| The podcast to this newsletter can be listened to here. Market and Economic roundup RSA Over the past week, the South African markets have demonstrated resilience amid mixed economic trends.  * The FTSE/JSE All Shares Index reached 101,750 points on August 21, 2025, marking a 0.69% daily increase and a robust 2.44% gain for the month, putting the index up over 21% year-on-year. This upward momentum has largely been supported by strong performances in the mining sector, especially gold and platinum group metals, as well as heavyweight stocks like Naspers and Prosus. * Meanwhile, the South African rand weakened slightly against the US dollar, trading around 17.74 ZAR/USD as of August 22, 2025, reflecting a 0.18% daily uptick for the dollar and a 1.11% rand depreciation over the past month; fluctuations over the week have remained relatively moderate.(On August 13th, we saw a R17.51 rate). * Despite ongoing challenges such as elevated unemployment and subdued GDP growth—forecast at just 0.9%-1% for 2025—business sentiment has improved, owing to political stability under the Government of National Unity, which has bolstered confidence in economic policy direction and reduced downside risks. Overall, while structural challenges persist, the last week has seen optimistic market trends and moderate currency movements for South Africa USA * Federal Reserve policy shift: Fed Chair Powell signalled a possible “U-turn” on a long-standing monetary strategy during the annual Jackson Hole Symposium, fueling speculation about changes in future interest rate decisions. * Inflation reports: Much attention centred around the consumer price index (CPI) and producer price index (PPI) results, which are critical for guiding upcoming Fed policy. Elevated inflation numbers have led to cautious trading and increased market uncertainty. * Stock market volatility and tech rally: Major indexes fluctuated as the S&P 500 and Nasdaq Composite neared record highs (last reached on August 13th), bolstered by gains in tech giants such as Apple and Microsoft. These rallies occurred alongside underlying concerns over tariffs, valuations, and economic outlook.  * Labour market concerns: Initial jobless claims increased to 235,000 last week, signalling softening labour market conditions—well above economist expectations and generating worries about broader employment trends. * Housing sector surprises: U.S. home sales posted an unexpected increase in July as home price growth eased, reflecting a slight improvement in affordability and consumer confidence in real estate markets. An interesting graph, below, shows some of the indices since Trump’s election.  Global * Bank of England interest rate cut: The UK central bank cut its benchmark rate by 25 basis points to 4.00%, its fifth cut since August 2024, in response to stubborn inflation and rising unemployment. This move had ripple effects on global bond markets, European stocks, and currency flows. * Global inflation and flash PMI readings: Key inflation reports emerged across the UK, Eurozone, Japan, and Canada, accompanied by August flash PMI releases. These provided early insights into manufacturing and service sector health, revealing patchy global growth and ongoing inflationary concerns. * US dollar and commodities swings: The US dollar index fluctuated on mixed US economic data, while gold bounced from a weekly low, and oil prices regained ground following ceasefire comments about Ukraine and changing risk premiums. * Major corporate tech deal: Google and Meta signed a $10 billion cloud agreement, sparking a wave of optimism among tech investors and influencing related equities worldwide. * Japan’s bond rate policy shift: Japan’s Ministry of Finance announced plans to raise its assumed interest rate for long-term government bonds in its 2026/27 budget, marking the highest level in 17 years, signalling tightening and impacting global fixed income markets.  AI wobbles Emerging story – add after market close on Friday Palantir Technologies Inc. has enjoyed the kind of year that companies of its size almost never get, but at one point, it was down 23% from last week’s all-time high. By the close, this was down to 16.8%. But its outperformance of the overall market has been so phenomenal that the pullback seems only reasonable. It’s outpaced everyone else in a way that dwarfs even Cisco Systems Inc.’s extraordinary run in the year that led up to its brief reign as the biggest US stock by market cap:  Graph: Palantir Technologies Palantir Technologies Inc. is a prominent software company specialising in big data analytics and artificial intelligence, consistently securing high-profile government and commercial contracts. This week, its shares experienced a significant plunge, extending a week-long slump with a drop of over 9% on Tuesday and continued losses throughout the week, bringing its total decline to around 22% from recent all-time highs. The sharp correction was triggered by a highly publicised warning from Citron Research, )led by well-known short seller Andrew Left), who