Articles & Presentations

Our technical research teams spend hours studying investment topics, analysing the micro-detail to develop a better understanding of the world of investing. These papers express the company’s opinions and views on some hotly contested investment topics.

A Mercer research paper detailing the hype and the challenges facing cryptocurrencies.

 

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A quick economic overview of global and local markets.

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An illusion can make still objects appear to rotate, or even make us see things that don’t exist. Illusions create a false sense of the possible. Illusions can also have a real influence in an investment landscape. The investment decisions an individual makes today could have long-lasting consequences for the future of their investment performance. In this article I explore four investment illusions that could create a false sense of reality when it comes to an individual’s investment outcome.

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Thomas Robert Dewar, a Scottish whiskey distiller who lived during the early 20th century coined the phrase “sometimes doing nothing is doing something”. While Mr Dewar was no doubt referring to the delicate art of the whiskey aging process, where the unique flavour of the whiskey is developed, the phrase could also be used when speaking about how to go about your retirement planning.

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Valuations on local and global markets remain dear. On a five-year outlook, weaker returns should be expected. Year-to-date, markets are somewhat flat and reflect the largely sideways trend in place since mid-2014 when equity markets peaked.
Lesiba Mothata
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Anecdotal evidence celebrates the broadly-accepted narrative of a growing Africa and the related investment opportunities. From a gross domestic product (GDP) perspective, this narrative appears true as African growth has been extraordinary compared to many developed nations. Based on the year-on-year real GDP growth rate data from the International Monetary Fund (IMF) below, the GDP growth in sub-Saharan African noticeably exceeds that of the seven most advanced countries, also known as the G7. However, beneath the surface, another narrative appears.

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Keeping with the theme of our quarterly report we’ll unpack the greatest financial illusion of them all. The money illusion - or wealth illusion - is a term coined by one of the most well-known economists of all time, John Maynard Keynes. It refers to the idea that people have an illusory picture of their wealth, income or money based in nominal currency terms rather than real terms. 

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Life is full of illusions and we often hear people talking about “perception versus reality”. In this edition we seek to address some illusions, the perceptions that are far from real and, importantly, may impact how we invest and the actions we take in relation to our investments. These actions may ultimately have an adverse effect on our financial well-being. In the world of investments and economics illusions are pervasive and - often because of our natural behavioural biases - we get caught out.
Mark Lindhiem
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Burial societies are informal forms of funeral insurance for millions of South Africans. These societies sit with hundreds of thousands, and in some cases millions, of rands in their bank accounts. Groups such as these are likely to have been active since the 1990s or even the 1980s. Can you imagine what a burial society such as this would have been worth had it been investing in a high-return unit trust over this same period? Burials societies are perfectly positioned to take their structures to the next level and make a tangible impact on their members and this country. The financial services sector should be doing everything it can to help them on their way.

  

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The value of the rand has been dominating conversations (and headlines) for the past year. The change in the value of the rand will always impact the rand returns of your offshore investments. Here we look at some of the reasons the currency has weakened over the past decade, as well as the implications for a South African citizen investing offshore.


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We are bombarded by so much information each day that making sense of it all is exhausting. Our decision-making ability is overloaded and instead of making effective decisions we are left paralysed - unable to distil the feasible ideas into decisions, let alone actions. So how do we zone into these feasible ideas and put them into action?

 

we filter the multitude of investment ideas and execute only a few so that we are able to deliver good long-term returns (growth) to our clients. Simply put, we deal in the complexity of identifying feasible ideas and putting them into action. 

Tracey Want
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This presentation breaksdown the meaning of Brexit, the main debates and broader fears surrounding it, and what the clients should know.


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Responsible investing remains a key focus for our business as we believe that you can invest for a more sustainable future only once you’ve considered all the risks.

