Select Page

Volatility is back. What impact is reasonable to expect in local markets?

Volatility is back. What impact is reasonable to expect in local markets?

Severe volatility in international markets mirrored by an ever-declining Allshare index of the Johannesburg Securities Exchange, raised the question among analysts whether we are set for a repeat of 2008 to 2010 when all markets worldwide gyrated wildly.

Last week, on 04 December, US markets went into a tailspin, plummeting between 3% and 4% in a single day. The downward trend continued on and off for another three days with investors holding their breaths just how far this correction will go.

This week Monday we celebrated Human Rights Day in Namibia, taking me out of my daily market watch, but big was my surprise on both Tuesday and Wednesday, when non-US markets staged somewhat of a comeback.

However, when I checked the actual index values on Wednesday, the surprise was even bigger when I noticed that the Dow has dropped another 560 points since last week’s calamitous Tuesday when the drop was a whisker shy of 800 points. The same trend was reflected in all the other major indices. The S&P is down by another 70 points, the Nasdaq by about 150 points, the Russel 2000 by 40 points with the Dow Total Market at an uncomfortable 27101, down by 600 points in five trading days.

I was expecting some regained ground from all these indices, yet the opposite transpired. To demonstrate just how severe the volatility continues to be, one only needs to look at the markets in Asia and at the FTSE. The Nikkei is back approximately where it was 9 months ago while both the Hang Seng and the Shanghai are substantially below their highs of 11 months ago, Even the FTSE, jumping more than one percent on Wednesday, was still stuck below 7000 index points, and very far from the lofty 7600’s earlier this year.

In our local markets, the two biggest events with a significant impact was the South African Reserve Bank’s decision to increase its repo rate from 6.5% to 6.75%, bringing it on par with the Namibian rate. Of course, the Bank of Namibia did not budge, opting to keep the rate at 6.75%, hoping that the SA move would be sufficient to support the currency.

Whether that was successful or not, is subject to opinion. There was a brief improvement in the Rand’s external value but this week it was back to the mid-R14’s with the JSE Allshare hovering above 51000 but very far away from the 62000 level in January this year.

During this year, there was much talk about a market correction but little reference to volatility. Although I chewed through one or two reports that warned of volatility, none saw it as a major threat. Instead, the question that I encounter most often revolves around the issue of a major market correction, say 20% or more.

There are several US analysts who expects a major correction, and there is the odd voice warning of another financial meltdown, but I sense these sentiments are based more on technical analysis and not on trading values. This boils down to a view that expects the market to correct, simply because it has expanded for ten years in a row. Sort of like a statistical probability – if it has grown so much for so long, history predicts that it has to contract again.

Fortunately, there are also sober analysts who stress that this is impossible to predict and that the only sensible strategy is to hold positions only in relation to their risk. Obviously, this brings me back to volatility for the more volatile the trading environment, the higher the risk.

Going by only one week’s trading history one certainly can not say that a correction has started. There is as yet, no factual basis for this. There is however, a very clear escalation in volatility and this may or may not portend a correction.

Equally speculative are the many opinions on what a correction will look like. Also for us, what the local impact of a worldwide correction will be?

It is dangerous to make dogmatic predictions but I think it is safe to expect that a major financial correction in the rest of the world, will have a definitive impact on the JSE directly, on the exchange rate indirectly, and on the Namibian capital market in a round-about way when investors shun Namibian instruments looking for better yield in other markets.

This much was already alluded to in the Bank of Namibia’s statement last week that accompanied the repo announcement. The bank made a point of local liquidity in the banking system, showing that it has deteriorated compared to the first nine months, but then again, by Wednesday it was back above N$3 bn and BoN Bills have dwindled to a mere N$50 million.

Do these pointers qualify as signs of local volatility? I doubt it. Our own banking system is stable, in a far better condition than the first half of 2017, and actually nibbling again on new credit. Will foreign market volatility have an impact on the JSE? Undoubtedly yes, but then do not forget that the Rand often appreciates when the rest of the market suffers.

Index values courtesy of the Wall Street Journal – Ed.


About The Author

Sanlam 2018 Annual Results

7 March 2019


Sanlam’s 2018 annual results provides testimony to its resilience amid challenging operating conditions and negative investment markets

Sanlam today announced its operational results for the 12 months ended 31 December 2018. The Group made significant progress in strategic execution during 2018. This included the acquisition of the remaining 53% stake in SAHAM Finances, the largest transaction concluded in the Group’s 100-year history, and the approval by Sanlam shareholders of a package of Broad-based Black Economic Empowerment (B-BBEE) transactions that will position the Group well for accelerated growth in its South African home market.

Operational results for 2018 included 14% growth in the value of new life insurance business (VNB) on a consistent economic basis and more than R2 billion in positive experience variances, testimony to Sanlam’s resilience in difficult times.

The Group relies on its federal operating model and diversified profile in dealing with the challenging operating environment, negative investment markets and volatile currencies. Management continues to focus on growing existing operations and extracting value from recent corporate transactions to drive enhanced future growth.

The negative investment market returns and higher interest rates in a number of markets where the Group operates had a negative impact on growth in operating earnings and some other key performance indicators. This was aggravated by weak economic growth in South Africa and Namibia and internal currency devaluations in Angola, Nigeria and Zimbabwe.

Substantial growth in Santam’s operating earnings (net result from financial services) and satisfactory growth by Sanlam Emerging Markets (SEM) and Sanlam Corporate offset softer contributions from Sanlam Personal Finance (SPF) and Sanlam Investment Group (SIG).

