Week in Review: China’s Economic Recovery on Track

China’s first quarter 2023 GDP growth beat estimates, rising 4.5% q/q vs 4% q/q est. Although retail sales outperformed expectations, surging by 10.6% y/y – the fastest pace in two years, industrial production fell short of consensus, recording a gain of 3.9% y/y in March. While the positive Q1 GDP print provided some relief, industrial output, fixed asset investment, and property data were below estimates. However, the overall surge in GDP growth is a sign that activity is returning to normal and puts the country on track to achieve its growth target of 5% or greater for the year. In related news, The People’s Bank of China kept its benchmark one-year lending rate on hold at 3.65% during its April meeting, as expected.

The relationship between China and the United States is deteriorating even further as recent reports suggest that U.S. President Joe Biden is preparing to sign an executive order aimed at limiting American businesses’ investment in China. This order is expected to be signed during the upcoming Group-of-Seven summit on May 19 in Japan, which will increase pressure on other members to support the action.

In the U.S., first-quarter earnings reporting is underway with about 17.5% of the constituents of the S&P 500 Index having reported for Q1 2023. FactSet Research data indicates that blended earnings per share (which combines reported data with estimates for companies that have not yet reported) decreased by 6.3% compared to the corresponding quarter a year ago. In contrast, sales saw an increase of approximately 2.3%.

The latest U.S. weekly jobless claims report, released on Thursday, revealed signs of increasing weakness in the labour market. However, investors seem to be divided on how to interpret this development. While some viewed it as good news, as it may prompt the Federal Reserve to reduce rate hikes, others considered it to be concerning evidence of an impending recession. In housing news, existing homes sales fell, and year-over-year home prices dropped -0.9%, the largest decrease in 11 years.

S&P Global’s gauges of current economic activity, released Friday, surprisingly suggested that multiple regions’ activity is recovering. According to S&P Global analysts, the S&P Global U.S. Composite Purchasing Managers’ Index (PMI), which measures both services and manufacturing activity, increased to its highest level in almost a year, reaching 53.5. The eurozone, UK, and Japan posted composite PMIs of 54.4, 53.9 and 52.5 respectively, topping estimates. The data indicates that developed economies are on track for robust growth in the second quarter. As a result, several central banks may decide to proceed with rate hikes next month, despite the recent turmoil in the banking sector.

In the UK, March’s headline inflation came in under estimates, rising 10.1% y/y from 10.4% in February. Energy, food and other goods and services were the primary drivers. The UK remains having the highest inflation rate among G7 countries, which creates doubt over whether the Bank of England (BOE) will pause rate hikes soon, as they have been suggesting. The probability of a 25-basis point hike at the BOE’s May meeting rose following the inflation print.

Eurozone inflation eased to 6.9% y/y in March from 8.5% y/y in February. The sizable drop can be attributed to declining energy costs, as natural gas prices continue their decline from their surge a year ago on Russia’s invasion of Ukraine. Core inflation, however, increased slightly from 7.4% y/y to 7.5% y/y, which has kept European Central Bank policymakers hawkish, with the group stating that interest rates will still need to keep rising.

On the market front, global indices ended the week mixed. The S&P 500 Index (-0.10%) was flat on the week, while the Dow Jones (-0.23%) and the Nasdaq index (-0.42%) also remained near last week’s close. Shares in Europe gained +0.41% (Euro Stoxx 50) over the week as positive inflation data and an improved economic outlook boosted investor sentiment.  The FTSE 100 managed a +0.54% rise, despite stubbornly high inflation.

As a result of Biden’s planned executive order, Chinese equities fell on Friday, as investors assessed the impact of escalating geopolitical tensions with the U.S. and took profit accordingly. The Shanghai index ended the week down -1.11% as a result. In Japan, the Nikkei 225 gained +0.25%. Gold dipped -1.07% while Brent Oil tumbled -5.83% over the week.

Market Moves of the Week:

Inflation in South Africa quickened faster than expected in March, with headline inflation rising 7.1% y/y (expectations: 6.9% y/y) from 7% y/y in February. Core inflation, however, remained unchanged at 5.2% y/y. Higher than expected food prices pushed the index higher, with food and non-alcoholic beverages rising by 14% y/y, contributing 2.4% to the total. This represents the largest annual increase since the 14.7% rise in March 2009. Outside of food, other supply-related categories within core inflation were more adverse than the market had expected (including regulated education, alcohol/tobacco and imported durable goods prices).