argued that Palantir’s valuation had become “detached from fundamentals.” He compared Palantir’s market metrics unfavourably to OpenAI, suggesting that if Palantir were valued similarly, its share price would be closer to $40 rather than the $150–$160 range where it was trading. Market anxieties were further exacerbated by broader macroeconomic worries, inflation concerns, and cautious investor sentiment toward growth and AI-focused stocks, all contributing to a heavy round of profit-taking. Despite the drop, Palantir remains one of the S&P 500’s top performers this year, having doubled in value on enthusiasm surrounding its AI software and large government contracts. AI is undergoing an extremely rapid mass adoption phase unseen in recent history – cell phones and the internet took years to reach the level of hype we are seeing in AI today. The big elephant in the room is how those massive AI companies that have been pouring billions into datacentres, going to monetise this trend? The field is evolving so quickly that new models come out every week, making old models almost redundant. Anyone who takes out a ‘pro’ subscription finds it surpassed and incorporated into the ‘free’ version in weeks, so annual subs are irrelevant. Most of the best-known models are trying to push people into paid versions by throttling the number of ‘tokens’ they can use in a day, but if you have all the models, then you just switch your prompts to another model. Well, that works at the moment, next week who knows. My advice to anyone who is going along this AI journey is to remain agnostic. The evolution of the models is moving up the chain of knowledge sophistication and out of the reach or need of us mere mortals and into things like quantum physics, algebraic geometry, advanced abstract algebra, and real analysis. Yup, rocket science. Another worry is that the models are running out of fresh inputs from humans – do they now train new AI models on AI? That won’t end well. Critical thinking skills are still very much a human trait. All over the world, (often clueless) CEOs are slashing staff and replacing them with AI without understanding the (now decades-old) admonition of ‘Garbage in, Garbage out’. If your existing systems and processes (probably in place for decades) aren’t working properly, AI is not going to magically fix them. Systems design has to be sound in the first place, because this is what the AI is going to use to design a replacement. Sure, AI might be coming after your job, but AI has to be trained and follow instructions. As I see it, from a personal perspective, you can tame your AI dragon by mastering prompts – the art of asking the right questions. Make AI your PA, not your boss. Tip: Make sure that the assistant/agent remains your Intellectual Property – the two of you can keep you relevant and preserve your job (and CEO’s jobs are just as much at risk as anyone else’s).  Powell in a Hole, and not just Jackson Hole (update over the weekend) As the world’s central bankers gather in Jackson Hole, Wyoming, there must be a feeling of a shift happening under their feet as the world’s focus seems to move from monetary domination to fiscal domination (which Cobie covered in the newsletter and podcast last week). The graph below is an indication that the ‘easing cycle’ we have seen over the past months may be coming to an end, because economic growth remains robust. With a strong economy, there is also inflationary pressure (without even taking into consideration the tariff’s inflationary effect).  This will definitely be Jerome Powell’s last symposium as chairman of the Federal Reserve, his Last Stand in the Wild West. The drama surrounding his replacement threatens to become all-consuming. Profound changes for the Fed, to be imposed by others, are on the agenda. But it’s also an opportunity for a profound change in the direction that the Fed decided on for itself five years ago, in what now appears to be a spectacularly ill-timed intervention. It was at Jackson Hole in 2020 that Powell unveiled Flexible Average Inflation Targeting (FAIT), which would aim to keep inflation to an average of 2%, rather than treat 2% as an upper limit. This was met with a large dose of scepticism at the time. The Fed’s fear then was of Japanification, and an approach that allowed the economy to run a little hot from time to time seemed better. As it turned out, within months, Japanification would seem the least of the Fed’s worries. Inflation has averaged far more than 2% over the last five years, Powell and his colleagues have taken the blame for a big mistake (being too slow to react), and the central bank’s credibility needs to be regained. There is no chance that the 2% target will be abandoned, even though the political pressure to cut rates would imply that the Trump administration feels happy to live with prices rising at a somewhat faster clip. The futures market suggests that the odds of a 25-basis-point cut next month are about 85%. But there are a lot of wagers on a “jumbo” cut of 50 basis points. Treasury