economy. Threat of recession in the EU with

negative real growth and so is in SA

What if w

e are in for a decade of slow/low

grow

th? where &

how should funds invest?

Image or illustrations

Global Perspective

CountryGDP

Growth Rate

Interest Rate

Inflation Unemployment

China 7.60% 6.00% 1.80% 4.10%India 5.30% 8.00% 6.87% 3.80%Japan 3.50% 0.00% -0.20% 4.30%UK -0.50% 0.50% 2.60% 8.00%USA 2.20% 0.25% 1.40% 8.30%SA 3.20% 5.00% 4.90% 24.90%

Other BRICS membersBrazil 0.80% 8.00% 5.20% 6.50%Russia 4.00% 8.00% 5.60% 5.40%


SOUTH AFRICA ……… In Focus & Facts

Botswana & SA excluding other African countries contribute

about 29.00% of world ‘s diamonds. Significant.

What if w


grow

th? where &



Diamonds

Australia13.20%

Canada18.60%

Botswana19.90%

Russia22.40%

South Africa9.10%

SA & Zimbabwe contribute about 82.53% of world ‘s platinum

requirements – used in cars (catalytic converters), but…

What if w


grow

th? where &



Platinum

Canada3.65%

Zimbabwe3.93%

Russia13.01%

South Africa78.60%

North America0.81%

…. no significant production of automobiles. SA assemble a sizable number of cars for domestic and export markets.

What if w


grow

th? where &



Passenger Cars & Heavy Truccks Producers

USA11.25%

Germany14.77%

Japan32.90%

China35.63%

South Korea5.45%

SA– In Focus: Growth & Inflation

Graph goes here

Average growth rate over the last decade is 3.52%. Current is 3.2% pa. Recent best growth years 2004-06. Real growth

-10.00%

-5.00%

0.00%

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15.00%

20.00%

25.00%

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Repo

Inflation (CPI)

GDP

Revenue, Expenditure & Debt as % of GDP

Graph goes here

On average consistently consumed what we don’t have. Percentage of debt to GDP reached lows in 2008 and is on upward trend. BRICS average Debt to GDP is 41.69%, SA at 38.80%, Russia 9.61%.

15.00%

20.00%

25.00%

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Exp/GDP

Rev/GDP

Debt/GDP

GDP contributing sectors performance

Graph goes here

• Gold mining – one way down for a long time. Other mining okay, but volatile. Overall mining contributes about 10% of GDP

• Manufacturing on the upside, contributes 13.65% to GDP and constitutes about 65.25% of the secondary sector.

0.00

0.50

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/01/

0119

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2012

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01

Wholesale trade

New commercial vehicles Gold Mining

Other Mining

Manufacturing


WHAT IF…..

• The global crisis continues for the next decade Printing of money by governments Government leadership changes in US, UK, Germany - policy changes

• Euro zone members stuck into a prolonged recessionGreece, Italy and other EU members exit the union

• China growth trajectory faltersand leads to another global crisis

•


WHAT IF….

• SA growth prospects remain subdued, as a result Other mining, e.g., platinum follows gold performance or substitute for catalytic converters is found Local manufacturing (13.65% of GDP) slows – threat of imports SA does not become a gateway into the rest of Africa (wholesale and retail trade contributes about 15% to GDP) The mining industry continue to loose its economic influence

• Equities volatility remain high and returns uncertainty increases, interest rates remain low…..?

Equities return over the last 17 years

Graph goes here

• If you had invested funds in SA, it would have multiplied 6 times in Rand terms, & still outperformed most major global equities in $ terms

• USA would have given an investor 1.5%, and lost half in Japanese equity market over the same period

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UK(FT100)

South Africa (JSE)

Japan (FJNK)

USA(S&P500)

Equities return over the last 12 years

Graph goes here

• The story does not change, SA equities performed better, and

• Investors would have lost in Japan, UK and USA equities

• Rand/$ = R6.30/$ on 31 January 2000, and current levels R8.40/$

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UK(FT100)

South Africa (JSE)

Japan (FJNK)

USA(S&P500)


So where & how should funds in invest

…..in times of low growth prospects/ uncertainty?


• Listed EquitiesChoose sound business in production sectors, with high

growth opportunities & employment levels. Keep members

• Fixed Income High quality fixed income securities, and not junk

instruments promising high returns

Returns in vanilla money market investments low – this might be so

for a long time as interest rates remain at record lows


• Private equity investments (unlisted)Three categories exist in this alternative assets class – Venture capital,

development capital and buy-outsChoose sound business & invest as development capital . Funds are

needed for growth & expansion.

Limit exposure to maximum of Regulation 28 (Reg. 28) of Pension

Fund Act (SA)

• Participating employers . In SA, Reg. 28 restricts this to 5%. Seek exemption to increase this

threshold (10%) where funds are needed for expansion & jobs are

secure with more to be created. Good position if company is listed


•Private equity investments…. Yes, but NO investments in Micro–lenders

Consider this scenario

A member of a retirement fund invests R1,000 (or $1,000) in a micro-

lender through the retirement fund (trustees’ decision)

Member borrows R1,000 from the same or any other micro-lender and

pays 5% per month (60% pa) interest.

Member receives 15% pa from his retirement fund investment

Member’s net loss is 45%pa - trapped in poverty funding the business

that do not make communities sustainable


• Private equity investments. Yes, but NO to micro-lenders / loan sharksThere are over 2,000 micro-lenders in SA

Retirement

Fund Bank/

Microfinance

Fund Member

$1,000 $1,000

$1,000+60% $1,000 +15%


• Finally…….Sustainable economic growth rates, job creation and social cohesion can only be achieved when both

Social and Financial returns

are obtained through any investment process. This requires the right decisions, right teams of trustees, consultants and investment managers. Let’s invest wisely.


“The best interest or returns is achieved when we care most about the interests of those we serve

because they will return to us”

Joseph Makamba Busha, 2 May 2012

What if we are in for a decade of slow/low growth? Where and how should funds invest? JOSEPH BUSHA,...

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