National Budget 2019

After an incredibly tough number of weeks for Eskom, the Government and the country at large, Finance Minister Tito Mboweni delivered a credible budget, if somewhat uneventful, that not only sought to please the rating agencies but give trust to President Ramaphosa’s reform promises while keeping the ANC factions, on the side. A very difficult job indeed.

What emerged clearly from the budget is that SA’s lack of economic growth is hurting tax revenue. In 2018/19 tax revenue was R42.8 billion less than budgeted, across most revenue categories. Without higher economic growth, the country will struggle to generate the revenue it needs to make structural changes.

The next immediate hurdle in the road is the country’s assessment on 29 March by Moody’s, which is the only rating agency to maintain SA on an investment grade, with a stable outlook. It is likely that Moody’s will downgrade the outlook to negative in March and will make another assessment later of how the government is fulfilling its promises.

But everything is not doom and gloom.

There was an underlying message from the Government that they are willing to do the right thing.
The decision to keep wages fixed, the discussion about not outright taking on Eskom’s debt, restructuring plans, and the few other subtle mindset changes government continues to make. One of these being concerned about keeping skills in SA, something that wasn’t considered important a decade ago.

South African consumers, savers and investors alike will take solace in the fact that no dramatic tax increases were announced. Tax however indirectly increases as the tax bands were not adjusted to address the effects of inflation. This “bracket creep” leaves less in most taxpayers’ pockets.

Implications for investors

Investors are understandably concerned about the prospects for their investment portfolios and their hard-earned savings against the backdrop our countries weak financial situation and slow domestic economic growth.

The risk of a further credit downgrade somewhere soon is a real one and fixed income investors can be negatively impacted if that happens.

The valuations of South African shares have materially improved over the past number of years, partly as a result of the weak returns earned and partly because of the global market weakness experienced at the end of 2018. Valuations are now far cheaper than a number of years ago and many local asset managers comment on the significant upside that they now see in domestic shares. Coupled with this is the fact that more than 60% of the collective earnings of JSE listed companies are earned from overseas. These foreign earnings are more dependent on global economic growth than locally.

For these reasons, we continue to favor a distinct pro-growth asset bias in our portfolios. Although global markets corrected towards the end of 2018 in what reflected a growth scare about the health of the Chinese economy, and uncertainty about the longevity of strong US equity returns. If there are any positive developments on the trade war front and/or traction from aggressive economic stimulus measures by China may cause a material upswing in emerging markets share prices. In this scenario, the South Africa market and our currency will be de facto beneficiaries.

Please let us know if you have any further questions

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