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The UK sent shock waves through global markets today as 51.9% of Britons voted to leave the European Union (EU) in the UK-wide Brexit referendum. Despite the narrow margin by which the referendum was determined, the political future of the UK has clearly been thrust in a different direction. The UK has now been set on a course to exit the EU, which has major implications for the UK and the EU.



 

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Currency and equity market volatility has increased in South Africa since the country has been put on watch by global ratings agencies. Investors have borne the brunt of this and are feeling less certain of their investment outcome than ever before.

 
Lesiba Mothata
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There will be a time in the future to take more risk, and this will ironically be at a time when investors are probably most fearful, but right now we urge a higher level of caution. We think that the tide has started to go out - we just don't know at what pace it will recede. So we advocate making sure you have your swimming trunks firmly on. In other words. be more cautious and emphasise risk management and diversification.


 
Mark Lindhiem
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Thank goodness for a decent recovery in markets in March. The weakness from January into part of February was an ominous sign. Emerging markets have performed better than their developed counterparts, but much of that is due to a recovery in their currencies. SA is no different, but there was some reversal in early May as global markets pondered a possible US rates increase.

 
Mark Lindhiem
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Global market performance was characterised by two key factors in first-quarter 2016 -- US Federal Reserve (Fed) monetary policy and negative interest rates in Japan and Europe. In the US, softer-than-expected economic growth and global asset-market turbulence caused investors to question whether the Fed would aggressively raise interest rates. US 2016 economic growth expectations have now fallen back below 1% despite a sustained recovery in the employment data.

 

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Emerging markets stabilised in the first quarter after a torrid 2015. While global risk appetite was restrained in January and February, the EM bond ETF was flat in January and gained 1.7% month on month (m/m) in February. Similarly, the JP Morgan EM currency index weakened by only 1.8% m/m (after 16% losses in 2016) and then gained 0.6% m/m in February. In March, when risk appetite recovered in earnest, the flood back into EMs was higher than into some other global asset classes.



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Sub-Saharan African (SSA) growth has slowed in the face of lower commodity demand and prices, and global economic fragility, making it difficult for the region to boost production and exports. With exports expected to decline over the next five years, the development of alternative growth sources such as private consumption and investment (in non-commodity sectors) may be required to prevent recession. In other words, sector diversification is required.

 

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Rising inflation, the rand’s recovery and the Resources-Industrials crocodile jaws were key characteristics of the local investment landscape for the quarter. But apart from these, local equity and bond performance was noteworthy positive (5.9% and 6.6% respectively).

 

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In recent years, two clear investment themes have emerged – "passive investing" and "responsible investing". Passive investing is simply a way to access the general risk-return characteristics of an asset class. It does this by investing in order to replicate a benchmark, which is normally set up to capture the "essence" of that asset class. Responsible investing is a response to a growing realization that market outcomes are driven by more than financial factors and therefore investment decisions are not fully informed without taking into environmental, social and governance ("ESG") factors into account.

 

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Investment Solutions, as the largest multi-manager in South Africa, believes it has an important role to play in ensuring asset managers consider the Environmental, Social and Governance (ESG) risks and opportunities of the underlying companies in which they invest. We believe asset managers that consider, evaluate and address sustainability issues and incorporate ESG considerations when evaluating investment opportunities are better informed of the potential risks and opportunities relating to the underlying assets in which they invest.

 

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South Africa has presented itself to the global economy as the gateway to Africa. The proposed sale of Barclays Africa by its London parent generates the perception that South Africa and Africa are not meeting these expectations, which contributes towards the wave of negative South Africa news permeating financial markets at present. The implication may be to restrain foreign appetite for SA equities, bonds and the rand at the margin.

 

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It is heartening that the National Treasury is working tirelessly to avoid South Africa’s credit rating being lowered to non-investment grade. While there are differences between international currency credit ratings, which are often cited in the financial press, and local currency credit ratings, which are less spoken about, a downgrade to non-investment grade on either local or foreign debt would have a serious effect on the country.

