Interest Rates

Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. (Investopedia)

A friend of mine (who is preparing for her CFA exam to be written in December) sent me a text a few weeks ago inquiring as to what will the implications be on her *fixed income assets if interest rates rose. The theory I grasped in varsity came quickly to mind and I started replying, but I stopped halfway through my reply because I realised that a lot of factors need to be considered about this before one could formulate an answer.

*corporate bonds, government bonds, preference shares, money market accounts etc.

Credit and the costs thereof (interest) are very important in our everyday lives, imagine if we here in Mzansi had interest rates at a range between 0.25%-0.50% which are the current levels seen in the US, I can imagine that consumers would be consuming much more thanks to cheaper cost of debt and companies would be borrowing from here to the moon to finance their operations and expansion. This would be a great state of affairs for the consumers, companies and their owners, not so much for fixed income asset holders as their coupon payments will be much less in a low interest rate environment (holders of fixed income may in time dump these assets and enter the equity markets further fuelling the above state of affairs).

However this is not economically viable ceteris paribus; when one starts to consider things like inflation, employment, ones currency, the economy etc. Central banks will “attempt” to strike a balance between inflation and employment by adjusting interest rates periodically, even reaching extremes in some instances. You see where this is going right? Yep, cycles! The fact of the matter is that interest rates will result in favourable as well as less favourable times for everyone, and as an investor your task is to select assets that’ll survive the changing fortunes of time.

All of this takes me to a well known adage among investors; Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average. As Howard Marks remarked; we can’t survive on average, we need to survive the bad days too!

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Want to grow your money? Find yourself an airhostess…

The Gradidge Patch

I remember clearly the first time I flew on an aeroplane. It was October 1997 and the trip was from Johannesburg International to Louis Botha (Durban). The flight down was largely uneventful, but the return flight I remember quite vividly, and for a number of reasons.

The first reason I remember that flight is because I sat next to rugby legend, Naas Botha. There was an aisle separating us, and I recall how the manne sitting close by were hanging onto his every word. With the Currie Cup final looming, they were talking rugby the whole time, and from what I could gather there were no Sharks supporters in that conversation. As a die-hard Sharks fan I found the conversation quite amusing at times. (The Sharks were the reigning Currie Cup champions then).

The second, and probably the most important, reason I remembered that flight is because of the extreme…

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Please Do Not Feed The Fears!

dont-feed-the-fears

2016 has been one hell of a wild ride, alright! At the beginning of the year, market “experts” must have been thinking the world was ending. Now order has somewhat been restored (FYI there’s never order in the markets as there is always a reason why you should sell and leave), leaving long-term investors feeling vindicated for their resilience and patience with equity markets rebounding, taking out bearish speculators along with the trash.

When it comes to investing, time is like a double-edged sword. Spending time in the market allows us to ride out volatile periods, thus giving us an opportunity to share in the intense recoveries that follow market corrections. More money has been lost trying to time the next big crash than when the actual crash happens! Lesson: don’t be smart because these markets will humble you. The more you keep your investing simple, the greater the chances of enjoying superior returns.

A Simple investment strategy is acknowledging what you don’t know and focusing on what you can control. Things that are within your control in the investment process – asset allocation decision, costs associated with investing, your investment horizon, and your emotions.

Since the beginning of 2014, the following, inter alia, factors have negatively influenced the South African market;

  • Geopolitical events such as Nene Gate, Zupta Gate, Brexit etc.
  • The prime interest rate has increasing from 8.5% to 10.5%.
  • Local politics and the aftermath of local municipal elections.
  • A weaker rand as compared to the US dollar at the beginning of 2014.
  • Increase in the inflation rate from 5.4% in 2014 and steadily approaching the 6% mark in 2016.
  • Stock market valuations have considerably higher P/E ratios.

 

Although this is not an exhaustive list, the highlighted factors leave little to be desired. (like I said, there’s always a good reason not to be invested but stay invested anyways)

 

However, despite all of this, the market is up more than 12% since the lows we saw on the 21st of January 2016.

 

Research on the JSE ALSI Top40 Total Return Index (TRI) starting from June 2002, illustrates how spending time in the market can work to your favour when it comes to investing. Going back to June 2002, If an investor had entered the market and stayed invested for a period of three years and longer, the worst cumulative* return over any three year period was 0.76%.

The best cumulative return over any three-year period was 207%! It gets better, over a five-year period the worst cumulative return was 33% and the best return being 370%. It’s Wild!

*A cumulative return is the aggregate amount that an investment has gained or lost over time, independent of the period of the time period.

 

The picture is not as rosy for the short-term traders. Over a period of one month the worst return was -13% with the best return sitting at 14%. Over a year the worst return was -38% and the best return being 73%.