After inflation rose unexpectedly in March, traders increased their bets that South Africa’s Reserve Bank will continue its interest-rate hiking trend next month. By using forward-rate agreements to speculate on borrowing costs, traders are now fully pricing in a quarter-point increase in the repo rate. There is also a possibility of a larger 50-basis point move on May 25 when the monetary policy committee announces its next decision.

President Cyril Ramaphosa is under mounting pressure to delegate authority to his new electricity minister, who can take necessary measures to prevent more severe blackouts during the upcoming peak winter demand. Kgosientsho Ramokgopa was appointed to the position two months ago, but Ramaphosa has not yet specified which responsibilities he will transfer from the energy and public enterprises ministries to the new office. In other Eskom news, the state power utility has proposed a 3.75% raise to its employees, yet the National Union of Mineworkers is advocating for a 15% salary hike along with other incentives.

In political news, President Ramaphosa signed the Electoral Amendment Bill into law on Monday which will pave the way for independent candidates to contest national and provincial elections.

The JSE (-1.22%) fell over the week, as investors searched for conviction. Positive Chinese data sent Platinum Group Metals shares higher, however, a lower gold price sent heavy-weight gold mining stocks lower, forcing the Resources (-1.21%) sector into the red. The rand held up against the U.S. dollar over the week to end at R18.07/$. 

Chart of the Week:

In the last few days, crude has wiped out all its gains after the surprise OPEC+ oil cut at the beginning of April. The cut led to concerns of a widening deficit in global markets as the year goes on and raised fears of the benchmark price surpassing $100 once again. However, increasing perceived risks of a U.S. recession have recently overshadowed the move, sending oil lower.

Source: Bloomberg

Understanding UK Property Tax

The rules around tax are intricate enough when you’re buying property in your own country; when you take that process offshore, you quickly understand the value of consulting a qualified professional.    

UK property as a long-term investment can yield high returns and is an effective means of hard currency exposure. Considering the impact and cost of taxes on your overall investment, it’s essential to ensure that you have (or at least your advisor has) a sound understanding of all the taxes that come with owning property in the UK.   

Understanding the complete ins and outs of buying, holding and disposing of UK property assets can be complex and is often overlooked.  

Transparency is the key word we stand by when assisting our clients in buying property overseas, and we work hand in hand with one of the UK’s top-rated accounting firms, HWFisher, to ensure our clients are fully informed  

Our latest tax guide, in partnership with HWFisher, is available to download for everything you need to know about tax when looking at UK property as an investment for your 2023 portfolio. 

Download Tax Guide

Week in Review: China’s Post-Covid Recovery Shows Strong Progress

China’s National Bureau of Statistics (NBS) reported that the manufacturing purchasing managers’ index (PMI) rose to 52.6 in February from 50.1 in January, above the 50-point mark that separates expansion and contraction in domestic activity. Furthermore, the NBS emphasized that the non-manufacturing sector’s purchasing managers’ index (PMI) reached 56.3 in February, up from 54.4 in January. After lifting Covid restrictions, China’s economy is showing signs of a more robust recovery, with manufacturing seeing its most substantial progress in over ten years, services activity rising and the housing market stabilizing.

In the U.S. market sentiment received a boost this week after Atlanta Fed President Raphael Bostic published his written essay on Wednesday, commenting that he believes the Federal Reserve (Fed)should increase its policy rate by 50 basis points, to a range of 5%-5.25%, and maintain it at that level until well into 2024. As of now, rates are within a range of 4.5%-4.75%. Elsewhere, Fed Governor Chris Waller expressed doubt about whether the Fed is making the necessary headway to curb economic growth and decrease inflation. Citing robust inflation rates, as well as strong retail sales and the January jobs report, Waller indicated that if this trend persists, the Federal Reserve may have to increase rates beyond initial expectations. Officials next meet March 21-22, and by then they will have seen fresh reports on employment and inflation.

In Europe, official data indicated that the annual rate of inflation decreased slightly from 8.6% in January to 8.5% in February, and this was primarily driven by declining energy costs. On the other hand, core inflation, which provides a more accurate representation of underlying pricing pressures by excluding volatile food and energy expenses, increased from 5.3% to 5.6%. All combined, these factors contribute to the view that the European Central Bank (ECB) may maintain its hawkish stance for an extended period. It was suggested by the ECB President Christine Lagarde that a probable half-point increase in interest rates would occur during the March 16 meeting. European government bond yields increased over the week due to concerns about the aggressive tightening of monetary policy by the ECB as a result of persistent inflation data.