 
Lesiba Mothata
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The presentation by our chief economist Lesiba Mothata and economist Rob Price, covers a general economic review and specifically looks at our currency, commodities as an investment, as well as considering the impact of what a ratings downgrade (to junk status) could mean for SA.

 
Lesiba Mothata
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The South African Reserve Bank (SARB) is widely expected to increase interest rates by at least 25 basis points when its monetary policy committee meets later today. One of the 22 analysts polled by Bloomberg forecast a 75bp increase, 64% of them forecast 50bp, 23% forecast 25bp, and only two forecast an unchanged decision. Investors should expect further rate increases over the coming year despite economic growth faltering, and appreciate that the higher trajectory of the increases is more important than the 25bp or more to be announced at today’s meeting.

 

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The USD-ZAR rate bolted to a new all-time high in January 2016, which follows on from noticeable weakness in the domestic currency in 2015 and continues a weakening trend that began in 2011. By most technical currency valuation measures, the rand is now "undervalued," which suggests a turning point for the currency is approaching. Unfortunately, this measure doesn’t provide much predictive power on the currency over the next 12 months.

 
Lesiba Mothata
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The South African bond market has become a disseminator of important information about the economy and its trajectory. The events that unfolded in the latter part of 2015 around the political machinations in the Finance Ministry have reinforced the important role bond investors have in an economy. As witnessed during the European sovereign debt crisis, bond vigilantes have often pushed bond yields higher in response to undesired economic prospects either induced by politicians making incorrect decisions or markets readjusting to global forces.

 
Lesiba Mothata
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During the sovereign bond crisis in Europe, financial markets often forced politicians to make the correct decisions. Bond yields rose to record levels -- above 7% in some peripheral Eurozone countries such as Spain and Portugal -- and endless summits were held as markets expressed dissatisfaction with political outcomes. Bond vigilantes often pushed bond yields higher and fund managers sold equities in retaliation against an undesired economic trajectory.

 
Lesiba Mothata
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Economic sanity had prevailed in SA until Finance Minister Nhlanhla Nene was removed from his post. Now, the country is on a slippery slope as the assault on the rand continues and investor confidence fades. The South African Reserve Bank (SARB) is on high alert and it would not be surprising if an emergency meeting of its monetary policy committee is convened and interest rates increased.

 
Lesiba Mothata
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Monthly Economic Update for October 2015
Lesiba Mothata
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The survey is Investment Solutions’ third annual survey on Southern African-based managers that have at least one fund that invests in Africa, regardless of asset class. The listed African equity investment space was the key focus area; however, as we did last year, we did ask managers to identify products covering other asset classes and have included the information where applicable. The intention of the survey is to provide potential investors with a better understanding of important characteristics of fund managers that invest in Africa.

 

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Emerging markets had an encouraging start to the year, with the MSCI Emerging Markets Index reaching the halfway mark to be slightly ahead of developed markets. However, the market sell-off that began in China and increased awareness of weak global growth led to a "risk off" environment and significant outflows from emerging-market assets and currencies. The MSCI Emerging Market Index delivered minus 17.8% for the quarter in dollar terms, the worst quarterly performance in four years.

 

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After a relatively flat second quarter, the MSCI World Index declined by 8.3% in the third, suggesting the bull market in global equities that began in 2009 is running out of steam. While financial markets and economies can diverge for long periods, economic growth is eventually needed to provide support for stretched valuations.

 

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Investors have for many decades attempted to diversify their portfolios by market capitalisation and investment style. The approach is based on the academic theory that large and small caps, and growth and value securities, explain most of the variation in equity returns and, although individually risky, dampen risk when aggregated within a portfolio. However, other research indicates that it’s not sensible to overlook quality.