What this shows is that over the long term (a period of three years and longer) an investor would not have lost money in nominal terms if they were invested in the South African equity market at any point between 2002 and 2016. This includes the disastrous market correction of 2008.

 

Over a 100 year horizon, the stock market has been on a consistent upward surge, of course there have been hick-ups along the way.

 

The reason for this consistent growth lies in the fact that shares remain an amazing investment vehicle for financial growth over the long-term. Shares carry a higher risk for the investor, but over the long term, shares remain one of the best asset classes for growth.

 

The important fact is that investors should remain invested in times of uncertainty and volatility.

Investors who try to time the market will fail more often than they are likely to succeed. Unless you happen to own a crystal ball and you believe in unicorns. This often leads to buying high and selling low. The recovery of the market often happens quickly after a correction, thus if an investor decides to exit the market when times are bleak, he may find it difficult to get back in at the correct time.

 

However, it is easier said than done to stay calm when it seems the world is going up in flames, and staying the course of the investment journey.

 

In order to deal with times of market folly, proper financial advice is paramount in ensuring that you minimise investment risk via an adequate asset allocation strategy and not by timing the market or acting on daily news feeds. And most importantly, please get a hobby!

 

“It is said an Eastern Monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘And this, too, shall pass’. How much it expresses! How chastening in the hour of pride-how consoling in the depths of affliction! ‘And this, too, shall pass’. And yet let us hope it is not quite true.”-Abraham Lincoln.

 

 

 

Friday-Mayday-Mayhem

On Friday we saw the worst market selloff in weeks, so that evening I decided to read up on what happened during the week. The main topic was the selloff that had occurred and most articles highlighted how much money security holders lost, perhaps I don’t understand financial markets as well as those journalists but I thought that money was only ever lost when one decides to sell or when the other party to the security went under, no one went under its just paper losses!

The reason for the selloff? The articles suggested that the market thinks the Fed will eventually raise interest rates this year as well as the Europe’s Central Banks’ sudden unwillingness to further stimulate the economy, some even suggested that the market is discounting in a Trump win hahaha. 

I realised one thing after reading these articles. markets are dominated by top down investors (all those investors will vehemently dismiss that), investors are not concerned about the individual assets they own, rather they are trying to move from asset class to class based on their “superior” judgement of how macro economic factors will effect industries, just thinking about that kind of behaviour makes me tired. 

At the end of the day, very few things are determinative but we can certainly rely on the fact that there will be cycles, the good times don’t go on forever, nor do the bad times. In the long run however, investors with a long term orientation will fair alright as long as they own good quality assets, stay the course and do not attempt the tedious task of market timing by moving from asset class to asset class.

I will leave you with a quote from the late Amos Tversky (he was a cognitive psychologist and good friend of Daniel Kahneman);  “it’s frightening to think that you don’t know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what going on”. If the market movers could comprehend this, their actions would not be governed by decision made by the central bankers who suffer from imperfect understanding just like the rest of us.

Stay calm, see the selloffs as an opportunity rather than a curse, stay the course.

MTN Zakhele Futhi (Prospectus & Update)

MTN has released the much anticipated Prospectus for MTN Zakhele Futhi (the new bee scheme that will replace MTN Zakhele when it unwinds on 24 November 2016)

The purpose of the MTN Zakhele Futhi Offer is to provide the Black Public with an opportunity to participate in the ownership of the MTN Group, either through the MTN Zakhele Futhi Public Offer or by continuing to participate therein through the MTN Zakhele Re-investment Offer. The MTN Zakhele Futhi offer is a part of the 2016 MTN BEE Transaction, which is sized to be approximately 4.0% of MTN’s issued share capital on a Fully Diluted Basis.

Black People and Black Groups are invited to subscribe for up to 123 416 819 ordinary shares in MTN Zakhele Futhi at R20.00 per MTN Zakhele Futhi Share. The total MTN Zakhele Futhi Offer size is up to R2 468.3 million.

The minimum subscription required for participation by a Cash Applicant in the MTN Zakhele Futhi Offer is 100 MTN Zakhele Futhi Shares, which amounts to a minimum subscription payment of R2 000.00.

The minimum subscription required for participation by a Re-investment Applicant in the MTN Zakhele Futhi Offer is the election to re-invest 50 MTN Zakhele Shares. A Re-investment Applicant is an MTN Zakhele Shareholder who wishes to receive MTN Zakhele Futhi Shares in respect of all or part of their scheme consideration under the MTN Zakhele Unwinding Scheme and who thus participates in the MTN Zakhele Re-investment Offer.

