We made it! 2016 is done and dusted. To be honest, at the beginning of 2016 we had higher hopes than what actually materialised. Unfortunately, all the unexpected happened. Brexit, Trump and of course our ‘powers that be’ trying their best to derail any chance of an upswing in the SA economy. One positive is that we managed to avoid the dreaded credit ratings “Downgrade”, which supported our rand and equity markets. However, we have merely kicked the can down the road.
But that was then, we now have a new year ahead, with new expectations.
The United States, with Trump at the helm, has surprisingly received a positive outlook for the year ahead. Confidence indicators have been buoyed due to the possible changes in the business sector, specifically a deregulation of business. What this means is the expenses and red tape around conducting business will be reduced, so, it should be easier and cheaper for companies going forwards. He has also mentioned tax cuts in the corporate sector. If this all materialises, then this should lead to an expansion of the corporate sector, which will boost the growth of the economy. The problem is the dollar which is currently overvalued – too strong – which hurts sectors of the economy, such as exports and manufacturing. That along with the lack of transparency in Trump’s policies, besides “America First”, is currently leading to uncertainty in world markets and currencies.
Europe is a slightly different kettle of fish. Since the unexpected BREXIT vote, there have been many other countries that have voiced similar protectionist views in wanting the same outcome as the UK. This year sees France, with elections in May, also on the edge. If Marine Le Pen is elected she has made it clear that she wants to review France’s membership of the European Union (EU). It will not be that easy, as it requires a change in their constitution, but it can happen. If this does happen, the confidence in the European Union political model will start to unravel, which will create further volatility and uncertainty.
The British Prime Minister (Teresa May) has indicated that she will seek to secure favourable Trade and other agreements. The problem is the rest of Europe doesn’t necessarily view the exit in the same manner, and could be unwilling to give the UK the same concessions. This could potentially result in a drawn-out exit by the UK from the European Union, without any favourable deals for the UK. With this is mind, the pound can remain undervalued.
China has re-stimulated their economy over the past year, especially apparent in the pickup of their industrial activity. As a result, industrial commodity prices have increased by around 20%, in dollar terms. This activity looks to continue into this year, which is favourable to commodity producing Emerging markets and their currencies. South Africa being one of these markets.
South African growth remains exceptionally weak but is expected to improve marginally this year supported by 3 things:
- Improvement in the agricultural season following a severe drought,
- Lower inflation due to slowing food prices which should provide some relief to consumers, and
- Improvement in exports helped by higher commodity prices, as mentioned above regarding China.
If our Government is able to maintain some sort of fiscal discipline, meaning the government is able to balance the budget more efficiently, this combination should see SA avoid a credit rating downgrade later this year. However, this year is likely to be another difficult year politically and the Minister of Finance is going to have to increase taxes significantly in the upcoming Budget, which no one likes to hear. There is a risk that SA’s modest economic growth recovery disappoints. If the growth isn’t as expected, it is likely that SA will be downgraded later in the year, putting the Rand under pressure.
With all this in mind we at Harbour will continue to navigate the road ahead as smoothly as possible for our clients. Bearing in mind that the offshore currencies are currently ‘CHEAP’, in relative terms to what we have been used to over the last 18 months, we have built an exciting new offshore structured product with Investec.
Again, the main benefits are capital protection, a known and predictable outcome, as well as diversification.
Details of the Harbour USD Eurostoxx 50 Autocall are as follows:
- Autocall will be listed on the LSE (London Stock Exchange)
- Autocall is designed to offer investors the potential to earn significantly enhanced returns relative to cash and fixed income investments.
- Issuer is Investec Bank Plc, but the Autocall is fully collateralised with Barclays Bank Plc, hence the investor will take on no Investec risk.
- Maximum 5 year USD investment linked to the performance of the Eurostoxx50 Index.
- The Autocall will pay a 10% cumulative enhanced return per annum, provided that the index is positive on the exercise date. If the index level on the date is below the initial level, the investments remains intact and continues to the next Automatic Redemption Valuation Date –
I. On the second exercise date, if the index is above the initial level the investment will redeem and the investor will receive 2 x 10% = 20%
II. On the third exercise date, if the index is above the initial level the investment will redeem and the investor will receive 3 x 10% = 30%
III. On the fourth exercise date, if the index is above the initial level the investment will redeem and the investor will receive 4 x 10% = 40%
IV. On the fifth and final exercise date, if the index is above the initial level the investment will redeem and the investor will receive 5 x 10% = 50% - If the Autocall has not been redeemed at the end of 5 years, and the index is equal to or below the initial level, the investment redeems and investors receive 100% of their initial investment in USD, provided the index has not fallen below 70% of the initial index level.
- 100% capital protection in USD at expiry provided that the Index has not fallen by more than 30% below the initial index level on the maturity date only. If the index falls by more than 30% on maturity date, the investor will feel the entire loss.
- Minimum Investment Amount USD 10 000 and increments of USD 1 000 thereafter.
- Daily pricing on the LSE and monthly statements from your Stockbroker.
We are looking to close the Tranche and list the product at the end of February 2017. For more information please consult your Financial Advisor, and/or view the attached brochure.