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1 thelighthouse Issue 7 May 2013 welcome It seems like just the other day that New Year's resolutions were being planned, now we're almost halfway through the year! As financial planner and author, Suze Orman, says, "No-one's ever achieved financial fitness with a resolution that's abandoned by February." This is therefore a good time to stop and reflect, to check if you're still on track with your plans - particularly with the ever-rising inflation and current market volatility in the picture. Our article on inflation risk will help you to understand a bit more about inflation. Enjoy the read. Understanding Inflation Risk We all know that over time, things get more and more expensive. This inflation of prices is measured by various rates and indices like the Consumer Price Index (CPI). Inflation is the silent killer of wealth and in time can erode all of your capital. The rate of inflation in South Africa usually refers to the rate of inflation based on the CPI. The South African CPI shows the change in prices of a standard package of goods and services which South African households purchase for consumption. In order to measure inflation, an assessment is made of how much the CPI has risen in percentage terms, over a given period compared to the CPI in a preceding period.* Linda Stonier, Stone Wealth Management's CEO and Head of Advice, says, "Inflation is the greatest risk to your wealth, so it is vital to understand its effects over long periods. Every long-term investor's objective must be to achieve a real rate of return on investment, which requires growing a client's continued over the page 1

2 continued from page 1 money at a rate above the rate of inflation. It's the only way that the purchasing power of their money can be protected. At Stone Wealth Management, our approach seeks to achieve these real returns at the lowest possibly volatility. A good way to quantify this inflationary risk is to look at the purchasing power of money over time. In the graph below, the purchasing power of R1 000 over the past 5, 10, 15 and 20 years is given. Purchasing power of R Historic Inflation Risk years 10 years 15 years 20 years Past X years If you had decided to hide R1000 under your mattress some time ago (5, 10, 15 or even 20 years ago) instead of investing it, you would have received no returns on this money and will only be able to purchase R1000 worth of goods and services today. However, 20 years ago you would have been able to purchase the same goods or services for only R178. That means that you would only be able to access a sixth of the purchasing power your money had back then. Likewise, these goods and services would have cost you R353 fifteen years ago, R545 ten years ago and R718 five years ago. So clearly, if you don't receive any returns on your money, its value will be completely eroded over time, says Linda. You can also look at the purchasing power of your money over the coming years: Assuming that inflation will lie in between the bands set by the Reserve Bank, ie between 3% and 6%, the purchasing power of your money over the next 5, 10, 15 or 20 years for the respective inflation targets, will be in the ranges given in the graph below Inflation Risk over the next 5, 10, 15 and 20 years (Inflation between 3 and 6%) years 10 years 15 years 20 years Next X years CPI at 6%p.a CPI at 3%p.a Linda concludes, Again, this highlights the importance of planning and investments for financial peace of mind and a secure future. *Source: 2 a professional approach to preparing your future

3 Issue 7 May 2013 Economic and Market Overview: Quarter 1, 2013 For the period ended March 2013 The following market review looks at the performance over the past quarter of local and global asset classes, as well as currencies, and puts this into perspective relative to longer-term performance. The purpose of this review is to provide a context in which the performance of the investment solutions in which you are invested can be assessed. International After managing to avoid the fiscal cliff at the eleventh hour, US politicians bought more time by voting in favour of extending the US debt ceiling. Negotiations around this were met with major delays, which prompted Fitch rating agency to make an announcement that the US is in danger of losing its AAA rating if they do not come to a timely agreement on how to address the US budget deficit. Britain was stripped of its AAA credit rating by Moody's down one notch to Aa1. This was due to the combination of increasing governmental debt levels and weak economic growth in the country. The low economic growth is also reflected in the country's unemployment figures. Britain's unemployment rate is sitting at 7.8% with the youth (18 to 24 year olds) being the most affected group. As Britain struggles with weak economic growth, the Eurozone slips further into recession. The region's largest economies, Germany and France, contracted at the end of 2012 by 0.6% and 0.3% respectively, recording their first quarterly declines during the year. In addition to dealing with the economic challenges facing Eurozone countries, Italy also had their elections in February, the results of which were inconclusive, without a credible government being formed. Cyprus came to the forefront of financial news as it proposed to tax banking deposits to rescue its ailing economy. The country's banking system has been under pressure due to the high exposure to Greek government debt. As a consequence of this, S&P lowered Cyprus's credit rating from CCC+ to CCC. Efforts to avoid a disorderly collapse of the country's banking system included a bailout package from the European Union and the International Monetary Fund of 10 billion. Despite global political and economic concerns, global financial markets have had a relatively strong start to the year with equities generating returns of 8%, closely followed by global listed property, which was up 7% over the quarter. Investors in the bond market were not as fortunate; the index 3