 

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Global equity markets came under fire in the third quarter as a result of uncertainty caused by the material slowdown in China’s economy and a lack of clarity on the timing of the Fed’s rates lift-off. Most regions were affected, but emerging markets were hardest hit. Despite this outcome, the FTSE/JSE’s modest 2.1% decline was cushioned by a 27% rally in SABMiller during September after Anheuser-Busch InBev (ABI) offered to acquire its main rival for £68 billion ($104 billion).

  
Lesiba Mothata
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Sub-Sahara African (SSA) countries have for some time recorded heady growth in output relative to those in other regions, especially developed markets. The best days of this strong performance arrived during the commodity super cycle, which was fuelled by China’s robust growth. For a significant period, China's GDP and its related demand for commodities has seen an annual compound growth of 10%. Due to the law of large numbers, it has slowed after reaching middle-income level. Consequently, the current contraction in commodity prices is likely to prove structural.

 
Lesiba Mothata
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Global equity markets sold off sharply in the quarter, with the MSCI ACWI down 9.3%. The S&P 500 declined 6.4% during the quarter -- the first negative period since the last quarter of 2012 on a total-return basis. Emerging-market (EM) stocks were the hardest hit, falling 17.8% and teetering near an outright bear market. Even prior to this sell-off, investors had been increasingly concerned about the ability of equity markets to continue to "climb the wall of worry".

 
Glenn Silverman
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This survey is Investment Solutions’ third annual survey on Southern African-based managers that have at least one fund that invests in Africa, regardless of asset class. The listed African equity investment space was the key focus area; however, as we did last year, we did ask managers to identify products covering other asset classes and have included the information where applicable. The intention of the survey is to provide potential investors with a better understanding of important characteristics of fund managers that invest in Africa.

 

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Monthly Economic Update for September 2015
Lesiba Mothata
Presentations
1.39 MB
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Economic Outlook for SA - looking at changing rand hedge qualities, investment flows and SA budget.

Lesiba Mothata
Presentations
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As an emerging-market country, South Africa (SA) has deep economic challenges. The recent student protests across the country against escalating university fees are testament to the need for economic transformation and resultant higher GDP growth. However, SA continues to underperform its peers on growth, inflation and even on redressing the troika of poverty, unemployment and inequality.

 
Lesiba Mothata
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The Bank for International Settlements (BIS), a central bank of central banks based in Switzerland, is a reputable source of primary data. In its September 2015 quarterly report, in which it published results from its newly minted database on credit, it shows that countries have accumulated substantial debt and continue to struggle to deleverage.

 
Lesiba Mothata
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Lesiba Mothata, Chief Economist, talks about South Africa's triple challenge - unemployment, inequality and poverty.

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Local equities have been at the epicentre of the growth in South African markets over the past few years, which has drawn a great deal of attention to the FTSE/JSE Shareholder Weighted All Share Index (SWIX) as a benchmark for South African retirement funds. Since market indices are often used to benchmark active managers’ performance, it is critical that they are a true reflection of markets.


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We have recently experienced a material sell off in equities around the world and a large increase in volatility as investors feel uneasy about the economic future of China. It is not unusual during times like these for equities, bond yields and certain currencies to collapse. This is because in times of significant uncertainty, investors flee emerging-market assets and currencies towards traditionally safe-haven investments such as the US dollar and gold.

 

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Investment Solutions' CIO Glenn Silverman gave background on the responsible investing.

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Lisa Kusters, head of responsible investing, presented on how Investment Solutions incorporates ESG factors into the investment process.

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Smart beta has become one of the buzz words in the investment arena during the past 18 months. This article aims to share with investors the evolution of smart beta, the different strategies and how they are used. In addition we will examine the costs, the South African landscape and considerations for investors looking to implement a smart beta strategy into their current investment portfolios.

 

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Our investment promise to clients is to consistently deliver above-average returns at below-average risk. By being "responsible investors", we aim to achieve this by engaging asset managers on their consideration of ESG (Environmental, Social and Governance) issues in their investment process. We aim to ensure all investment risks are considered, including those that have been referred to as "non-traditional" and which may only play out over the longer term.

