Basking in the rosy glow of change – how to take advantage of it

This week will still be uncertain with cabinet changes and the budget, the positive aspects of the first may be counteracted by the second.

Local Economy: While it was a drawn out process, worthy of any soapie, the ousting of Jacob Zuma has been well received by the international market. There is still a lot of work to be done, but Ramaphosa has the opportunity to clean house, and stop the R1Bn a year corruption costs, and we have already started to see that with the Vrede Dairy arrests (which perfectly ensnares many involved in the State capture debacle). The cabinet reshuffle will be interesting and should continue to bolster the Rand. The Budget is on Wednesday (I will be putting out my summary that same afternoon as usual) and that is likely to be Gigaba’s swan song.  It would be nice to have Pravin back, but I doubt he wants that hot potato anymore. There are still some real concerns that we need to watch very carefully because of their potential to impact the market and the economy. As ever, there is a substantial tax shortfall that has to be addressed. The multimillion tax-payer sponsored gap-year for matriculants (over 90% of first-year tertiary students fail, and if they go back, fail again) is one such black hole. The other much more onerous obligation you might have missed in all the speeches last week is the NHI (National Health Insurance). I have touched on this topic several times in the last year (BizNews Blog Here), and this project runs to billions of Rand. The Medical Tax credit is under threat, maybe as soon as this year. A ‘rounding up’ of VAT to 15% is a distinct possibility, perhaps with relief with more zero-rated goods. VAT is already two-tiered, the possibility of a third tier hasn’t really been talked about but is a distinct possibility – adding a luxury VAT at 20% say (but that may wait until October). Ramaphosa’s reaffirmation of the ANC’s new policy of confiscating land without compensation, a la Zimbabwe, is worrisome but a blatant political ploy to wrench voters back from the EFF. While this would take a change in the constitution to effect, Juju would probably hold his nose and join ranks with his sworn enemy – despite the fact it would render his party meaningless. A strong opposition brought about this change – but complacency would be a huge mistake. As the Chinese curse goes – we live in interesting times.

Offshore: Internationally, the global economy continues to improve despite the smallish stock market correction. While the stock market is not the economy, if a correction is severe, it does start to impact on the economy. A smallish correction just weeds out over-inflated stocks, but from an investor’s perspective gives us an ideal opportunity to buy into stocks that have long-term potential – an end of season sale for classic products as it were. The US housing market continues to heat up, but the graph below shows that with mortgage rates in the US almost doubling recently, mortgage apps are already shrinking fast. It is difficult to forget that it was the collapse of the housing market (thanks to sub-prime rates) that triggered the Great Recession – also it appears very little was learned from that fiasco.  The Dollar continues to be weak, and there is a growing trade and tariff stand-off, especially with China.

Exchange rate: The Rand/Dollar continues to trade below R12, but this is still mostly Dollar weakness but we have strengthened against the other Western currencies too but not to levels of last year. The Rand/Dollar closed Friday on R11.60, Rand/Euro on R14.44, and Rand/GBP on R16.32.

Indices: The oil price continues to be under pressure, but seems to be finding a new level closer to $65 than $70. That combined with a stronger Rand bodes well for our petrol price, which is a major factor that drives the inflation rate. At the moment our inflation rate is only 1% point above the UK – we haven’t been there for a while. If the economy stabilizes, SARB may drop the interest rates – the fact that the differential between inflation and fixed interest rates is at CPI plus 3% or more is out of line from the historical average (but has been attracting a lot of foreign investment).

Week 7 2017 Week 7 2018
ALSI ended at  52586 ALSI 59122(55903 on 9/2) up in the short term.
Repo rate/Prime interest rate 7%, 10.25% (29/1/2016 was 10.25%). Inflation 7.07% (Dec) 2016 Repo rate/ prime Interest rate 6.75%, 10.25% – Inflation down to 5.1%,0.25% interest rate cut 20/7/2017. Inflation 4.5% (Dec) slightly up from Nov
Brent crude $ 55.23 Brent Crude $64.93, down from the $70 level we saw recently. This bodes well for the petrol price and inflation
Rand/Dollar R13.00 Rand/Dollar R11.60 Dollar weakness
Rand/Euro R13.88 Rand/Euro R14.44
Rand/GBP R16.21 Rand/GBP R16.32

 

 

Action: The budget is due on Wednesday and may put a damper on the current euphoria, especially among higher income earners.

Dawn Ridler, CFP®, BSc Hons, MBA,
Founder, Kerenga – Wealth Ecology
Oracle Broker Services, Licensed FSP 28418

By |2018-02-20T11:31:18+00:00February 20th, 2018|Uncategorized|