Secretary Scott Bessent argued last week that the Fed should consider a jumbo cut, and also that rates should be at least 150 basis points lower. The market currently is behaving as though he’s likely to get what he wants. The main reason for that comes from the politics of the Fed. Two governors, both of whom have been told they’re candidates for the chair, voted to cut last month (welcome to the world of orange-nosing the demander-in-chief). Several more members of the Federal Open Market Committee are also now under consideration — and know that they’ll need to do the same if they want the job. For now, the race to replace Powell remains wide open, probably because the administration has calculated that this maximises its chances of getting cuts even while he remains in place. The enthusiastic rate-cut bets rest primarily on the theory that the way President Donald Trump and his officials are running the Fed contest (everyone is a contender) will persuade the committee to vote that way. Inflation, which is rising and above target, offers no reason whatever to cut rates. The case for easing rests exclusively on employment, the other side of the Fed’s mandate. Labour – the most important indicator at the moment This year’s Jackson Hole symposium is entitled Labour Markets in Transition: Demographics, Productivity, and Macroeconomic Policy. It will be wrestling with the critical topic of the moment. Evidence from the labour market is contradictory and, of course, marred by unreliable data. Payroll growth is still positive but slowing. The New York Fed also tracks mobility by asking what has happened to those who were in work three months earlier. The number who have moved on, for whatever reason, has rebounded to a post-pandemic high: When the jobs market churns this much, it’s harder to see the macroeconomic signals. (The major reason for job churn is that it is the only way someone can get a meaningful salary bump.)  Atlanta Fed’s wage tracker, based on census data, shows wage rises falling but still at levels for the highly skilled that weren’t seen for more than a decade after the Global Financial Crisis. Inequality, which became acute during the Obama presidency as wages for low-skilled workers languished, appears to be returning. That’s not great for a White House dedicated to reversing inequality. It also implies that falling immigration hasn’t yet pushed up wages for the low-skilled:  This may be a matter of time. Reliable data on illegal migrant labour is hard to come by, but Banco de Mexico’s data show that remittances to the country are now declining, after rising for the better part of a decade (including Trump’s first term). That suggests the supply of migrant labour in the US is tighter, which might imply higher wage inflation for the low-skilled:  Turning to the consumer, big retailers are now releasing quarterly results. Home Depot offers scant evidence of declining consumer appetite. Revenues are at a record — not something you’d expect at a time when a jumbo cut is needed. Home Depot’s sales tend to rally when more people are moving house. The housing market is perhaps the most widely cited reason for the Fed to cut aggressively; houses are very hard to afford, and new building is languishing. Cheaper mortgages might spark this back into life. It’s a difficult situation. There is a case for a rate cut next month. It’s hard on the current evidence to see that market expectations would be anywhere near where they are without the political pressure.  |
| Expecting Exceptionalism We often talk about so-called ‘American exceptionalism’ in our newsletters. In a market context refers to the continuing outperformance of US assets, aided by a strong dollar and by the magnetic effect of the big tech groups that currently dominate the world. The reaction to the Liberation Day tariffs suggested exceptionalism might be over, and trust in US institutions fatally compromised. Now we’re in a grey area: the tariffs are in force at much the same levels outlined then (except in China), and the world is living with it. The dollar is at a fascinating juncture. Foreign exchange traders care about trends. The DXY dollar index’s fall ended earlier this year, exactly when it hit an upward trend line that started with the low in 2011 before the euro-zone crisis powered the dollar higher.  