In our July article entitled “Equity Market Direction – Will it be the ‘P’ or the ‘E’?” we wrote about the well-known fact that corporate earnings (E) are a very influential driver of share prices (P) over the long-term.
To quote US-based investment advisory firm, Fisher Investments: “With two companies now reporting positive advanced trial results for a Covid vaccine – with big share price booms accompanying their announcements – investors’ interest in vaccine candidates is at fever pitch. The thesis: If you can just pick the winner(s) in the vaccine race, quick riches will follow. Appealing, but in our view, wrong. This heat-chasing ignores markets’ efficiency and fundamental considerations, and we think investors are best off not speculating in this arena (or at all).”
Fisher further points out that vaccines generally are not huge money-makers for pharmaceuticals firms. They cost a lot to develop, sell for little, and are a one-time purchase for each customer. The entire world may seek inoculation, but after society has gained immunity, demand will dry up.
Markets are forward-looking, and with specific reference to these pharmaceutical companies, it is the extent to which the ‘E’ will materialise that will determine the ‘P’ over the medium-term.
Dynasty has an investment bias where our selected Funds comprise quality holdings with a strong element of earnings certainty, in preference to chasing thematic-based earnings dreams!
Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.”
– Fred Schwed Jr, an American stockbroker turned author
Global News
- Two companies have released positive data on Covid-19 vaccines this week. Pfizer reported that its vaccine was 95% effective whilst Moderna announced that their vaccine was 94% effective. While this is good news for the fight against the coronavirus, there are still many hurdles to overcome such as the logistics of distribution as well as peer review obstacles.
- Tension is near boiling point in the US. President Trump and Rudi Giuliani have accused Democrats of orchestrating a “national conspiracy” in stealing the election for which there is no evidence. The President continues to refuse to concede the election to President-elect Joe Biden. Biden has called President Trump’s refusal “totally irresponsible” and that Trump’s obstruction of the transition process could delay distribution of a Covid-19 vaccine to Americans by months.
- As Joe Biden steps up to fill his new role as President of the US, a problem faces the administration. What do you do with an ex-President with substantial criminal liability? Follow this link for more on this.
- According to data from the Society for Worldwide Interbank Financial Telecommunications, the euro was the most used currency for global payments last month, making this the first month that it has outpaced the US dollar since February 2013. Trade upheaval, a pandemic-induced recession, and political disharmony have placed renewed pressure to reduce the share of international payments in dollars. Although the dollar has weakened more than 11% from its March peak, it remains the top funding currency, as disclosed by the Bank for International Settlements in a July report.
- Telsa Inc. will finally enter the S&P 500 on December 21, which will greatly broaden its investor base. The company is the largest ever to be added to the Index. Tesla shares rose as much as 15% in extended New York trading on the news.
Local News
- South Africa, and Africa as a whole, were largely ignored under President Trump’s administration. What will a Biden Presidency mean for South Africa? Sasha Planting from the Daily Maverick has written an opinion piece on what she thinks may happen with US and SA relations under Biden, especially considering China’s stronger hold on the continent that was gained during the Trump administration. Follow this link for the article.
- The South African Reserve Bank yesterday decided to keep interest rates on hold as the third quarter saw GDP expand by 50%. However, this was off a very low base following the second quarter’s economic meltdown.
- President Ramaphosa’s investment drive received a boost of R109 billion in investment pledges from local and foreign companies in his third SA Investment Conference. This makes the total amount that the President has accumulated since 2018 to R773.6 billion, his target being R1.2 trillion over five years.
- Following last week’s newsletter theme of “Thuma Mina”, we have attached an article authored by Justice Malala as published in this week’s Financial Mail. “Ace’s arrest: time to celebrate”, postulates that President Ramaphosa’s greatest failure is due to an ANC that remains divided, causing policy to be haphazard and unimplementable. Magashule has been the main antagonist in the party, obstructing Ramaphosa’s reform initiatives at every turn. In this context, Magashule’s arrest and court appearance is a time to celebrate, but the story is far from over. Follow this link for more.
- Former President Jacob Zuma appeared at the Zondo Commission this week. It became apparent that whatever the commission decided upon, Zuma would attempt to delegitimise the State Capture commission rather than try to win a legal battle. Zuma’s statement painted him as a victim, with so-called conspiracy theories and “alternative facts”. His statement also focused on his feelings and fears rather than a structured argument of innocence.
- Santam’s share price fell after a Cape Town court made a landmark ruling, ordering the insurer to compensate for Covid-19 related business damages. Bloomberg reported that the insurer will have to pay out business-interruption claims to two South African hospitality companies, potentially opening up the entire insurance industry to cover widespread losses suffered by corporates during the lockdown period.
SARB Announcement on Inward Listed Instruments puts Industry in a Spin
The local investment industry has been put into a spin following Exchange Circular No. 15/2020 (published on 29 October 2020 by SARB), allowing inward listed debt and derivative instruments, as well as exchange-traded funds referencing offshore assets, to be classified as domestic, provided they meet all the criteria and are approved by SARB and the exchange after going through an approval process.
This would have far-reaching implications for local investment vehicles in that approved retirement funds would no longer be subject to the 30% limit in terms of offshore exposure and that they could effectively be fully rand-hedged by investing in locally listed exchange-traded funds (ETF’s) which track offshore indices.
A few asset managers and investment advisory firms have been quick to publicise this opportunity to “dollarise” clients’ assets, but Dynasty’s retirement fund providers such as Ninety One (formerly Investec Asset Management), are being forced to follow a more cautious approach as the Financial Services Conduct Authority (FSCA) have now stepped in:
The FSCA was not aware that the Circular was going to be published and have indicated that they need time to evaluate the impact and determine the correct Financial Sector application.
The lack of wider industry consultation has meant that there are a number of issues that need to be clarified by various industry participants before the opportunity can be properly assessed. This includes how these assets will be treated from CISCA (the Collective Investment Schemes Control Act); from a Regulation 28 perspective; and the level of look-through required.
A subsequent FSCA communication – communication 53 – makes it clear that current regulations remain in force. This means that offshore exposure (ex-Africa), both direct and indirect, is limited to 30% within retirement funds until such time that further clarification has been provided.
The communication also warns the investment industry not to make assumptions in relation to their own governing legislation and to await clarification from the FSCA. The SARB Exchange Control Circular was issued to regulate exchange control and not to determine Financial Sector legislation, following the Finance Minister’s and National Treasury’s aim to permit increased flows into the country.
As Dynasty, we are very excited about the opportunity to be more flexible in terms of our offshore allocation within clients’ retirement funds, and are eagerly awaiting further regulatory clarification on this matter.
