Spotlight on Budget 2020 – Investment impact analysis
The National Budget presented by Finance Minister Tito Mboweni on 26 February detailed stimulatory measures that begin to address SA’s challenging economic climate.
Investment impact analysis
Our investment experts, Victor Mphaphuli, Keillen Ndlovu, Herman van Velze and Marius Oberholzer discuss the impact of the Budget on the markets.
Listed PropertyBy Keillen Ndlovu – Head of Listed Property
The listed property market has reacted positively with property shares rising post the announcement.
Higher GDP growth is needed. An average GDP growth rate of 1% over the next three years will remain a challenge for the listed property sector. To see meaningful uptake in the retail property space, we need GDP growth of at least 2%.
The consumer-friendly tax relief will help to support the retail property sector which is facing challenges due to lower consumer spending. We expect the lower- to mid-income retail shopping centres to benefit most from these measures, due to greater tax relief for the lower income brackets.
It’s positive to see initiatives to help support electricity generation. Load shedding will remain a challenge for the property sector in general given the need to buy, maintain and run backup power facilities. Additionally, it results in disruptions in trading patterns.
Strengthening municipalities will be key for the property sector as rates and taxes have been the biggest driver of cost increases for landlords. Stronger well-run municipalities will also allow property companies to achieve greater efficiencies.
Fixed IncomeBy Victor Mphaphuli – Head of Fixed Income
The Budget has already been well received by the markets with the Rand recovering quite well into the speech.
PODCAST: Listen as Chief Economist Kevin Lings’ talks to Victor Mphaphuli about his views on the Budget, expectations of how it will affect the bond market and the outcome of Moody’s rating decision as SA’s fiscal position continues to deteriorate. They also discuss the impact of the coronavirus on the local markets.
Bond yields declined in line with the surprisingly positive announcements earlier today, which were better than the Medium-Term Budget Policy Statement.
This year’s Budget speech was an improvement on previous announcements, which may be enough to create a wait-and-see approach from the rating agencies.
Markets expect that the rating decision to downgrade will be pushed out to later in the year, giving them a chance to see how the associated risk regarding the wage bill plays out. This opens the way for SARB to cut the repo rate to support the economy.
There is a clear indication that Government still hopes to reduce the budget deficit through reductions in the wage bill. This will still need to be negotiated with the unions which are already voicing their opposition.
It was disappointing to note that no major adjustments were announced on the sale of state assets.
Equities and BalancedBy Herman van Velze – Head of Equities and Balanced
The National Budget announced today is both equity and bond market friendly.
The numbers on paper are encouraging, especially because of the expenditure reduction initiatives outlined by the Finance Minister. However, the sobering reality of government achieving these savings through expenditure control initiatives generates more caution than relief.
A pleasant surprise from the Budget is that Moody’s is not expected to announce a credit rating downgrade for SA in March and will allow government a chance to deliver on their planned budget cuts.
SA equities will take heart from the gains earmarked for consumers in the form of personal income tax cuts, adjusted up by more than inflation. These concrete steps will drive SA retail shares and domestic bonds.
The most significant feature for the medium term is that corporates have been sensitised to corporate taxes being reduced soon. This will have a positive impact on company valuations.
Absolute ReturnsBy Marius Oberholzer – Head of Absolute Returns
Overall, we consider this a market friendly budget, with some tough choices and messages delivered, which should be good for SA assets in the short term (ignoring COVID-19 knock on risks), especially given the recent sell-off.
We do, however, remain circumspect on Government’s ability to deliver on the Budget’s announcements. If there is action, notably around wage cuts, market participants will embrace the change.
We have maintained for some time that a downgrade was priced into the market and with the Budget failing to address the growing debt trajectory, the downgrade seems to be inevitable. In our view the downgrade is likely to take place in November.
Our view on bonds remains unchanged and we expect lower bond yields to persist. In support of this view, FRAs have moved to price in two, and almost three rate cuts in SA over the next 12 months, which should continue to hold our bond yields lower.
Naturally, a global bond yield compression amid the COVID-19 threat helps the case for SA bonds. We are now more concerned as global bonds (US rates) have priced a big move in US rates, and a disinflationary outcome from COVID-19.
We are delighted that the anticipated tax increases did not materialise which consumers will welcome. This should result in a rally in banking, consumer and domestic stocks, including property. Moody’s will welcome this but are likely to need to see some more balance sheet repair.
The announcement around the reduction of the public sector wage bill is positive and the market will respond well to it. We are concerned about the influence the unions may have on the implementation and action is critical for success.
These announcements, along with a more business friendly approach, should be seen as a growing acceptance that public-private partnerships are key to addressing growth. The shorter-term sentiment will also shift with the announcement of funding towards extra prosecutors and investigators.
The overall sentiment should result in the Rand rallying against many developed market currencies after weakening since the start of the year. We wouldn’t expect the Rand to strengthen much below 14 against the US Dollar as the fiscal position remains tenuous. In addition, the market remains sceptical about the government’s ability to balance the need to stimulate growth and cut expenses.
Economics & Markets
Economics & Markets