The bearish dollar hypothesis revolves around capital flows. As countries repatriate money, the huge allocations that foreign fund managers hold in US equities will require flows out of the dollar. The Magnificent Seven stocks attract foreign money; exclude them, and the remaining US large caps are now significantly lagging the rest of the world. However, the actual flows in and out of US assets tell a different story. Equity flows went negative last year, but are back to strongly positive. Flows into Treasuries are diminishing, but still positive — it’s not long since emerging market central banks drove outright outflows during the pandemic. Overall, flows into dollar-based assets are stronger than ever. It’s hard to square this with the narrative of a major crisis of confidence in the US. The dollar bears’ last stand might conceivably come at Jackson Hole. A hawkish surprise from Powell would also be a shock for those betting against the dollar. So, to a lesser extent, would a “hawkish cut” next month, in which the FOMC signalled it was unwilling to cut again in a hurry. In the FMOC minutes that came out on Thursday, here is a brief summary of where the committee stands: Many said: • Overall inflation remained somewhat above the committee’s two percent longer-run goal. • It could take some time for the full effects of higher tariffs to be felt. Some: • Mentioned indicators that could suggest a softening in labour demand. • Emphasised that a great deal could be learned in coming months from incoming data. • Noted that it would not be feasible or appropriate to wait for complete clarity on the tariffs’ effects before adjusting monetary policy. • Stressed that the issue of the persistence of tariff effects on inflation would depend importantly on the stance of monetary policy. A few: • Emphasised that they expected higher tariffs to lead only to a one-time increase in the price level that would be realized over a reasonably contained period. • Remarked that tariff-related factors could lead to stubbornly elevated inflation. A couple: • Suggested that tariff effects were masking the underlying trend of inflation and, setting aside the tariff effects, inflation was close to target. A Summary of the Jackson Hole symposium is as follows: * Powell acknowledged a “shifting balance of risks,” with downside risks to employment rising and the Fed now less committed to overshooting the inflation target. The “balance of risks” across the economy has started to shift, raising the odds of a rate cut at the next Federal Open Market Committee (FOMC) meeting in September. * The effects of tariffs on consumer prices have become “clearly visible,” and Powell warned that “upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed.” * Powell explained that while some of the inflation caused by tariffs might be a “one-time shift in the price level,” changes to tariff rates and supply chains mean that the adjustment could linger, potentially making inflation more persistent. * He emphasised that the Fed remains committed to its dual mandate, and that the central bank would “proceed carefully” as the balance of risks shifts, especially with a cooling labour market and rising recession risk. * Importantly, Powell noted that while inflation had moved closer to the Fed’s target, “upside risks had diminished,” but persistent inflation cannot be ruled out—especially with ongoing trade tensions and immigration-related wage pressures. The spotlight now turns to Lisa Cook, the governor whose mortgages are now under scrutiny, and Trump wants her out (and replaced by one of his sycophants.) Basically, the charge is that Cook misrepresented the ‘Primary home” status on two mortgage applications. This is so commonplace that the Philadelphia Fed report found that about a third of all property investors misrepresent their status as owner-occupants. It found that doing so allowed them to obtain lower interest rates and higher loan-to-value ratios. This type of fraud is difficult to detect until long after the mortgage has been originated. Cook’s mortgages in question were from 2021. Trump’s administration has also made mortgage fraud allegations against California Senator Adam Schiff and New York Attorney General Letitia James. Both are Democrats and political foes of Trump. Trump 2.0 is much wilier and more dangerous. It’s also a clear message of intent. This White House is thinking a long way out of the box to exert control over public institutions that it sees as having gone astray. Make no mistake, there is plenty of lasting damage that can be done in 3 ½ years. Texas has gone ahead with its gerrymandering ambitions to add 5 more Republican seats to the State – finally, one hopes, waking the democrats out of their big fat election loss sulk to fight back. The midterms are going to be ugly.  India While some world leaders are happy to kneel and kiss the Trump ring, we’ve seen real signs of defiance from others. India’s Prime Minister Narendra Modi is a case in point after being spurned by US President Donald Trump. This week, Modi revived domestic economic reforms, warmed to the other superpower, China and responded with recalcitrance to US warnings on India’s purchases of Russian oil. Many in India are viewing these developments as a sign of India’s strength, even as stock markets remain cautious.  