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Market and Economic snapshot Week 48 2016

The Wealth Ecology Newsletter – brought to you by Dawn Ridler CFP ® BSc Hons, MBA

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Local Economy: It’s great news that the full trifecta of rating’s agencies kept us out of junk, but it only gives us breathing space to get things right once and for all. Central to all of that is Gross Domestic Product and in order to do that consumer consumption (not fuelled by debt) needs to increase. There are two classic things a government can do, drop interest rates (monetary policy) or drop taxes (fiscal policy). Monetary policy is supposed to be independent of the government (via the Reserve Bank). Gordhan has already indicated that he is going to have to top up the gravy train with more taxes (no fiscal stimulus), so what are the prospects of an interest rate decline? Inflation came in at 6.4% in October which is not good but a lot of that is food inflation which could start coming down soon. Unfortunately, if we drop our interest rates just as the US is looking at increasing theirs (as soon as next month) then foreign liquidity will flood out of the market back into dollars. Tough call but a decline in interest rates will make government debt cheaper and put cash into taxpayer’s pockets.Thanks to the rise of populism, politics and economics are inextricably linked and unless we start defining that positively – without the fascist hangers-on and noisy opportunists (EFF) – then this threat of downgrading is going to remain over our heads. The massive potential of every individual exercising their power is very evident in the eToll boycott and it shouldn’t stop there. Is the trillion Rand nuclear energy deal the best way to address our future energy demands? Probably not, especially since it is not home grown, and the price-tag could bankrupt us. Imagine if hundreds of thousands of South Africans and businesses went ‘off-grid’ with wind and solar energy (even if Eskom refuses to buy the excess). The more pushback the government gets, the more time we ordinary South Africans have to implement alternatives. If you haven’t bought yourself a Xmas present yet, perhaps something along these lines? The Allshare Index is at 49,256, quite a bit down from the 54,000 level it has tested several times this year. The hardest hit is the industrial sector, with resources the only bright light in the markets (but on flimsy fundamentals). The Banking sector has stabilised but mostly because they have been shedding jobs to become more productive.

header*source sanlamitrade.co.za

Global economy: There is still very little clarity as to what Trump’s presidency is going to look like, and until that is known expect the global markets to be extremely volatile. His Taiwan faux pas is perhaps some indication that he doesn’t know what he’s doing or engages his mouth (or Twitter fingers) before his brain. Markets hate uncertainty. Companies sit on their cash rather than invest, replace humans with technology and buy back their shares. Obviously, that isn’t going to get the economy going. Be very careful about buying into the hype around Trump’s assertions that he is going to spend trillions of dollars on infrastructure, increasingly it is looking like those trillions are going to be in tax breaks to construction companies, not true fiscal stimulus. The price of copper is often a ‘leading indicator’ of the economy because it is used in basic infrastructure and it reacted immediately on Trump’s win (see the graph below).

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The best we can hope for is that this hype becomes a self-fulfilling prophecy – which is quite possible! There is a quantum shift in the global economy taking place, ride the wave or get left behind. To quote Steven Hawking: “The automation of factories has already decimated jobs in traditional manufacturing, and the rise of artificial intelligence is likely to extend this job destruction deep into the middle classes, with only the most caring, creative or supervisory roles remaining.” (you can read his op-ed HERE ). The reality is that the gap between haves and have-nots is going to grow. A ‘No’ vote in Italy will be game changing because it will open the door for an Italian EU exit, the first exit from the Euro and not just the EU. The rejection of the alt-right candidate in Austria was a good sign that sometimes sense does prevail.

Exchange rates: The Rand exchange rate volatility over the last couple of weeks has been all about our ratings, and the trifecta of good news reflected instantly in the exchange rate (the most fickle barometer of the globe’s perception of our risk). The Rand/Dollar ended Friday on R13.81, The Rand/GBP on R17.84 and Rand/Euro on R14.72. We have seen a gradual improvement in the Rand over the year since Nenegate (you can see that in the graph above), on the whole, the trend is in the right direction.

Other Indices: Brent Crude price has been the other big story of the week with a formal agreement between OPEC and non-OPEC countries to cut production. The fact that it has only risen to $54 is an indication that very few people believe it is going to stick. The price of petrol was expected to drop by around 40c on Wednesday, but it now appears it is only going to be half that mostly as a result of the volatile exchange rate over the last few weeks. With a bit of luck, a continued improvement in the Rand will be able to absorb this crude price increase going into the new year.
Mitigating Risk over the Holidays: Make sure your short-term insurance is up-to-date, especially the value of the house/s, contents and stuff you’re going to take on holiday. Check the small print in terms of security requirements, this changes annually and might not have been brought to your attention (one such change is the requirement for double locks on sliding doors). Make sure that any paperwork w.r.t insurance, assurance, medical aid, Wills, important documents can be quickly and easily found if necessary. Keep an eye on your bank accounts etc. – at this time of the year, fraudsters are in full swing. Watch your consumption with an app like 22seven.

Lump sums into Retirement Annuities (RA): The maximum taxable deduction is now 27.5% of your income, or R350,000 pa from all sources, including your pension and provident fund. Not only do you get the deduction but the investment has no CGT, tax on interest and dividend withholding tax is rebated. In the right investment, it is a no-brainer. Do some rough sums before the end of January to find out if you could be adding a lump sum. Please do not add that to your old insurance platform RA and load it with opaque fees and penalties, put it into a LISP RA. If you’re not sure what the difference is, give me a shout.

Blogs you might have missed: Trusted Professional – is it a meaningless descriptor? HERE

Action for the week: Tie up any loose ends in your assurance and insurance (claims for example). They go on skeleton staff in the next couple of weeks and it all gets pushed out to next year. Check your eFile profile for communication from SARS, never assume they will contact you.

Author: Dawn Ridler CFP ® BSc Hons, MBA, you can contact her HERE 

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