2 years ago

Blue Chip Issue 78 - Jan 2021

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The second main reason

The second main reason for the underperformance of emerging market equities is that the growth differential between emerging and developed markets has reduced significantly over the past decade (see graph 2). When China is excluded, the differential is very close to zero over the past five years. This collapse in emerging market growth is due to a number of factors. While idiosyncratic factors have played a role, specifically in various large emerging market countries, there are also a number of common factors at play. These include the trade dispute between the US and China, increasing debt levels in emerging markets, and a strong US dollar. These have compounded to ultimately lower emerging market GDP growth rates to levels closer to those of developed markets. Graph 2: GDP Growth Rates Annual GDP Growth (%) 10 8 If we know one thing today it is that the short- to medium-term economic outlook is as uncertain as it has ever been. ” 6 4 2 0 -2 -4 -6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Advanced Economies Emerging Markets EM ex China Given the above, it may seem clear-cut that developed market equities should be prioritised over emerging market equities. This view is potentially reinforced by the onset of economic shutdowns, and the fact that emerging market economies are likely to be more severely impacted by economic shutdowns than their developed market counterparts. Taking a step back, if we know one thing today, it is that the short- to mediumterm economic outlook is as uncertain as it has ever been. We also know that extrapolating recent events into the future is a sure way of being wrong. Our memories are often short, and we forget that at the beginning of the previous decade emerging market equities were all the craze after their spectacular returns of the 2000s. Given the resultant poor returns generated by emerging markets over the 2010s decade, today that sentiment is completely turned on its head. From a pure equity perspective, the emotional response is that emerging market equities are likely to deliver more of the same over the next 10 years. The rational response, however, is to ensure global diversification across markets and geographies, and this includes emerging markets. Our experience of the past decade should teach us that the rational response is the more prudent one. 12

FINANCIAL EMIGRATION DO THE COSTS AND COMPLEXITIES WARRANT THE BENEFITS? By Chris Potgieter, MD: Old Mutual Wealth Trust Company South Africa’s “expat tax” and its potential implications have caused a great deal of hype (largely based on inaccurate information), resulting in many clients looking to financial emigration as a means of resolving their issues around paying tax in South Africa on income earned offshore. Financial emigration is the application, as part of a formal emigration process, to the South African Reserve Bank to change from a resident of South Africa to a non-resident for exchange control purposes. It does not by itself impact one’s tax residency, but can be seen as a related process. Formal emigration and changing tax residency are complex processes and may well be the desired outcome for individuals seeking to live permanently in another country, but it is certainly not a quick-fix solution for tax relief. Furthermore, changing tax residency status could result in immediate tax consequences in the form of exit charges. REVISED LEGISLATION The revised Income Tax Act (effective 1 March 2020) results in South African tax residents working abroad temporarily being exempt from paying tax on the first R1.25 million they earn abroad. Thereafter they will be required to pay tax on any foreign earnings. Previously, the foreign employment income earned by South African tax residents was fully exempt from tax in South Africa, provided certain requirements were met. Importantly, the amendment only affects income received from employment and does not affect those earning foreign investment income (which is already taxed) or individuals who are no longer residents of South Africa for tax purposes. Much of the misunderstanding around this topic stems from the fact that financial emigration is a colloquial term that does not exist in any legislation. Rather, the key issues are formal emigration and tax residency, which are two separate (often linked) processes. Formal emigration entails physically relocating from one country to another country. Formal emigration will typically also involve financial emigration, i.e. changing one’s status to non-resident for exchange control and tax purposes. The entire process is lengthy and includes rigorous audit, and upon South African Reserve Bank (SARB) and South African Revenue Service (SARS) approval, the individual will be issued with an Emigration

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