India-China relationships haven’t always been this cordial. After the 2020 border clash, Modi was urging Indians to junk their made-in-China goods, but this week warmly welcomed Chinese Foreign Minister Wang Yi on his first visit to New Delhi in three years. The two countries agreed to revive travel and trade ties, especially Chinese supplies of rare earth minerals, fertiliser and tunnel-boring machines. They also agreed to explore border demarcation, notably with no mention of India’s earlier demands for the restoration of pre-2020 territorial status. Later this month, Modi will meet President Xi Jinping on his first visit to China in seven years. Expect more chummy headlines then and maybe even a selective relaxation of Indian restrictions on Chinese investments. After all, Modi also has an Apple economy to protect. Trump’s actions against India may have added urgency to these reconciliatory moves but they should be viewed as part of a longer process that includes last year’s Modi-Xi meeting in Kazan, Russia.India has been seeking to stabilize ties to create more strategic and economic space for itself and to prevent another border crisis. The question is whether China will follow through on the commitments. “We’ve seen previous such dialogue phases get cut short by border crises, for instance, in 2017 and 2020 — and, if Beijing perceives New Delhi as vulnerable, there could be another. As if to underscore that fragility, right after his India visit, Wang travelled to Pakistan, a country China has deep economic and defence ties. Make no mistake, the India-China patch-up will also be impacted by how Trump views this new cosiness between the two BRICS members, and finalisation of the US-China trade deal.  Modi’s reform revival On Aug. 15, he announced a long-pending rejig of the country’s goods and services tax. The proposed rationalisation of over five tax rates to about two will lower prices and help lift consumption. But it’s also expected to cut tax revenue, especially for states, raise borrowing costs in the short term and curtail government expenditure — a key driver of growth for India in recent years. And until the rates for different goods and services are finalised, consumers may have to postpone purchases of high-value discretionary goods like air conditioners, refrigerators and automobiles. In other words, austerity. Never pretty, never popular, but often the only way to climb out of the debt hole. Most American (and South African) politicians shy away from this approach like the plague. Some of the proposed recommendations would apply just as well here in RSA, like measures to cut red tape (BEE?)for big and small firms, on spurring manufacturing hubs, incentives to super-size the boom in offshoring services via global capability centers, faster trade deals with the EU and others, implementation of new labour codes, improved market access for agricultural goods, improved efficiency in the judicial system and speedier monetization of government assets to fund all these. Many of these have been pending for years. Besides, the government’s view of reform can often mean cosmetic changes to a law, like with the criminal and income tax codes. Or the outlawing of an industry overnight, as India did with online money gaming this week. Starting this week, Trump’s 50% tariff will impact over $48 billion in Indian exports, according to a government estimate. No relief seems to be in sight yet, with US negotiators reportedly deferring talks and senior Trump administration officials slamming Indian billionaires for profiteering off Russian oil. Modi’s response has been to buy even more oil while making small concessions to the US, such as lower duties on cotton imports. Picking defiance over diplomacy could cost India its biggest trading partner and access to the world’s largest consumer market. China camaraderie or reform intensity are good moves, but even they won’t make up for that.  China’s property mess – the Evergrande story Once one of the country’s biggest growth drivers, China’s property market has been in a downward spiral for five years with no signs of abating. Real estate values continue to plummet, households in financial distress are being forced to sell properties, and apartment developers that have racked up enormous debt on speculative projects are on the brink of collapse. The once roaring Tiger has been muted, and because of its massive role in the global economy, nobody is going to be happy. There was some optimism that the government’s measures to end the crisis had been working to reinvigorate the market, but in March, government-linked developer Vanke reported a record 49.5 billion yuan ($6.8 billion) annual loss for 2024, showing just how deep the problem runs. Then on Aug. 12, property giant China Evergrande Group announced it would delist from the Hong Kong stock exchange, marking a grim milestone for the nation’s property sector. How did Evergrande get into trouble? We have written about the woes of Evergrande over the years, and the story never gets better. Evergrande’s downfall is by far the biggest in a crisis that dragged down China’s economic growth and led to a record number of distressed builders. Founded in 1996 by Hui Ka Yan, Evergrande’s rapid expansion was from the outset fuelled by heavy borrowing. It became the most indebted borrower among its peers, with total liabilities reaching about $360 billion at the end of 2021. For a time, it was the country’s biggest developer by contracted