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The political game of chess affects us all

08 October 2018 Jonathan Faurie

One of the key indicators of a tough economic climate is that net inflows into the investment industry become depressed.

At times, this can decrease by between 15% and 20%. However, in extreme cases, it can decrease by 30%. If we look at the current situation in South Africa, net inflows have decreased by 50% when compared to four years ago. 

While this may seem troubling, the Association of Savings and Investment South Africa (ASISA) says that it is not something to be gravely concerned about just yet. 

The interesting journey

Speaking at a meeting of the ASISA Board, Thabo Khojane – MD of Investec Asset Management and ASISA Deputy Chairperson – said that pre-2014, the investment industry was enjoying a net flow rate of 10% (net inflows over opening assets). In rand terms, this amounted to about R90 billion. 

However, since then we have experienced some tough economic times and a political climate that had a major effect on the investment industry. Ian Kirk – CEO of the Sanlam Group and ASISA Chairperson – pointed out that the Nenegate debacle in December 2015 was a poignant moment in South Africa’s history and had a significant impact on the investment industry. 

South Africa was then downgraded to junk status following the decision of Former President Jacob Zuma to fire then Finance Minister Pravin Gordhan and replacing him with Malusi Gigaba. 

“Since 2014, we have seen a significantly depressed net flow rate. As of June 2018, this is currently sitting at 2%, which is R35 billion. This is significantly less than the 2014 levels,” said Khojane. 

While the largest driver, South Africa’s political climate is not the only reason these net inflows are so depressed. 

“Disappointing equity returns is another major driver of these depressed net inflows. ASISA hopes that if the equity markets start to improve, we will see a normalisation in the net inflow rate,” said Khojane. 

Alternative destinations

If this capital is not making its way to the investment industry, where is it going? 

Khojane said that ASISA is not sure about this, but they imagine that there are three alternatives that the public is taking advantage of. 

“The first place where the public is reinvesting this money is in savings. People are trying to save more or are upgrading their cars or their houses. This can be muted though in really tough economic times,” said Khojane. 

The second place the public is reinvesting their money is in alternative methods of investing. This can be seen in the popularity of bonds and cash which traditionally take a back seat to equities during healthy investment conditions. Another form of alternative investing is that consumers are opting to accelerate their bond repayment, which Khojane points out may not be a terrible investment decision. 

The third destination where these net inflows may be going is directly into savings. While Khojane admits that ASISA has not been keeping an eye on bank deposits, the association would not be surprised to see that during times of depressed net flow rates, bank deposits would increase significantly. 

Don’t be alarmed just yet

“Looking forward, my expectation is that the equity market will not underperform forever. When it normalises, we will once again see set inflows increase to between 10% and 12%. Whether this will be worth the same as it was in 2014 remains to be seen, but we will eventually return to a normalised situation,” said Khojane. 

Once this occurs, who will be the major beneficiaries? 

Khojane pointed out that if we exclude the traditional money market funds, there are 946 mutual funds in the industry. The top 20 of these funds account for 43% of the asset management industry. Therefore, there is a high degree of concentration in the South African asset management industry. 

What this means is that the experience of the top 20 funds is not an unfair reflection of what is going on in the industry. If they receive increased net inflows, then the rest of the industry should be experiencing the same. 

Turbulent time ahead

The South African political climate has been turbulent over the past five years and may enter into an additional period of turbulence as the country prepares itself for elections in 2019. The cracks within the African National Congress (ANC) are starting to show and are exacerbated every time we hear of reports similar to the one describing a recent clandestine meeting at a hotel in Durban where certain ANC members were said to be plotting the demise of President Cyril Ramaphosa. 

Leon Campher, ASISA CEO, said that it should not come as a surprise that net inflows would dry up as the political climate becomes increasingly uncertain. Khojane adds that when we look at the investment industry, half of the capital entering the industry are retirement savings (going into retirement funds) and half is made up of discretionary savings. This is the half that is most affected by the political climate. 

The industry is taking a stand against the political climate pointing out to government that if the political situation is not controlled, then South Africa may never see inflows of close to 10%. 

“The Nenegate debacle in 2015 made the life insurance industry wake up and take a stand. We are constantly engaging with government to come up with a solution to normalise the industry, and we have not seen the lapse rates that we were expecting. Intermediaries are working very hard to keep the industry as healthy as possible,” said Kirk. 

Editor’s Thoughts:
We are not sure when we will see net inflows return to 10%, I feel that the build up to the 2019 elections, as well as its aftermath, will play a role in this. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Peter, 08 Oct 2018
It's simple - money flows to financial and legal stability and certainty. Until the State Capture clean up results in criminal convictions of the MAIN PLAYERS, (and not some token scapegoats) followed by a real perception of Competent, Honest, Clean government, savings will continue to flow offshore. Sensible people need to build a safety net.
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