Following their sharpest weekly decline in two months, U.S. stocks rose Friday ending the week strongly, regaining some of their recent losses. The tech-heavy Nasdaq gained +2.58% for the week, while the S&P 500 and the Dow Jones were also both strongly up on the week, with gains of 1.90% and 1.75%, respectively. PMI’s in both Europe and the UK picked up in February with the Eurozone PMI rising to 52 from 50.2 in January and the UK composite rising to 53.1 versus 48.5 in January. Both the Euro Stoxx 50 and FTSE 100 ended the week positively, gaining 2.78% and 0.87% respectively.

For the second consecutive week, Chinese equities rose in anticipation of the National People’s Congress (NPC) meeting, as promising economic data raised expectations for a recovery that could surpass previous projections. The Shanghai Composite climbed by 1.87%. After four consecutive weeks of losses, the benchmark Hang Seng Index rebounded, increasing by 2.79%. The Nikkei 225 also secured positive gains of 1.73% this week.

Market Moves of the Week:

In local news, the Absa Purchasing Manager Index (PMI) indicated that factory activity in South Africa (SA) experienced a significant contraction in February. The seasonally-adjusted PMI dropped to 48.8 in February, down from 53 points in January, falling below the threshold of 50 points that distinguish between expansion and contraction. This is the first time it has fallen below this level since September 2022. This decline was likely due to the unprecedented seven days of Stage 6 loadshedding that occurred during the survey period. According to Absa, the business activity, new sales orders, employment, and inventories, sub-indices were all in contractionary terrain. Export sales, however, rose to the best level in a year, suggesting that manufacturers who solely supply the domestic market may have faced a challenging month.

Statistics South Africa (Stats SA) released their quarterly labour force survey during the week, and it highlighted that the official unemployment rate recorded a slight decline of 0.2 percentage points, reaching 32.7% in the final quarter of 2022 — marking its fourth consecutive decrease. During the quarter, the financial services sector was responsible for the largest share of job creation, hiring an additional 103,000 workers. The other sectors that contributed to the quarter’s job gains were private households, trade, and transport. The community and social services industry, however, saw a significant reduction in employment, shedding 122,000 jobs. Agriculture and construction were also among the sectors that made a negative contribution to the employment figures for the quarter. Although the unemployment rate has decreased in recent times, it remains higher than its pre-pandemic level of 30.1%.

This week, the JSE all-share index recorded a gain of +1.76%, fueled by gains in the resource sector (+3.73%), followed by industrials (+1.36%), and the financial sector (+1.18%). However, the gains were offset by a slight decrease in the property sector (-0.04%). The rand appreciated marginally to end the week at R18.15 to the dollar.

Chart of the Week:

The manufacturing sector in China saw significant growth in February 2023, expanding at its fastest pace in over a decade. This unexpected surge in production was attributed to the lifting of COVID-19 restrictions towards the end of last year.

Succession SA #4: The name is Bond, Mortgage Bond

In Roman Times, an heir could receive a nasty surprise when the will of a deceased parent was read. In Roman Times, an heir could inherit a parent’s debt.

What complicated matters even more, was that the inability of a debtor to repay a debt could result in the creditor demanding an arm or a leg from the debtor as an alternative settlement measure.

In present times, both inheriting a debt and debt costing you an arm or a leg is unthinkable, and, in the wise words of the infamous Asterix, one would gasp a “these Romans are crazy” at the thought of the idea.

The right to reject (“repudiate” if you want to be fancy) an inheritance was an important development in later Roman Dutch Law. If you cannot be forced to inherit, you cannot be forced to inherit debt, now, can you?

Smart move Roman-Dutchies, smart move!

The arm and the leg thing also fell by the wayside long ago (no pun intended), as did the risk of imprisonment for unpaid debt (far too recently than is comfortable really). However, to reset the balance, upon one’s demise, a pecking order in deceased estates was created to appease the creditors.

Creditors moved right to the top of the pecking order. What you own is first used to pay what you owe.

However, like the animals in Animal Farm, some creditors are more equal than others. Even within the band of merry creditors, a pecking order was created:

The top pecker being Bond, the mortgage bond.

So, when I die, and I bequeath property that has an unpaid bond registered over it – what happens?

