The JSE All Share Index endured another particularly volatile quarter, closing weaker than the last quarter bringing the closing value down from 55349 to 51038. The Rand further depreciated against the major currencies with investors’ main fears focused on the lack of policy certainty, following the recent budget speech.

In South Africa, Tito Mboweni delivered his budget speech as Finance Minister in February 2020.  In this, he outlined the state’s financial position with the primary focus being on curbing Government expenditure. Mboweni painted a subdued picture of the current economic position in South African with a low expectation for growth. His main objective is to substantially reduce the state wage bill over the next three years. This may prove to be particularly challenging given the expected pushback from our major trade unions. The South African Treasury forecast limited growth of 0.9% and with inflation being above 4.5%, this is an area of concern.

One should view this against the backdrop of the rest of sub-Saharan Africa, which is forecast to be the second fastest growing region in the world, with a growth rate of over 3.5%. The biggest shift in the budget was that Tito Mboweni is now committed to cutting expenditure rather than boosting revenue. This key shift in focus, coupled with the fact that there were no significant changes to the tax regime, is an acknowledgment that the tax payer can contribute little more. It remains to be seen if this bold statement by the Finance Minister will be enough to stave off a downgrade by Moody’s in March 2020.

The poor economic climate and government’s limited options to increase taxes, has resulted in some tax relief to the following:

  • Tax Relief: R2 billion in tax relief in FY20/21 due to an above-inflation increase in personal tax brackets and rebates. As a re-distributive measure, lower income earners will receive a disproportionate amount of relief.
  • Tax Free Savings: Increased annual contribution limit for tax-free savings accounts from R33,000 to R36,000 from 1 March 2020.
  • Expat Tax: Government will increase the cap on the exemption of foreign remuneration earned by South African tax residents from R1 million to R1.25 million per tax year from 1 March 2020.
  • Transfer Duty:  No transfer duty payable on property valued below R1 million, to alleviate pressure on the fragile housing market.
  • Fuel levies: Increase of 25 cents per litre to the fuel levy, which consists of a 16 cents per litre increase in the general fuel levy and a 9 cents per litre increase in the Road Accident Fund levy.

The rapid spread of the Coronavirus worldwide has resulted in significant downward pressure on global markets.  Global markets suffered a sell off towards the end of February, which was a direct result of the concerns around the spread of the virus. Globally, there is a complete lack of understanding as to what this really means to investors, as public health crises can scare investors and affect economies and businesses at an alarming rate.

The recent shutdown of some manufacturers and airports and the slowing of global trade, particularly in China, has led to a significant amount of sensational media coverage that has caused investors to run to safe havens. The knock on effects of the outbreak may tip some economies into a period of slower growth and, as a result, cause revenue streams to come under pressure. We will continue to monitor the world wide reaction to the Coronavirus and concentrate on ensuring that investment fundamentals are adhered to while looking for opportunities on any significant pullbacks.

Looking back at the nine major outbreaks since 1998, there is little evidence linking global epidemics to long-term investment fundamentals.  We believe that this global retracement may provide good opportunities to enter into some of our favourite stocks. The Chinese economy may slow, perhaps even meaningfully, but this is no reason to dis-invest as long-term investing is often best disconnected from short-term economic reactions.  We believe that investors should remain focused on the long-term nature of investing at this stage.

One of the answers may be that we have to assume that the outbreak will take a similar path to other recent epidemics and note that there is no safe approach for investors in the short-term.  Exiting stocks in favour of cash has its own risks, namely, crystallising any losses and exiting from long-term dividend growth. Trying to time the market will almost surely cause one to miss out on a rebound if a vaccine can be found, or if the contagion rate decreases. However, there is no economy, entity or stock that is immune to a retracement as a result of the virus. Companies and global commodities are vulnerable to any slowdown in trade, as can be seen from a number of the global stocks that have recently reported their earnings may be lower as a result of the virus.

In Europe, Brexit continues to forge ahead and it remains to be seen whether or not this separation will have any meaningful impact on the European economies. At the same time, the United States is gearing up for an election race, which always proves to be a hot headline in the media, and the outcome seems at this stage to be favouring a Trump victory.

Politics in South Africa is going to endure an interesting period as the ANC elective conference takes place in the next few months.  Hopefully, this will provide some clarity to the South African investors as to which faction within the ANC will have the upper hand.

Despite all the doom and gloom, we believe that the South African economy is showing some of the best value in decades. As can be recently seen in some of the retail and banking updates/articles, there are signs of green shoots returning to our economy. It has indeed been a long period for investors in a low return environment, but despite this we are committed to our long-term goal of capital and dividend growth, with a focus on excellent quality companies within the South African space.

May we take this opportunity of wishing all of our investment family a peaceful and prosperous financial year.

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