The number of your MTN Zakhele Shares in respect of which you elect to participate in the MTN Zakhele Re-investment Offer will constitute an offer by you to MTN Zakhele to receive MTN Zakhele Futhi Shares in exchange for the MTN Zakhele Scheme Consideration due to you in respect of such MTN Zakhele Shares, at R20.00 per MTN Zakhele Futhi Share.

For Cash Applicants that have applied and paid for more MTN Zakhele Futhi Shares than are eventually issued to you, MTN Zakhele Futhi will refund to you the excess amount plus interest by EFT.

If you are a Re-investment Applicant and have applied for more MTN Zakhele Futhi Shares than are eventually transferred to you, then the relevant portion of your MTN Zakhele Scheme Consideration which was not settled in MTN Zakhele Futhi Shares will remain with you and be settled to you as part of the MTN Zakhele Unwinding Scheme. As you have not paid any monies, no interest will apply to you.

MTN intends to implement the proposed 2016 MTN BEE Transaction, through MTN Zakhele Futhi, by means of the following core elements:

o the MTN Zakhele Futhi Public Offer;
o the MTN Zakhele Re-investment Offer, if the MTN Zakhele Unwinding Scheme proceeds;
o MTN Zakhele Futhi raising third-party finance through the MTN Zakhele Futhi Pref Shares;
o MTN providing MTN Zakhele Futhi with funding and vendor facilitation through, amongst others, the Notional Vendor Finance and the 20% transaction discount provided by it; and
o the subscription for MTN Shares by MTN Zakhele Futhi using the funding raised through these sources.

The 2016 MTN BEE Transaction will be funded through a combination of:

• Money raised from the Black Public under the MTN Zakhele Futhi Public Offer;
• Re-investment value received from MTN Zakhele under the MTN Zakhele Re-investment, if any;
• Notional Vendor Finance from MTN;
• An upfront effective 20% discount being provided by MTN to the price payable by MTN Zakhele Futhi for the MTN Shares acquired by it; and
• Third party bank funding.


Each MTN Zakhele Futhi Share has an underlying value, as at the Last Practicable Date of approximately R33.50.
The market price of the MTN Shares is the most important factor affecting the value of an MTN Zakhele Futhi Share although such value is also significantly impacted by the financing obligations.


For every R2 000 you invest, MTN Zakhele Futhi will be able to make an investment into MTN Shares of about R8 000
, facilitated by way of the 20% discount provided by MTN, and the funding raised by MTN Zakhele Futhi from MTN and the third party funders. This will give you exposure to a significant investment into the MTN Group, and its future, for a relatively small (25%) contribution. (For every R100.00 you put in, MTN and the funders will effectively put in about R301.60)

MTN Zakhele Futhi will subscribe for up to 76 835 378 MTN Shares. Based on the MTN Zakhele Futhi issued and MTN shares held, MTN Zakhele Futhi will hold 62.2 MTN Shares for every 100 MTN Zakhele Futhi Shares issued.
The Empowerment Period for MTN Zakhele Futhi is eight years after the date on which the MTN Zakhele Futhi Shares are issued to the Black Public, which is expected to be 23 November 2016.

You cannot sell or otherwise dispose of your MTN Zakhele Futhi Shares during the first three years of the Empowerment Period (i.e. the Minimum Investment Period). Restricted trading will be allowed during the fourth to eighth years, where you can only sell or Dispose of your MTN Zakhele Futhi Shares to eligible MTN Zakhele Futhi Shareholders. All sales and Disposals during the fourth to eighth years are subject, amongst others, to approval and BEE verification processes.

You cannot Encumber (e.g. use for security) your MTN Zakhele Futhi Shares during the Empowerment Period (i.e. 8 years).


During the Minimum Investment Period, MTN Zakhele Shareholders will generally not receive a dividend.
From year four onwards, while the MTN Zakhele Futhi Pref Shares remain outstanding, the dividend income earned on the MTN Shares held by MTN Zakhele Futhi in the ordinary course will be used firstly to pay or provide for permitted operational fees, costs and expenses and tax liabilities of MTN Zakhele Futhi and then a portion will be used to pay dividends and to provide a specified minimum amount per annum for settlement of the third party funding of MTN Zakhele Futhi. If funds remain, the MTN Zakhele Futhi Board has a discretion to pay up to 20% of the total dividend received from MTN (less the above amounts which have been paid or provided for operational fees, costs and expenses and tax liabilities) as a dividend to MTN Zakhele Futhi Shareholders, subject to MTN’s discretion.

The MTN Zakhele Futhi Offer opens at 09:00 on Monday, 12 September 2016 and closes at 16:00 on Friday, 21 October 2016.


MTN Zakhele Futhi Shares will be allocated Wednesday 23 November 2016.

For more info here is the prospectus: https://www.mtn.com/zakhelefuthi/Documents/ZakheleFuthi_Prospectus.pdf