Upon death, all your liabilities become due and payable. Your appointed executor of your estate will firstly determine all your assets and all your liabilities to establish if your estate is solvent (assets exceed liabilities). Even where your estate is solvent, the executor will also ascertain if you have sufficient liquid assets to settle the debt.

When a property is bonded, the portion of the debt that has not been repaid is a preferential liability in the estate. Nothing can be done with the property over which the bond has been registered until the bondholder’s claim has been settled.

If there is enough cash – no problem. The bond is repaid, and the property is available to either sell to settle other creditors (the less equal peckers) or to fund the administration costs of the estate.

If all creditors have been settled and the administration costs of the estate have been secured, only then can a property held in a deceased estate be inherited by an heir to whom it was awarded in the will.

So, the modern heir has moved down the pecking order in exchange for not risking life or limb for the debt of a legator. Fair exchange, one would think.

Sometimes, however, you do get a friendly bondholder who would be agreeable to allow an heir to apply for a new loan to enable the property to be transferred to the heir with a replacement bond being registered over the property in favour of the creditor. When the by-line of the financial institution says, “How can we help you?” the answer from an heir could be “a replacement bond would be helpful, thank you.”

The call here is in the hands of the bondholder. Estate planning based on the premise that a creditor will be kind to your heirs, is more often than not prone to fail. Planning to ensure sufficient liquidity in the estate is a better route to follow, as it enables executor and heirs.

Estate planning is about scenario planning, not just drafting a will. Scenario planning in estate plans starts with debt and costs, as these must be settled before the will has any relevance at all.

Failing to do proper estate planning is planning to have a failed estate plan when you are no longer there to resolve matters and could end up costing your heirs an arm and a leg in legal fees.

The fact that it has become more proverbial does not make it more palatable.

Carrick Consult is Not Guessing Maths or Law

“Failure to plan is planning to fail” is one of those often-repeated phrases one would find in many a financial planning article.  It is true of course, but if you put this dictum to the test in real life, it still is astounding to what extent people in general fail to plan.

The conundrum with estate planning is that even if you plan, the plan is never tested until after death – at which time – if the plan does not work out – there is nothing one can do.

That is simply not good enough either.

 

The Living L&D is an innovative product development that puts a stop to this madness.  Yes, you should plan, but at the same time the plan should be put to the test to ensure that the outcome one had in mind is realised.

Any plan can be tested through a simulation.  Financial planners “test” their plan through a simulation done on an Excel spreadsheet (or some other smart financial tool) to ensure that the growth and risk they propose on an investment achieves the desired investment outcome – one of which is the risk of longevity. 

Carrick Consult has adopted a similar simulation called the Living L&D to not only test any estate plan by simulating the administration process of a deceased estate, but also to manage the plan and the simulation over the lifetime of a client to ensure that the plan changes over time and that the simulation provides certainty that the plan works as it was intended to do.

Enrolling in the Living L&D programme achieves a number of objectives:

  • It provides a precise mathematical visual aid to a client to see for him – or herself the actual result of the estate planning.  One can see exactly who will get what, which assets will be sold and which retained, what the estate duty payable is and whether a liquidity issue exists.
  • It provides an opportunity for the advisor and the client to change the planning and see how the outcomes change.
  • It allows the estate planner to be constantly prepared for the eventuality of death as the greater part of the work that needs to be done after death is already in place.  By running the Living L&D simulation, the actual work required to be done after death is already done.
  • The avoidance of calculation errors and thought errors means that the time it takes to administer such an estate is cut in half.  Most delays in deceased estates could have been avoided through proper planning and proper planning cannot be done without running a simulation or testing the plan.

Guessing either maths or the law is simply crazy.

From this day on, no Carrick client will ever have to guess either.  At Carrick we simply don’t guess maths and we simply don’t guess the law.

To support this drive, Carrick Consult makes use of smart automation to collect the information from its clients and to import each client’s reply into its Living L&D process.  Remediation is done through a team of expert fiduciary advisors, all admitted attorneys, that work alongside the wealth advisors.

In order to encourage this change in estate planning behaviour, all costs incurred in accessing this solution are offset against any future executor’s fee and the level of adoption of the solutions will also give a client an automatic discount of between 30% and 50% of the executor’s fee.

Estate planning is a key building block of financial wellness and will never be done differently again.

Take control and ownership of your estate plan through the Carrick Consult Living L&D.  It’s the best gift you can leave your loved ones.