Ensimini Financial Services

Ensimini in the Press

Making Sense of the New Normal

Retirement fund trustees have the unenviable task of navigating through a myriad of complex issues in managing their funds’ investments.

Aside from market behaviour, they also have to deal with the added complexity of understanding the position of their selected asset managers relative to other managers and be able to explain to members why their selected managers were, or were not, exposed to a specific market segment or stock.

Eric Mtshweni, Director & Investment Consulting Head of Ensimini Financial Services, says over the past two months specifically we have seen even more so how many experienced asset managers have struggled to make sense of “the new normal” during the uncertain times we are experiencing. It is therefore unsurprising that many retirement fund trustees have commented that they are ill-at-ease with the mammoth responsibility of setting, implementing and monitoring an appropriate investment policy for their funds.

“It is at volatile times like these that the robustness of investment policy statements as well as the conviction of retirement fund trustees on the suitability of the strategy they implemented to achieve their risk and return objective, are severely tested,” says Mtshweni.

He says retirement funds have been on the receiving end of volatile markets for the past two years and this volatility has caused much anxiety for retirement fund trustees and members, especially those contemplating retirement in the near future.

In order to best charter through this atypical territory’ Pretorius and his investment team believe it is critical for trustees to unpack some of the key issues they believe will impact global and domestic market behaviour in 2018.

Global outlook

It is generally acknowledged that most of the growth in 2018 will come from China, United States and the European Union (EU), on the back of ongoing expansionary fiscal policy, the improvement in employment statistics in these economies and the resultant increase in consumer spending.

“The increased risk of higher inflation, however, may result in a tightening of the monetary policy which is likely to affect emerging markets like South Africa negatively as the capital inflows experienced in the last decade could be reversed.”

It is still uncertain, how US President Trumps’ Tax Amendment Bill will affect the rest of the world. Particularly, the incentive of reduced corporate taxes for repatriation of profits by US companies in foreign countries.

Mtshweni says emerging markets have, to date, ignored these developments. However, in the event of aggressive monetary policy tightening, capital is likely to flow out of emerging markets, which will result in depreciation in emerging market currencies and induce inflation leading to an increase in interest rates by monetary authorities.

As the monetary policy normalises, the stock market is likely to benefit positively as an alternative asset.

Research by many investment houses seems to suggest that the equities are near or at fair value valuations. However, the risk of capital losses as the interest rate increases might be positive for the global stock market.

Domestic outlook

On the domestic front the outlook is encouraging. Markets entered 2018 buoyed on the back of the election of Cyril Ramaphosa as president of the ANC in December.

This result was well received by domestic markets and the business community at large and it is likely to increase domestic business confidence and improve investment spending in support for economic growth. Local companies have an estimate R1.3 trillion in reserves that could be released as companies look at expanding on the back of improving market sentiment.

Domestic economic growth has been low compared to the pre financial crisis period in 2008. At the centre of this low growth was the structural bottle neck resulting from a lack of adequate skills, lack of investment, political uncertainty and a fiscal consolidation programme.

The Reserve Bank has forecast the economy to grow at about 1.4% and 1.6% for 2018 and 2019 respectively.

Despite the positive sentiment, the risk of another downgrade of our sovereign debt remains. The deciding issue for ratings agencies is the significant challenge government is facing with regards to its own fiscal consolidation (i.e. low revenue collection and higher government expenditure). Added to this are the dual challenges of low economic growth and pressure on inflation.

The inflation rate for December 2017 was 4.7% compared to 4,6% in November 2017. This is within the Reserve Bank target range of 3.0% - 6.0%. The Reserve Bank forecasts inflation to remain within the target band for both 2018 and 2019. The Reserve Bank has evaluated the risk to the inflation to be balanced and as a result decided to keep the interest rates unchanged to date.

Bond market

The outlook for the bond market is dependent on the developments in the developed markets, particularly the US and UK with regards to monetary policy tightening. If this is performed aggressively, it is likely to have a negative impact on our domestic bond market.

“It is surprising that the South African bond market is not pricing in any risk relating to the tightening of the monetary policy in the developed market, albeit the fact that the US labour market is strengthening further,” notes Mtshweni.

He says the explanation for this phenomenon might either be that the positive news of the election of Cyril Ramaphosa might be over-priced in our market, relative to the risk outlined above, or in the alternative, the market is playing a wait-and-see game. If it is the latter, the budget speech will provide extra clues on the direction of the market.

All Share Index

It is anticipated that the Johannesburg Stock Exchange (JSE) will be volatile for most of the year. The volatility will be sparked by both local and offshore economic and political developments.

The JSE All Share Index has lost approximately 6.0% since the beginning of 2018. We view these losses to be largely as a result of profit-taking by investors after the domestic equity market performed well in the calendar year 2017, with the All Share Index returning a handsome 17.5% for the 12 months to 31 December 2017.

Equities have a better chance of being the best performing asset class, provided that the monetary policy tightening in the US and UK does not surprise on the upside. If we see a faster than expected monetary policy normalisation, the market might be jittery and heighten irrational exuberance.

“For trustees trying to make sense of these global and domestic predictions we remain of the view that market timing as a strategy generally reduces investment returns as opposed to its intent of enhancing it. Experience has proved that a sound long-term strategic asset allocation strategy is key to ensuring consistent long-term investment performance. Whilst it is important to regularly review your investment strategy, we caution investors against investment strategies driven by sentiment, momentum or market noise.

There is always going to be noise and lots of it. Knowing which noise to listen to remains a very difficult task. The recent case of Capitec is an excellent example of how easily investors react to untested noise. For retirement fund trustees it has never been more critical to seek proper professional advice to help navigate the murky waters of investment decision making,” concludes Mtshweni.


Prepared on behalf of Ensimini Financial Services by Cathy Findley PR.

Any queries to Jacqui Rorke on (011) 463-6372 or email This email address is being protected from spambots. You need JavaScript enabled to view it.