4 Issue 7 May 2013 was down 2% year to date. Over the oneyear period, listed property would have given investors the best return (22%). Domestic In South Africa, we continued to see labour unrest at the start of the year, as the Western Cape farm workers strike resumed. This was particularly problematic in light of our weakening currency. The rand has been under significant pressure over the past couple of months, due to a combination of factors, one of which is the widening trade deficit. A record deficit of R24.5 billion was recorded in January, which was caused by a decline in exports and a significant increase in imports. Year to date, the rand has weakened by 10% to the USD and by 21% over the past year. Governor of the South African Reserve Bank (SARB), Gill Marcus, has announced that she will not intervene to stem the depreciation of the rand. On the day she made this announcement, the rand fell to a four year low of R9.30 to the USD. The SARB has maintained the repo rate at 5%, despite revising inflation expectations upwards. Inflation is expected to average at 5.9% (previously 5.8%) in 2013, peaking at 6.3% in the third quarter (compared to the 6.1% peak previously projected). The SARB has the challenge of balancing inflation expectations with the low economic growth in the country. South African GDP increased by 2.5% in 2012, which is in line with what is expected for the year ahead. Regardless of economic challenges facing the country, financial markets have held up well. Property has maintained its position as the top performing domestic asset class; it is already up 9% year to date. The other domestic asset classes have delivered positive, but more muted returns over the past quarter. The SARB has maintained the repo rate at 5%, despite revising inflation expectations upwards. Inflation is expected to average 5.9% (previously 5.8%) in 2013, peaking at 6.3% in the third quarter (compared to the 6.1% peak previously projected). The SARB has the challenge of balancing inflation expectations with low economic growth in the country. South African GDP increased by 2.5% in 2012, which is in line with what is expected for the year ahead. Regardless of economic challenges facing the country, financial markets have held up well. Property has maintained its position as the top performing domestic asset class; it is already up 9% year to date. The other domestic asset classes have delivered positive but more muted returns over the past quarter. 4 a professional approach to preparing your future

5 Economic and Market Overview: Quarter 1, 2013 market overview The tables below provide a review of key local and international investment indicators for the past quarter, as well as over longer periods. South African asset classes (in rands) (Performance over periods to 31 March 2013) Asset class Indicator 3 months 1 year 3 years 5 years LT-average* Equities All Share Index 2.5% 22.5% 14.9% 9.3% 12.5% Property Listed Property Index 9.1% 37.3% 24.0% 20.7% 11.4% Bonds All Bond Index 0.9% 14.3% 11.9% 11.6% 6.9% Cash STeFI Call 1.1% 4.9% 5.4% 6.9% 6.0% Inflation CPI (one month in arrear) 1.5% 5.8% 5.2% 6.2% 4.9% Source: I-Net and Nedgroup Investments Global asset classes (in dollars) (Performance over periods to 31 March 2013) Asset class Indicator 3 months 1 year 3 years 5 years LT-average* Equities MSCI World Index 7.9% 12.5% 9.1% 2.8% 10.0% Property S&P Developed Property Index 7.0% 22.3% 15.0% 4.0% 8.2% Bonds JPM Global Bond Index -1.9% 2.8% 6.7% 3.6% 4.7% Cash US 3-month deposits 0.1% 0.3% 0.3% 0.7% 4.0% Inflation US CPI (one month in arrear) 0.8% 2.0% 2.3% 1.9% 3.1% Source: I-Net and Nedgroup Investments Currencies (Performance over periods to 31 March 2013) Currency Value at 30/09/ months 1 year 3 years 5 years LT-average* Rand / Dollar % -20.5% -8.2% -2.7% -5.5% Rand / Sterling % -14.9% -8.2% 2.7% -3.9% Rand / Euro % -15.5% -6.3% 1.6% -5.7% Source: I-Net, Morningstar and Nedgroup Investments * Updated annually from 1900, or longest available period Returns for periods longer than 12 months are annualised. 5

6 Everyone has the sense that right now is one of those moments when we are influencing the future. Steve Jobs, Co-Founder of Apple talk to us The Stone Wealth Management team welcomes your feedback. If you have any queries, suggestions, praise or complaints, please and we ll either get back to you personally, or we ll tackle your topic in a future issue of The Lighthouse. Stone Wealth Management a professional approach to preparing your future 68 Old Main Road, Kloof PO Box Maytime Centre Kloof 3624 Tel Fax VAT reg no CK No 2006/038071/23 Stone Wealth Management is a licensed Financial Services Provider FSP you asked us... How risky are equity investments? Although investing in equities is more risky than cash and bonds, over the long term, they have created much value for investors who are able to withstand the sudden market drops that sometimes occur. While it is never possible to say how quickly markets will recover, records show that, in the long term, investors in equities are suitably rewarded. Do you have any questions that you would like answered? and will post the answer in the next issue. We ve MOVED! Stone Wealth Management is now at 68 Old Main Road, Kloof We look forward to welcoming you into our new Stone Wealth Management home! 6

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