Volume 18 Issue 2– March 2020

I’ve learnt that mistakes can often be as a good a teacher as success. – Jack Welch

COMMENT AND OUTLOOK – Virus Gets The Markets

After an initial recovery in early February, there was a significant correction in global markets by the end of February. This was the result of escalating fears about the economic impact of the spread of the Coronavirus. Some markets experienced their biggest weekly falls since the 2008 global financial crisis. The US markets which were the best performing markets in 2019, fell by 10% in the case of the Dow and over 8% in the case of the S&P 500 with the tech heavy Nasdaq falling significantly as well. Markets in Europe were all down 10% or more for the month and all major global markets are now negative for the year to date. Stock markets in the East and particularly the Japanese Nikkei were also sharply down. The JSE did not escape the global sell off and was down over 10% for the month. It was a market correction, the scale of which has not been seen for a long time.

“The JSE did not escape the global sell off and was down over 10% for the month.

The Coronavirus has spread very rapidly and fears about its impact on the global economy and company profits caused the panic that arose in global equity markets. A broad spectrum of economic activity is currently being impacted by the effects of the virus. Global shipping has been hit hard and this is affecting global trade. The airline industry, cruise liner industry and tourism are being affected. Major sporting events and global conferences are being cancelled or postponed and this has economic consequences. Manufacturing is being affected as components manufactured in the affected areas in China are not getting into the supply chain. This will in turn impact on sales and some major companies are already warning about the effect this will have on bottom line profits. Some 70 countries have reported coronavirus cases. Italy has reported a number of cases and deaths, as has South Korea. The more the rate of spread of the virus increases, the greater the economic impact is going to be. The oil price and some commodity prices are reflecting the fears of a global downturn. Brent crude oil has fallen over 12% to just above USD 50 per barrel. Emerging market currencies have all fallen through this period of turmoil with the Rand being one of the worst affected currencies, dropping to its lowest levels in 18 months.

“The oil price and some commodity prices are reflecting the fears of a global downturn.

During the turmoil in the markets, Finance Minister Tito Mboweni delivered the 2020 budget speech  and tax proposals. It was quite a surprising budget in many ways and the intentions and proposals have been welcomed by most commentators. The challenge is, as always, in the implementation of what has been put forward. It was a budget delivered against a backdrop of a very weak economy and falling tax revenue resulting in a growing fiscal deficit and spiralling state debt. The biggest surprise was the fact that there were no personal tax increases and this is an acknowledgement of the current poor economic and business environment. The focus of the budget was about reducing government spending and creating an environment that is conducive for improved economic activity.

“The biggest surprise was the fact that there were no personal tax increases and this is an acknowledgement of the current poor economic and business environment.

The key target in the drive to reduce expenditure is the public sector wage bill. This has grown significantly over the past 10 years and is a result of government employees’ salaries escalating at a much higher rate than they should have rather than more people being employed in the civil service. The proposal to reduce public sector wages by R160 billion over the next 3 years was immediately rejected by the unions representing government employees. Given that this is a key outcome for the budget to meet its targets, there is going to have to be consensus reached between the unions and government in terms of how this is achieved. Failure to do so is going to result in the state of the country’s finances deteriorating even further. Moodys Investor Services is due to give an update on its credit rating for South Africa in March. It is the only credit ratings agency which still has South Africa rated at an investment grade rating. Given the poor performance of the economy, the deterioration in state finances and increased levels of debt, it is hard to see how they will not downgrade South Africa. The best that can be hoped for is that they defer a decision on the country’s credit rating until November when the medium term budget will indicate whether any progress has been made on meeting the 2020 budget outcomes and whether the decline in the state finances has been turned around. The budget proposals were a good start, they must just be implemented in order to give investors and business the confidence that a turn around for the country is indeed underway.

Prior to the budget President Ramaphosa had delivered his State of the Nation address at the opening of parliament. Apart from the usual theatrics of the EFF it was a measured and considered assessment of where the country is at. The fact that there is greater acknowledgement of what is wrong and that it has been caused by state capture under an ANC government, is a change for the better. There are signs that progress is being made in restoring some critical parts of the state that were hollowed out in the Zuma era through the state capture project. Eskom’s financial position is a dire one but there is now commitment to increased independent power production to solve the country’s electricity supply crisis so that sustainable economic growth can be achieved again. Delivery and results are now what is needed. The country is running out of options. Time to act is now.

Source: Twinoaks
the-acorn-brief Twinoaks Investment Management (Pty) Ltd (Twinoaks) is a FSB approved Discretionary Financial Service Provider – No 849. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Twinoaks has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. For any further information concerning this publication, please contact Twinoaks.