sales and was worth more than $50 billion in 2017 at its peak. Founder and chairman Hui became Asia’s second-richest person. Over the years, the company has also invested in the electric vehicle industry and bought a local football club. In 2020, Beijing started to crack down on the property sector. The new measures put a cap on the developer’s borrowing capacity, effectively cutting off its lifeline from credit markets. Following failed restructuring attempts, Evergrande was given a winding-up order in Hong Kong in 2024. Later that year, a mainland Chinese court accepted a liquidation application filed against one of its major onshore units. After a long trading suspension, the Guangzhou-based company said its listing would be cancelled by the Hong Kong stock exchange on Aug. 25, and it wouldn’t apply for a review of the decision. Evergrande still has two other units listed in Hong Kong: a property service provider and an electric vehicle maker. The latter, China Evergrande New Energy Vehicle Group Ltd., has been suspended since April. How did some developers get into this mess? In 1998, China created a nationwide housing market after tightly restricting private sales for decades. Back then, only a third of its people lived in towns and cities. That’s risen to two-thirds, with the urban population expanding by 480 million. The exodus from the countryside represented a vast commercial opportunity for construction firms and developers. Money flooded into real estate as the emerging middle class leapt upon what was one of the few safe investments available, pushing home prices up sixfold over the 15 years ending in 2022. Local and regional authorities, which rely on sales of public land for a chunk of their revenue, encouraged the development boom. At its peak, the sector directly and indirectly accounted for about a quarter of domestic output and almost 80% of household assets. Estimates vary, but counting new and existing homes, plus inventory, the sector was worth about $52 trillion in 2019 — about twice the size of the US real estate market. The property craze was powered by debt as builders rushed to satisfy expected future demand. The boom encouraged speculative buying, with new homes pre-sold by developers who turned increasingly to foreign investors for funds. Opaque liabilities made it hard to assess credit risks. The speculation led to astronomical prices, with homes in boom cities such as Shenzhen becoming less affordable relative to local incomes than those in London or New York. In response, the government moved in 2020 to reduce the risk of a bubble and temper the inequality that unaffordable housing can create. Anxious to rein in the industry’s debts and fearful that serial defaults could ravage China’s financial system, officials began to squeeze new financing for developers and asked banks to slow the pace of mortgage lending. The government imposed stringent rules on debt ratios and cash holdings for developers that were called the “three red lines” by state-run media. The measures sparked a cash crunch for developers that was exacerbated by the impact of aggressive measures to contain Covid-19, such as the suspension of construction sites. Many developers were unable to adhere to the new rules as their finances were already stretched. In 2021, Evergrande defaulted on more than $300 billion, triggering the beginning of China’s property crisis. After years of insatiable demand from buyers, the market ground to a halt. In addition to the government’s lending restrictions, the economic shock of ‘Zero-Covid’ lockdowns reinforced a culture of frugality, and a deteriorating job market meant people were suddenly facing layoffs and salary cuts. Property prices began to fall in 2022. In August 2024, the country recorded its steepest annual drop in property values in nine years. On top of the millions of square feet of unfinished apartments that indebted developers left to gather dust, the imbalance in supply and demand meant 400 million square meters of newly completed flats remained unsold as of May 2024. With household debt at a high of 145% of disposable income per capita at the end of 2023, homeowners are increasingly under financial pressure. The country’s residential mortgage delinquency ratio – which tracks overdue mortgage payments – jumped to the highest in four years as of late 2023. Some homeowners are being forced to sell their properties at a discounted rate, which is only exacerbating the problem. . What has the government done to try to prop up the market? In 2022 authorities realised the rules to rein in the market had gone too far. Aiming to avoid a “Lehman moment” — when the failure of the US bank in 2008 sent shock waves through global markets, the government unveiled measures centred on boosting equity, bond and loan financing for developers to alleviate the liquidity crunch. Developers were allowed to access more money from apartment pre-sales, the industry’s biggest source of funds, and 200 billion yuan ($27 billion) was advanced as special loans to complete stalled