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 rates Production (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 we are in for a decade of slow/low growth? where & how should funds invest? Image or illustrations Global Perspective

What if we are in for a decade of slow / low growth? Where and how should funds invest? SOUTH AFRICA ……… In Focus & Facts

Botswana & SA excluding other African countries contribute about 29.00% of world ‘s diamonds. Significant. What if we are in for a decade of slow/low growth? where & how should funds invest? Image or illustrations

SA & Zimbabwe contribute about 82.53% of world ‘s platinum requirements – used in cars (catalytic converters), but… What if we are in for a decade of slow/low growth? where & how should funds invest? Image or illustrations

…. no significant production of automobiles. SA assemble a sizable number of cars for domestic and export markets. What if we are in for a decade of slow/low growth? where & how should funds invest? Image or illustrations

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 Real growth

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%.

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.

What if we are in for a decade of slow / low growth? Where and how should funds invest? 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 recession Greece, Italy and other EU members exit the union China growth trajectory falters and leads to another global crisis

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

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/$

What if we are in for a decade of slow / low growth? Where and how should funds invest? So where & how should funds in invest …..in times of low growth prospects/ uncertainty?

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

What if we are in for a decade of slow / low growth? Where and how should funds invest? Private equity investments (unlisted) Three categories exist in this alternative assets class – Venture capital, development capital and buy-outs Choose 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

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

What if we are in for a decade of slow / low growth? Where and how should funds invest? Private equity investments. Yes, but NO to micro-lenders / loan sharks There are over 2,000 micro-lenders in SA

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

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