High unemployment, pedestrian growth, bailouts of state-owned enterprises (SOEs) and the slow implementation of President Cyril Ramaphosa's 'New Dawn' do not paint a very cheery picture. That said, it would be naïve to think that any person could wipe out the devastation of the last 10 years in one fell swoop.
It’s clear that Ramaphosa is committed to reversing the mistakes of the past and making a positive difference going forward. He has already been instrumental in helping to ensure the highest foreign direct investment that our country has seen in the last five years.
Let’s not forget that he has also further shrunk our bloated cabinet from 36 to 28 ministers and helped appoint four commissions of inquiry (which have unearthed a lot of rot).
Furthermore, it would be naïve to think that South Africa is unique in the world and that other foreign markets do not have their own problems.
Several issues have plagued the global economy in recent weeks and months. Just some of these have included the trade wars between the US and China, the devaluation of the Yuan, Brexit, the Hong Kong protests, low interest and bond rates, and heavily declining stock markets across the globe.
It’s time to stop the panic
We know that savvy South African investors are hedging their bets and taking some of their portfolios offshore.
That said, many local investors also understand that if they live, work and play in South Africa; a material part of their portfolios should be invested here. These types of investors should increasingly look to alternative asset classes which offer risk-adjusted returns.
One of these alternative asset classes — which prices in the risk of rand devaluation — is that of Section 12J, which boasts in excess of R6bn of assets under management.
Investors into a registered Section 12J company are entitled to a 100% deduction of their investment from their taxable income in the year in which the investment is made. This gives the investor up to a 45% tax benefit on their investment. The recent Taxation Laws Amendment Bill (TLAB) affords all taxpayers the opportunity to invest a maximum of R2.5m, in any tax year, into a registered Section 12J.
Because Section 12Js typically feature predictable cash flows from their underlying investments as well as solid asset underpins, it’s common to see these funds offering high yields along with reliable dividends.
Not only are investors getting risk-adjusted financial returns, but by investing in South African SMEs they are playing a crucial role in creating direct and indirect jobs, while further growing the tax base of our country.
To illustrate the benefits of 12J, one can look at the example of an investor, who is paying tax at the marginal rate of 45%, injecting R1m into a Section 12J fund when the exchange rate is $1.00 = R15.00. The inherent risk-adjusted exchange rate for this investor, as a result of the Section 12J benefit, would be $1.00 = R27.00. This is an 80% buffer.
South Africa’s tourism industry is one key example of a sector that has a built-in hedge for a weak rand. Interestingly, there are many hospitality-focused Section 12Js to choose from with one such fund being Mdluli Safari Lodge Limited: a joint venture with the Mdluli community that is building a 100-room luxury lodge in the Kruger National Park.
Around 80% of Mdluli Safari Lodge’s visitors are expected to be foreign tour groups. In addition to the financial returns, investors receive bed nights as part of their investment. Thus far, 120 new jobs have already been created as a result of this type of impact investment.
Another interesting opportunity to look at is that of solar energy and battery storage. With the electricity supply challenges in South Africa, 12J funds in this renewable sector offer reliable and consistent cash flows, as well as high yields. This is particularly the case when considering that more companies and body corporates no longer want to be reliant on the Eskom grid. This situation helps lock-in future renewable energy prices while supporting a transition to these new green technologies and the creation of much-needed jobs in this space. The likes of Decentral Energy Capital Limited and Rencell Limited are just two renewable-energy focused Section 12J companies that are making a difference.
With economic challenges come great new economic opportunities. Section 12J further extends into many sectors that I haven’t even begun to mention here, including the fast-growing asset rental space and junior mining, to name but a few.
It’s clear that SA continues to offer resilient investment options and that the growing Section 12J asset class should certainly not be overlooked.