 

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Equity markets simply shrugged off the worst financial crisis since the great depression in 2008, delivering extraordinary returns over the last decade. Investors have become accustomed to double digit real returns which has framed their future expectations catching many in a success trap. A success trap occurs when investors become so used to success, that they develop a false sense of security, blissfully ignoring those risks taken to achieve the success.

 

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The performance gap between Industrial and Resource shares relative to the FTSE/JSE All Share Index (ALSI) is at its historical widest. Resource shares continue to underperform as incoming data confirms that the Chinese economy has slowed, resulting in weakened demand for commodities. The top 10 Resource companies’ market capitalisation has more than halved since 2002 to R1.02 trillion from R2.8 trillion at the height of the commodity super cycle.

 

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The MSCI Emerging Markets Index had outpaced its developed-market counterpart (MSCI World) by 5.3% this year to end-April despite the sub-par economic performance of most emerging markets (EMs). China, the emerging world’s largest and fastest-growing economy in the last decade, has seen its GDP growth rate slow to 7% -- behind India’s 7.3%.

 

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The beginning of quantitative easing in Europe and the continuation of Japan’s own version attracted investors, which helped these two equity markets to begin the quarter strongly, pulling global equities higher. However, there is an old saying that warns to "sell in May and go away," which suggests market returns from May through October are generally lower than October through April.

 

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Despite the ongoing volatility in global financial markets and the imminent slowdown in China –evidenced by a sharp decline in electricity production, bank loans and rail-freight volumes —sentiment towards growth in Africa remains positive. Admittedly, many of the economies in burgeoning sub-Saharan Africa (SSA) are growing off a very low base.

 

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The significant events of the second quarter were the Greek debacle, and the country’s possible future exit from the Euro, along with a drastic fall in the Chinese equity market, down 31% from its peak. Both events prompted the question of whether the long-overdue correction in equities had finally arrived. Capital markets have run hard since the end of the global financial crisis (GFC) of 2007/8. .

 

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The 2015 budget is well intentioned; however, the likelihood of achieving the desired results is doubtful. South African government finances are clearly under pressure. Fiscal flexibility has been declining over the past six years. The previous budget tabled by then Minister of Finance Pravin Gordhan showed signs of financial distress. The distress has increased since then, reflecting the difficulties faced by current Minister of Finance Nhlanhla Nene.

 

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Financial repression in the form of suppressed interest rates has been the policy of choice, particularly in the developed world, to try to generate a recovery from the 2008 global financial crisis. Seven years on and the global economy remains in convalescence.  


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Sub-Saharan African countries Nigeria, Angola and Mauritius have announced fiscal budgets for 2015/16 that reflect difficult economic conditions in oil-producing economies and relatively better circumstances in those that import oil. The new budgets for Nigeria and Angola are austere, with government spending reduced due to falling oil prices.

 

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The annual World Economic Forum Global Competitiveness Report showed South Africa had dropped again in the overall ranking. It is now ranked the 56th most competitive country out of 144 assessed, behind China (28) and Russia (53), but ahead of India (71) and Brazil (57) among the BRICS.

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In the investment fraternity, Momentum strategies have been neglected as a serious investment option. They are typically seen as a form of Smart Beta – which can be defined as the segment of “traditional alpha” that can be reproduced by creating a systematic exposure to a particular factor, theme, or style within a market or index.

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Two of the most dangerous words in the investment world are ‘market timing’. Market timing occurs when investors try to predict the direction of the market with the intention of buying when share prices are low or selling when share prices are high.

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Smart beta has become one of the buzz words in the investment arena during the past 18 months. This article aims to share with investors the evolution of smart beta, the different strategies and how they are used.

Articles
212.44 KB
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This is Investment Solutions’ second annual survey on Southern African-based managers that have at least one fund that invests in Africa, regardless of asset class. The listed African equity investment space was the key focus area.

Presentations
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