housing projects. The government tweaked financial rules, allowing the central bank to increase support for distressed developers and instructing banks to ensure growth in both residential mortgages and loans to developers in some areas. In the past year, the government has cut borrowing costs on existing mortgages, relaxed buying curbs in big cities and lowered taxes on home purchases. It also trimmed purchasing costs for people seeking to upgrade dwellings in some big cities. Despite an initial sales recovery, the property market remains lacklustre. Government officials clearly don’t want the property crisis to worsen. By limiting the damage done to developers, they aim to stem the bleeding to other vulnerable parts of the economy. This includes banks with a significant portion of their assets tied to real estate; the construction industry, which employs an eye-watering 51 million people; and local governments, which rely on selling land to developers to sustain their public spending. Authorities have signalled that more intervention is likely. Premier Li Qiang in June pledged more efforts to stabilise the real estate decline. Earlier in August, Beijing authorities removed a cap to now allow eligible families to buy an unlimited number of homes in outer suburban areas. Author: Dawn Ridler  Flexibility leads to higher withdrawal rates For individuals approaching retirement, the shift from building wealth to drawing an income from it is one of the most significant financial changes you will experience. The key question becomes, “How much can I safely withdraw from my portfolio each year without running out of money?” We explore this question from a South African perspective. We move beyond simplistic rules of thumb to provide a data-driven framework for understanding what a sustainable income level looks like and how a flexible approach can significantly improve your retirement lifestyle. Summary and key takeaways * The starting point: For a retiree with a 30-year time horizon aiming for a 90% chance of success, a starting withdrawal rate of around 4.3% of the initial portfolio value, adjusted for inflation each year, is currently a reasonable starting point for a traditional balanced portfolio (60% equity). * Flexibility is key: Rigidly increasing your income with inflation every single year may not be the best idea. By introducing simple, intuitive rules – like forgoing an inflation increase after a bad market year – retirees can start with a withdrawal rate of around 4.7%, without compromising the long-term health of their portfolio. * The “retirement smile”: Real-world spending is not a straight line. Research shows that expenses tend to decrease in the middle years of retirement before potentially rising again later due to healthcare costs. Structuring your income plan to reflect this “smile” can lead to a withdrawal rate in excess of 5%. Introduction: The two great unknowns of retirement Planning for retirement income is challenging because it requires us to confront two fundamental unknowns: 1. Longevity risk: How long will you live? We can work with averages, but in reality, your personal retirement timeline is unknown. A 65-year-old couple today has a high probability that at least one of them will live past 90. To be safe, we must plan for a long horizon, typically 30 years or more. 2. Sequence of returns risk: It’s not just the average return of your portfolio that matters, but the order in which you receive those returns. Experiencing poor market performance in the first few years before or after retirement, while you are simultaneously drawing an income, can do irreparable damage to your portfolio’s longevity. Our methodology: Looking forward, not just back Rather than focusing solely on the past, our research uses Monte Carlo simulations to model potential future outcomes. This approach allows us to test a retirement plan against thousands of different, randomly generated market scenarios, based on forward-looking assumptions for investment returns, risk, and inflation. How it works: 1. Building the portfolios: We construct a range of portfolios with varying allocations to equity, from 0% (very conservative) to 100% (very aggressive). Each portfolio is a diversified mix of South African and global assets. 2. Setting assumptions: We generate forward-looking expected return assumptions, which blend historical market data with current market valuations, to create a realistic picture of potential future returns for South African investors. 3. Running the trials: For each portfolio, we simulate 1 000 possible 30-year retirement journeys. In each trial, the portfolio grows or shrinks based on a randomly generated return, and a withdrawal is made. 4. Defining success: A trial is considered “successful” if there is still money left in the portfolio after 30 years. Our goal is to find the highest possible initial withdrawal rate that achieves a 90% success rate, meaning it succeeded in at least 900 of the 1 000 trials. This process allows us to determine a “safe” withdrawal rate with a much higher degree of confidence than examining historical data alone. Findings: The baseline scenario First, let’s look at the most straightforward strategy: you withdraw a set percentage of your portfolio in your first year of retirement and then increase that rand amount by inflation each year, no matter what the market does. This is our “constant inflation adjustment” scenario.  