/ 30 October 2014

The haves have a great deal more wealth

The star performance of the JSE underlines the importance of retirement funds to the creation of wealth.
With study after study showing that incorporating sustainability into investment decisions is more than just a feel-good exercise, these funds and services are designed to win over more than just millennial investors.

Amid much economic doom and gloom, South African household wealth grew nicely in the second quarter of 2014.

According to the most recent Momentum/Unisa household wealth index, household net wealth grew 36.4%, rising from just over R7.2-trillion to just over R7.8-trillion, on a quarter-on-quarter, seasonally adjusted and annualised basis. Year-on-year growth was 22.4%, or 15.4% in real terms.

The ratio of household wealth to disposable income increased to 359% compared with 317% in the second quarter of 2013.

Net wealth is derived by subtracting the value of households’ liabilities from their assets.

The increase was thanks in large part to the “very nice run” by the stock exchange recently, according to Johann van Tonder of the personal finance research unit at Unisa. Financial assets dominate the make-up of household assets, with roughly 70% made up of investments in retirement funds and unlisted companies.

But the report warned that a potential stock market correction could hit household assets.

According to the report, which uses the South African Reserve Bank’s estimates of households’ liabilities and assets as a benchmark, the composition of household assets is dominated by property, in the form of residential buildings, at 23%, as well as investments in retirement funds and other financial assets at 39% and 26% respectively. Cash holdings and other nonfinancial assets make up the remaining 8% and 4%.

The report noted that the two main categories of household assets, namely residential and financial assets, were driven up by changes in house and share prices. Increases in share prices in particular helped to lift household investments in retirement funds and in unlisted companies.

The JSE all share index (Alsi) was up 28.7% in the second quarter of 2014, compared with the second quarter of the previous year. Its uptick was owed to international and domestic factors that contributed to the increase in household financial assets. These included the international economy growing, rising to 3% in the first quarter of 2014 compared with 2% in the first quarter of 2013. “This supported the profits of South African companies listed abroad, or earning part of their revenue in other countries, which in turn supported their share prices,” the report noted.

South Africa’s own poor economic growth of 0.6%, though “subpar”, showed “companies produced more, contributing to their profits and therefore share prices”.

Other factors that contributed to a demand for listed shares include households’ contributions to retirement fund instruments and the benefit of payouts from these to households, as in the case of retirement.

Contributions to long-term insurers and official pension funds grew 6.9% from R72.6-billion in the first quarter to R77.6-billion in the second. But it was 5.3% lower than the second quarter of 2013.

Benefits paid to households from long-term insurers and official pension funds exceeded contributions, amounting to R106.1-billion, or 3.2% more than a year before.

Because benefits payments outweighed contributions, the report noted, the increase in the value of households could be ascribed to the return on such assets.

The good news may not hold for much longer, the report warned.

“However, many analysts warn that shares in the JSE Alsi are very expensive as the price-earnings multiple increased to 18.21 at the end of Q2 2014 compared to a long-term average of 14,” it said.

“Consequently, it is very unlikely for the increase in the JSE Alsi to continue and therefore the increase in the value of household assets is to either slow significantly or even decline in quarters to come.”

Van Tonder said the research highlighted the importance of contributions to retirement funds in wealth creation and closing the wealth gap. The results illustrated the growing discrepancy in wealth between those with retirement savings and those without. The longer the country took to address the issue of retirement reform, the “bigger the wealth gap will grow”.

The Reserve Bank also flagged the growth in household wealth in its September financial stability review released earlier this week. It found household wealth increased by 20.6% year on year.

The growth in household disposable income did not match that of net wealth, the bank said, resulting in the ratio of households’ net wealth to disposable income rising to 357.9% in the second quarter of 2014.