The mid-term budget speech was met with widespread disappointment. The numbers were worse than expected, economic growth forecasts decreased, the consolidated budget deficit widened, the nuclear deal was not addressed, and neither was the continuous bailing out of State Owned Enterprises – there is a concern that the rating agencies may downgrade us as a result.
Global News
- Interest rates in the US were higher after rumours that a hawkish Fed Chair would succeed Janet Yellen. This to and fro of hawkish and dovish succession possibilities will most likely continue until the final decision in February next year.
- Copper has reached a record high since 2014. The copper price is often seen as an indicator of economic health after the IMF revised global growth upwards, copper was impacted and reflected record highs. Copper has gained 27.4% year-to-date.
- The Catalonian government has this afternoon voted for independence. Madrid Senate reacted by imposing direct rule over Catalonia. Catalonia’s attempt to gain independence is important because it will set the tone across the Eurozone regarding pro-independence movements.
- The two US Republican Senators who have quit, Jeff Flake and Bob Corker, have both come out heavily critical of Donald Trump’s Presidency.
Local News
- Finance Minister, Malusi Gigaba, delivered his mid-term budget speech this week to great disappointment. Markets reacted briskly, the rand severely weakened peaking at R14.35 and SA government benchmark bond yields have kicked up to over 9%. Nazmeera Moola has described the budget as not cutting our coat according to the size of our cloth.
- After Zuma’s cabinet reshuffle last week there has been speculation that the Russians are behind it. It was revealed in the Sunday Times that new Energy Minister David Mahlobo and Zuma’s aide George Moloisi met members of Putin’s cabinet a week before our cabinet reshuffle. It is strongly suspected that there will be an attempt to push through the infamous nuclear deal.
- President Zuma replaced SACP General Secretary, Blade Nzimande, as Minister of Higher Education in his most recent cabinet reshuffle, this is placing additional pressure on an already strained tripartite alliance between the ANC, SACP and COSATU.
- Inflation for September was reported at 5.1% year-on-year. This was both above market expectations of 4.9% as well as August’s print of 4.8%.
- RMB Morgan Stanley reported that the rand has been the world’s most volatile currency in 2017.
- ANC Treasurer-General Zweli Mkhize has thrown his hat into the ANC presidential race. With 50 days to the ANC conference in December, there is still little certainty of the outcome.
- SAP has willingly cooperated with US authorities, disclosing their relationship with the Gupta’s, and they have initiated disciplinary action in this regard. Follow the link for their full statement.
- In contrast to all of the above, consumer spending has yielded positive results with retail receiving their biggest gain in sales since August 2012. Retail sales gained 5.5% year-on-year in August, compared to 1.6% in July, market expectations were at 2.3%. This is sure to impact the third quarter’s GDP print positively.
Dynasty Lineage – Do Investors Accurately Price Risk?
The positioning of our domestic portfolios (refer to our News Flash of 13 October) was vindicated by the week’s sharply weaker rand. The rand/dollar exchange rate currently sits at R14.17, representing month-to-date depreciation of 4.4%. Last week, we alluded to asset managers who have structured their portfolios based on specific projected SA political outcomes in December, whereas frequent readers will be familiar with Dynasty having positioned our clients for ‘maximum uncertainty’.
So what can market observers learn from Wednesday’s Medium Term Budget Policy Statement, as many analysts had already anticipated that the speech would offer little by way of good news – both in terms of the current status quo, as well as by providing clarity on policy frameworks and specific remedial action to address structural inefficiencies and confidence levels? Our view is that many asset managers and investors did not properly price risk as evidenced on Wednesday afternoon when the rand depreciated by 2.7% post the speech and long-term bond yields kicked up by 0.35%.
Similarly, we maintain our view that investors have not priced in the risk of a poor outcome from the ANC December Elective Conference. Even in a best-case scenario, one would need to witness clear ‘rules of the game’, set by the leading party – nation building, addressing corruption and bolstering business confidence, fixed investment and job creation.
For the Dynasty Investment Committee this a reality check, and we still have the 2019 General Election ahead! We will, therefore, in the lead-up to December, be maintaining a full weighting to offshore asset classes, with almost zero exposure to SA listed property and long-dated bonds. We have also disposed of our small and mid-cap fund where these sectors are primarily exposed to ‘SA Inc’ stocks.
It was notable that SA cash offered no protection against this week’s events. This is in contrast to the JSE which has performed at 5.5% month-to-date, offering a large measure of protection against a weaker rand.
Lastly, the rand at R14.17 is only 3% weaker than it was on 31 December 2016. This presents an opportunity for investors to evaluate the ‘locking in’ of reasonable dollar returns on domestic assets for 2017, and to remit the proceeds offshore. Dynasty is able to attend to foreign allowance applications, as well as currency hedges pending approval thereof. Bespoke ‘rand immunised’ portfolios for retirement annuities and other retirement funds have also been structured for our clients.