The chart shows that for a portfolio with 60% in equities, the highest starting withdrawal rate that lasts for 30 years is about 4.3%. This means that if you retire with R 1 million and withdraw around R 43 000 in the first year of retirement and then increase that amount in line with inflation every year, you will have a very high chance that your money will last for 30 years. This is a good starting point when planning your retirement withdrawals. Adding flexibility: A smarter way to spend The baseline scenario may be too rigid. It assumes you’ll ignore market crashes and bull runs, giving yourself the same inflation-adjusted “paycheque” every year. In reality, most people adapt. Adding a degree of flexibility to your withdrawal plan can significantly increase your starting income and your total lifetime spending. We tested three flexible strategies against our baseline: 1. Forgo inflation adjustment: A simple but powerful rule. If your portfolio experienced a negative return in the previous year, you simply skip the inflation increase for the following year. 2. Retirement smile: This strategy mirrors real-life spending patterns. People tend to spend the most in the earlier years of retirement, after which spending decreases. To reflect this, we reduce the income by 10% in year 11 and by another 10% in year 21. 3. Smile & Forgo (combined): This combines both of the above rules, offering the most flexibility.  This chart shows that every flexible strategy allows for a higher starting withdrawal rate than the rigid baseline. For a 60% equity portfolio, the “Smile & Forgo” strategy boosts the safe rate from 4.3% to 5.3%. On a R10 million portfolio, that’s the difference between starting with R 430 000 per year and R 530 000 per year, a substantial improvement. This does require a willingness to be flexible and react to market outcomes. Find your balance Determining a sustainable retirement income is not about finding a single magic number. It’s about understanding the interplay between your goals, your comfort with risk, and your willingness to be flexible. This research demonstrates that while a conservative starting point of around 4% is a prudent baseline, building in flexibility can unlock a significantly better lifestyle without taking on undue risk. Working with a specialist can ensure that you find the right balance. Author: Jonathan Brummer EXCHANGE RATES:  The Rand/Dollar closed at R17.44 (R17.61, R17.74, R18.15,R17.76, R17.72, R17.90, R17.58, R17.89, R17.99, R17.92, R17.77, R17.95, R17.88, R18.04, R18.16, R18.39, R18.64, R18.89, R19.12, R19.10, R18.36, R18.21, R18.18, R18.20, R18.71, R18.35, R18.38, R18.41, R18,67, R18.38, R18.73, R18.03, R18.05, R18.11, R18.21,)  The Rand/Pound closed at R23.53 (R23.84, R23.84, R24.09, R23.88, R23.76, R24.22, R24.08, R24.49, R24.22, R24.35, R24.05, R24.18, R24.14, R23.95, R24.16, R24.40, R24.82, R25.10, R25.01, R24.73, R23.78, R23.55, R23.52, R23.50, R23.53, R23.19, R23.12, R22.85, R23,16, R22.93, R22.80, R22.99, R22.98, R22.72, R22.99, R22.73, )  The Rand/Euro closed the week at R20.44 (R20.56, R20.64, R21.04, R20.86, R20.61, R20.93, R 20.70, R20.91, R20.74, R20.68, R20.24, R20,37, R20.27, R20.13, R20.43, R20.78, R21.21, R21.52, R21.72, R20.93, R19.95, R19.72, R19.83, R19.72, R19.41, R19.20, R19.29, R19.02, R19,35, R19.31, R19.23, R19.09, R18.87, R19.19, R18.85, ,)  Brent Crude: Closed the week $67.73 ($66.08, $66.07, $69.46, $68.29, $69.21, $70.58, $68.27, $67.39, $77.27, $74.38, $66.56, $62.61, $65.41, $63.88, $61.29, $65.86, $67.72 $64.76, $65.95, $72.40, $72.13, $70.51, $70.33, $73.03, $74.23, $74.51, $74.65, $76,40, $77.60, $79.98, $71.00, $72.38, $75.05, $70.87, $73.86, $73.99).  Bitcoin closed at $114,916 ($117,371, $118,043, $113,608, $118,139, $118,214, $117,871, $108,056, $107,461, $103,455, $105,017, $105,643, $104,049, $103,551, $104,615, $96,405, $94,185, $84,571, $84,695, $82,661, $83,074, $84,889, $82,639, $83,710, $85,696, $96,151, $96,821, $96,286, $99,049, $104,559, $104,971, $99,341, $97,113, $97,950). Articles and Blogs: How to survive volatility in your investments NEW What to do when interest rates drop NEW Difficult Financial Conversations Financial Implications of Longevity Kick Start Your Own Retirement Plan You matter more than your kids in retirement To catch a falling knife Income at retirement 2025 Budget Apportioning blame for your financial state Tempering fear and greed New Year’s resolutions over? Try a Wealth Bingo Card instead. Wills and Estate Planning (comprehensive 3 in one post) Pre-retirement – The make-or-break moments Some unconventional thoughts on wealth and risk management Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |