Inside Investing Ep 11: Big company greed-driven lobbying killed RA breakthough – Wierzycka, Heystek

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In episode eleven of the Inside Investing podcast, Sygnia’s Magda Wierzycka and Magnus Heystek take a swing at the country’s large asset managers who they say have put their own pockets ahead of South Africans trying to save for retirement; CemAir’s Miles van der Molen highlights the impact which erratic Covid-19 policies are having on the global airline travel; renewable energy company Bright Light Solar says despite the disruption of the lockdowns it will go ahead with a limited capital raise in February – but restricting the offer to existing investors and BizNews community members; and we pick up on two questions posed in Tuesday’s webinar updating the global share portfolio – whether it’s time to go big into the under-performing JSE; and where to put your money – Tesla or General Motors.- Alec Hogg 

This episode of Inside Investing is brought to you CemAir. For flights to George and other exotic local locations, go to CemAir.co.za.

First, the big story of the past week was the backtracking by National Treasury and the SA Reserve Bank on an exchange control regulation that provided a much needed breakthrough for embattled South African savers.

In a nutshell, the highly detailed and obviously long considered new regulation removed a 30% cap on the foreign investment component of retirement annuities. The circular terminated the destructive situation where 70% of RA funds had to be invested in a very narrow pool of poorly performing local assets, a group which accounts for less than 1% of the global investable universe.

The decision was warmly welcomed by Sygnia founder Magda Wierzycka and independent financial advisor Magnus Heystek in episode 10 of Inside Investing. They congratulated the decision, in essence, removed a hefty tax on retirement saving – one so negative that it has been a major factor for many who decided on financial emigration. But on Monday the authorities suspended their own new rules. In the interview which follows, Wierzycka and Heystek lay into the large asset management companies which lobbied for the backtracking, while unpacking some of the reasons why. What follows isn’t pretty.

And for those answers to a couple of the many questions posed in the monthly update webinar of the BizNews portfolio – first up, as shares on the Johannesburg Stock Exchange have underperformed for some years, is it now time to invest all of your money there?

One of the questions asked about thoughts on whether to be buying Tesla or General Motors.

CEO of CemAir’s Miles van der Molen talks to Alec Hogg:

Miles van der Molen of CemAir is with us, as our regular discussion about the airline industry and the gatvolness of not being able to get on a plane. Are things improving for us, Miles? Are we going to be able to go abroad soon? Or indeed, is it easier now to fly around our own country? 

Certainly it’s easier to fly around our own country. We’re seeing the local market tick up month on month, the international markets into a far more complex marketplace, with every country making its own decisions on renewed lockdowns and the individual way forward. So the international market is very much a mixed bag. For the airlines – like the guys out of the Middle East – whose business model requires almost the world to be open, there still seems to be some pain to come. 

How do they manage to work through this? If you consider it’s been tough enough for South African businesses and we know one of your competitors – Comair – went into business rescue, came out after quite a few months off the radar. But what about big international airlines who clearly must be hurting even more?

The guys that were taking pain before – so Comair was talking about restructuring retrenchments even before Covid came along. So, the Covid crisis was just too much for them to withstand. Equally, quite a few of the big guys – Etihad, for example – have carried losses for a few years. The question is how they will weather the storm.

The likes of Alitalia have also seen big changes. The major, Emirates and Turkish, there isn’t a huge amount of information flowing from Turkish. But certainly Emirates, deep restructuring, lots of retrenchments and nobody knows when this will end. Everybody thought it would be behind us by now. Here we still are facing new waves and regulations in certain countries. 

I read an interesting piece on LinkedIn this morning from a pilot, who I have spoken to from time to time, who worked for SAA. He said he spoke to wartime pilots, guys who flew Spitfires and Hurricanes. When the war ended, they never got in a plane again. He says he feels that he’s going to be in the same situation. Now that he’s left the airline industry, he’s no longer a commercial pilot.

I suppose in a way, it’s a part of his life that he’s closing his door on. It brought to mind how many pilots – how many incredibly highly qualified individuals – are no longer going to be able to do, A) what their passion is and, B) they’re going to have to try and find jobs in something else.

The market was short of pilots before the Covid crisis, so a downsizing of the industry would right size it to the pilot pool that existed. I do think the market will bounce. I think it will take a few years before we are at the same levels. But I don’t think it’s going to be quite like the wartime scenario, where there’s just a structural change in what is happening in the world. People do seem to want to get back to the old way of doing things, and there’s a lot of Covid fatigue that we’re seeing. I’m sure you’re getting the same message.

And your gut feel? How long might this take before normality returns?

Well, I use Spain’s graph as almost a litmus test for where Europe’s going because they seem to have led the charge in both cycles. The numbers do seem to be decreasing there and it seems to be very seasonally based. So we’re hoping that as they go into the dead of winter that their infection rate will drop. It seems when infection rate drops, the decisions are unwound. 

The death rate in Europe is substantially lower than it was in the first round. So this is more about infections rather than fatalities. So if that’s the case, things can change quite quickly. We saw when it de-escalated last time. It sort of ran quite fast between the countries. So we’re hoping in a month or two that we may see that again. Of course, as South Africa goes into the 2021 winter season, I suspect we may see a similar cycle to what they’ve seen in Europe the last month.

What about the UK and the United States in particular, where the media is telling us that things are reaching crisis proportions? How is that affecting the airline industry?

As soon as Europe went back into a second wave of lockdowns, you could see everything pull back here. A country like South Africa is obviously very reliant on international traffic for all sorts of things. So, it is very damaging. The traffic out of the US is slightly lower to South Africa, simply because it’s so far away.

 But the vast number of people that used to travel from Europe, that’s been curtailed. It has a marked effect. I’m not sure of the exact numbers, but international travel is a fraction of its former size, whereas domestic travel, I think, is around about 25% of its pre-Covid levels at the moment. 

So I guess we have to look forward to the vaccines and the news on that front is positive. The most recent announcement being, in fact, when AstraZeneca-Oxford, which has got relationships with South Africa – we’re even doing the testing here as one of the countries that’s testing it – is now they’re saying they’ll have the vaccine available before the end of the year. 

How long will it take after those vaccines are being administered for things to come back to normality? In other words, before you allow people onto your planes, are you going to make sure that A) they’ve had the vaccine or, B) that they are testing negative? 

We follow what the regulations say. The vaccine, there’s a lot of concern about a rush vaccine in the safety of it and all sorts of things like that. I see Qantas has issued a statement that they won’t let anybody on without a vaccine.

I don’t think that will be widely adopted. The airline industry mostly seems to view the Covid infection risk as low on board an aircraft. So, no. I don’t believe that we would be overly restrictive. And again, as the recovery rate moves into the high 99s, it has to be a question of whether this is a real risk or whether it’s a media driven crisis.

So interesting to hear you say that, because there is a perception that is gathering a lot of momentum now. It’s almost like we’ve been panicked into doing some pretty crazy things around the world. When you say it could be a media driven crisis. What do you mean by that?

Well I mean, if you look at the underlying data, does it really justify the decisions that have been made? Global economic shutdown, stopping movement of people, all of this. If you compare the fatality rates to flu fatalities to pneumonia or other respiratory illnesses. And then if you look at the elephant in the room, which is the TB fatality rate and the number of people that are out of that, every year for decades.

It does raise an important question as to why Covid-19 has received so much attention. The vaccine for hunger is far easier to administer, but yet many, many more people die of hunger every day than of Covid-19. So why is the attention here? I’m not making light of anybody’s death, but unfortunately, death is part of life. Is it really warranted that all this attention goes on one thing? 

I suppose we should be grateful – to a degree – that in South Africa, we seem to be steering a much more sensible path than in many other countries around the world, when you take it from that perspective.

Obviously the lockdowns in the early days were very severe here – more so than many other places. Now we seem to have been fast to relax. The cycle has been amplified, but when the infection rate picks up – it may well be seasonally as we go into winter as I mentioned before – what will that mean for the decisions? It does seem that this consciousness of the immense damage to the economy, employment and tax revenue, that these decisions are made. 

So hopefully it’ll be a balanced view rather than a blinkered view, looking only at Covid numbers.

As an entrepreneur – and CemAir is a company that you are running, you started and you’re the man at CemAir – how are you managing to navigate your way through a scenario where, as you said earlier, it’s 25% of the traffic in domestic airlines compared with pre-Covid?

Well before, there was a shrinkage on supply as well. But with Comair returning to the market, LIFT talking about starting next month and Mango certainly becoming a lot more aggressive, we’ve seen a lot of capacity return to the market. In December we may well have more capacity than last December, but a reduced number of passengers. 

So we don’t take too many long-term views, we’re very conscious of the fact that decisions have been made on short notice. So we are looking at various things and you keep your options open and you try to stay agile. But it’s very difficult to predict where the market will be. Normally you run an airline on a long-term view. At the moment we’re running on a very short-term view over the next month or two and hoping for stabilisation. But I see early signs of stabilisation in some ways, but certainly not a stable industry at this stage.

This episode of Inside Investing was brought to you CemAir. For flights to George and other exotic local locations, go to CemAir.co.za

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