Investment update | SA tax takes shine off cash. Israel-Hamas war sparks rush to dollar, gold

• JSE-listed gold miners rallied on Monday as the military conflict between Israeli forces and Palestinian Islamist group Hamas raised political uncertainty in the Middle East, prompting safe-haven buying of investments like bullion. Spot gold was up more than 1% to $1 848.15 per ounce by late afternoon, having hit its highest since September 29. Prices touched a seven-month low on Friday after a rally in US Treasury yields.
• Sibanye (+8%), Harmony (+8%) and DRDGold (7%) saw large price gains.
• Sasol (+6%) also jumped as oil prices spiked amid concerns that the Israel unrest could escalate into a regional conflict in the Middle East, the largest oil producing region.
• These large gains kept the JSE's All Share index in the black on Monday, despite losses in Vodacom (-3%), Spar (-2%), Santam (-2%) and Pick n Pay (-2%). - News24, Reuters and AFP

• The rand weakened from around R19.30/$ early on Monday to around R19.41 /$ by late afternoon as investors fled to the dollar, seen as a safe-haven investment in times of crisis.
• "If a war breaks out anywhere in the world it is a good idea to hold US dollars. It can therefore come as no surprise that the greenback started trade last night with some gains," said Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.
• The dollar also drew support from Friday's data showing US employment increased by the most in eight months in September, potentially setting up for a higher-than-expected inflation print later this week. - News24, Reuters

• Around the world, equity markets stumbled following the attacks on Israel.
• The escalating conflict comes at a time of heightened uncertainty for markets, as investors grapple with a historic sell-off in US Treasuries and volatility in stocks spurred in part by fiscal worries and concerns that the Federal Reserve will leave rates around current levels for longer than previously expected.
• Soaring Treasury yields have pressured equities, with the S&P 500 off roughly 6% from its late July highs, though the index is up 12% for the year. Yields on the benchmark 10-year US Treasury - which move inversely to bond prices - stand at their highest levels in more than a decade and a half.
• "The worst-case scenario from a geopolitical risk perspective would be a full-scale confrontation between Israel and Iran," analysts at Fordham Global Insights said. "A return to the risk of direct military tensions - especially the risk of Israeli attacks on Iran's nuclear facilities - would likely have systemic impact."
• A widening conflict could keep oil prices elevated, they said. That could complicate the picture for the Fed and other global policymakers, who have been seeking to tamp down inflation after consumer prices surged last year.
• "Conflict is by nature inflationary, conflict in the Middle East, even more so," Fordham's analysts said.
• US earnings season, which kicks off on Friday, is expected to add another measure of uncertain. Meanwhile, investors are also bracing for inflation data slated for Thursday. - REUTERS

• The Bank of Israel said on Monday it will sell up to $30 billion of foreign currency in the open market, the central bank's first ever sale of foreign exchange, to maintain stability during the war with Palestinian militants in Gaza.
• The shekel fell 2.2% versus the dollar to 3.924 - its lowest since a 2016 - after the announcement, then steadied.
• "The bank will operate in the market during the coming period in order to moderate volatility in the shekel exchange rate and to provide the necessary liquidity for the continued proper functioning of the markets," it said in a statement.
• The central bank also said it would provide liquidity through SWAP mechanisms in the market of up to $15 billion.
• "The Bank of Israel will continue monitoring developments, tracking all the markets, and acting with the tools available to it as necessary," it said.
• The shekel was already weak, down 10% against the US currency so far in 2023, partly due to the government's judicial overhaul plan that has sharply curtailed foreign investment.
• "Despite our expectation of a weaker Shekel in the medium term - softer tech equity flows, a more complex political background and more two-sided risks to monetary policy - we do not expect further sustained bouts of shekel weakness," Citi economists said in a report.
• Israeli stock and bond prices slid 7% on Sunday, a day after Hamas gunmen burst across the fence from Gaza in the deadliest incursion into Israeli territory since Egypt and Syria's attacks in the Yom Kippur war 50 years ago. - REUTERS

Jono Braans, private wealth manager at NFB Private Wealth Management.

For the last 12 months, the SA Reserve Bank has embarked on a mass rate hike campaign to fight inflation and protect the volatile rand. This has resulted in interest rates being at their highest levels in 14 years. Generally, a high interest rate environment is bad for borrowers and good for lenders or depositors. However, many individuals have been sitting on substantial pots of cash for quite some time to take advantage of these high rates and, while the pretax return of 8% to 8.50% (current rate) in cash looks appealing, the after-tax return is much less attractive.

To illustrate the impact of taxes on cash investments, consider a hypothetical scenario. Let's say an investor, with a marginal tax rate of 45% has R2 million in a cash investment (savings account). The savings account yields an annual interest rate of 8%. This means, after 12 months, the investor should have R2.16 million in the savings account - an increase of R160 000. However, the after-tax return is nowhere near this level. In SA, if you are under the age of 65, the annual interest income exemption for tax purposes is set at R23 800. Thereafter, interest income is taxed at the marginal tax rate (45% in this case). We can therefore work out the real return:

R160 000 of interest earned less R23 800 (exemption) = R136 200.

R136 200 multiplied by 0.45 = R61 290 of tax payable.

The after tax return is therefore R98 710.

Therefore, what appears to be an 8% return actually equates to around 4.94% after tax.

In contrast, other asset classes, such as equities and certain bonds, may offer tax advantages. For instance, capital gains tax (CGT) is typically lower than the income tax rate, making these assets more tax-efficient. Moreover, there are tax incentives and exemptions for certain products such as endowments, Tax Free Savings Accounts and Retirement Funds.

See table below detailing tax efficiency:

Balancing liquidity and tax efficiency

Investors should consider their individual financial goals, risk tolerance, and investment horizon when determining the appropriate allocation to cash.

Even those with short-term liquidity needs or a conservative risk profile may find there are other, more suitable alternatives to cash. A good solution would be to keep no more than R250 000 in a cash savings account as this will ensure interest income does not exceed the R23 800 amount in the year and therefore no tax on interest income would be payable.

The remainder of your savings could then be invested in a diversified income fund, housed in a wrapper or endowment structure - a materially more tax-efficient investment.