Key features of the 2018 annual results include:

Net result from financial services increased by 4% compared to the same period in 2017;

Net value of new covered business up 8% to R2 billion (up 14% on a consistent economic basis);

Net fund inflows of R42 billion compared to R37 billion in 2017;

Adjusted Return on Group Equity Value per share of 19.4% exceeded the target of 13.0%; and

Dividend per share of 312 cents, up 8%.

Sanlam Group Chief Executive Officer, Mr Ian Kirk said: “We are satisfied with our performance in a challenging operating environment. We will continue to focus on managing operations prudently and diligently executing on our strategy to deliver sustainable value to all our stakeholders. The integration of SAHAM Finances is progressing well. In addition, Sanlam shareholders approved the package of B-BBEE transactions, including an equity raising, at the extraordinary general meeting held on 12 December 2018. Our plan to implement these transactions this year remains on track.”

Sanlam Personal Finance (SPF) net result from financial services declined by 5%, largely due to the impact of new growth initiatives and dampened market conditions. Excluding the new initiatives, SPF’s contribution was 1% down on 2017 due to the major impact that the weak equity market performance in South Africa had on fund-based fee income.

SPF’s new business sales increased by 4%, an overall satisfactory result under challenging conditions. Sanlam Sky’s new business increased by an exceptional 71%. Strong growth of 13% in the traditional individual life channel was augmented by the Capitec Bank credit life new business recognised in the first half of 2018, and strong demand for the new Capitec Bank funeral product. The Recurring premium and Strategic Business Development business units also achieved strong growth of 20%, supported by the acquisition of BrightRock in 2017. Glacier new business grew marginally by 1%. Primary sales onto the Linked Investment Service Provider (LISP) platform improved by 5%, an acceptable result given the pressure on investor confidence in the mass affluent market. This was however, offset by lower sales of wrap funds and traditional life products.

The strong growth in new business volumes at Sanlam Sky had a major positive effect on SPF’s VNB growth, which increased by 7% (14% on a comparable basis).

Sanlam Emerging Markets (SEM) grew its net result from financial services by 14%. Excluding the impact of corporate activity, earnings were marginally up on 2017 (up 8% excluding the increased new business strain).

New business volumes at SEM increased by 20%. Namibia performed well, increasing new business volumes by 22% despite weak economic conditions. Both life and investment new business grew strongly. Botswana underperformed with the main detractor from new business growth being the investment line of business, which declined by 24%. This line of business is historically more volatile in nature.

The new business growth in the Rest of Africa portfolio was 68% largely due to corporate activity relating to SAHAM Finances, with the East Africa portfolio underperforming.

The Indian insurance businesses continued to perform well, achieving double-digit growth in both life and general insurance in local currency. The Malaysian businesses are finding some traction after a period of underperformance, increasing their overall new business contribution by 3%. New business production is not yet meeting expectations, but the mix of business improved at both businesses.

SEM’s VNB declined by 3% (up 6% on a consistent economic basis and excluding corporate activity). The relatively low growth on a comparable basis is largely attributable to the new business underperformance in East Africa.

Sanlam Investment Group’s (SIG) overall net result from financial services declined by 6%, attributable to lower performance fees at the third party asset manager in South Africa, administration costs incurred for system upgrades in the wealth management business and lower earnings from equity-backed financing transactions at Sanlam Specialised Finance. The other businesses did well to grow earnings, despite the pressure on funds under management due to lower investment markets.

New business volumes declined by 13% mainly due to market volatility and low investor confidence in South Africa. Institutional new inflows remained weak for the full year, while retail inflows also slowed down significantly after a more positive start to the year. The international businesses, UK, attracted strong new inflows (up 57%).

Sanlam Corporate’s net result from financial services increased by 4%, with the muted growth caused by a continuation of high group risk claims experience. Mortality and disability claims experience weakened further in the second half of the year, which is likely to require more rerating of premiums in 2019. The administration units turned profitable in 2018, a major achievement. The healthcare businesses reported satisfactory double-digit growth in earnings, while the Absa Consultants and Actuaries business made a pleasing contribution of R39 million.

New business volumes in life insurance more than doubled, reflecting an exceptional performance. Single premiums grew by 109%, while recurring premiums increased by a particularly satisfactory 56%.

The good growth in recurring and single premium business, combined with modelling improvements, supported a 64% (71% on a comparable economic basis) increase in the cluster’s VNB contribution.

Following a year of major catastrophe events in 2017, Santam experienced a relatively benign claims environment in 2018. Combined with acceptable growth in net earned premiums, it contributed to a 37% increase in gross result from financial services (41% after tax and non-controlling interest). The conventional insurance book achieved an underwriting margin of 9% in 2018 (6% in 2017).

As at 31 December 2018, discretionary capital amounted to a negative R3.7 billion before allowance for the planned B-BBEE share issuance. A number of capital management actions during 2018 affected the balance of available discretionary capital, including the US$1 billion (R13 billion) SAHAM Finances transaction. Cash proceeds from the B-BBEE share issuance will restore the discretionary capital portfolio to between R1 billion and R1.5 billion depending on the final issue price within the R74 to R86 price range approved by shareholders.

Looking forward, the Group said economic growth in South Africa would likely remain weak in the short to medium term future, and would continue to impact efforts to accelerate organic growth. The outlook for economic growth in other regions where the Group operates is more promising. Recent acquisitions such as the SAHAM transaction should also support operational performance going forward.

“We remain focused on executing our strategy. We are confident that we have the calibre of management and staff to prudently navigate the anticipated challenges going forward,” Mr Kirk concluded.

Details of the results for the 12 months ended 31 December 2018 are available at