On a Budget

 

“Whilst every economist would have worked feverishly on the budget and their summaries, and what it may mean ahead, perhaps the cheerfulness of the recovery leading to higher collections is a little overdone. Treasury growth forecasts are more rosy than those of the IMF, Michael points out.”


 

To market to market to buy a fat pig The Vestact budget special is below. We did our best. We are equity guys. So markets, and specifically equities markets are important to us and our clients, and whist the budget impacts on people and their ability to spend freely (or not), that filters through to companies. Companies work around regulation. I was snooping yesterday around the history of taxation, Chinese written literature (and the preservation thereof) is around 3000 years old, there is of course references to taxation there. The word only appears in english literature officially around the 14th century. Augustus of Rome, you have him to thank for inheritance tax, Julius Caesar, you have him to thank for sales tax, or VAT as we know it here. Benjamin Franklin said you can be certain of death and taxes, his reward was to find his face (and completely awful hairstyle) on the 100 Dollar bills. What kind of hairstyle is that sports lovers?

Our Rand weakened after the budget speech sending markets better on the day, stocks still closed down nearly 0.9 percent. Sliders (not the burger kind) included Anglo American, down over ten percent on the day, BHP Billiton also fell sharply, Glencore fell over ten percent. In the winners column were the precious metals stocks, GoldFields and AngloGold Ashanti were up over ten percent. Is there an instrument that measures volatility on the commodity producers? Jeepers, that thing would be on fire.

Stocks across the world, in New York, New York, traded from the depths of despair to much higher on the session, tech stocks closed the session up 0.87 percent after all was said and done. I said (on the very exclusive Vestact WhatsApp group) that I was researching the correlation between rising oil prices and Facebook. I was of course being sarcastic, a terrible character trait apparently. The S&P 500 ended the day up 0.44 percent, with the Dow Jones Industrial up around one third of a percent.

The reason for the about turn in stocks was an oil price ramping up. At the same time as the market was turning and the oil price was increasing, an “alert” flashed up on my mobile screen, saying that oil could “crash” to 20 Dollars and stay there. Something like that. And then the oil price was increasing. JP Morgan reported some stresses in energy loans (JPMorgan Says Long-Term $25 Oil Means $1.5 Billion Reserve Boost), impacting their core business. You see, it has a knock on impact everywhere, lower energy prices. At the same time however, the wealth transfer into the hands of consumers globally is an excellent outcome. I always think that it would be better spent.

Across the seas this morning out East, Chinese stocks markets in Shanghai are getting smoked, down nearly 6 percent at one stage. Why? Small caps are getting trashed, the overnight repurchase rate jumped sharply, which is a sign of credit tightening. More cash and fewer shares this week please. Man, those markets are incredibly volatile, it is crazy. Government in that part of the world are willing to run a larger deficit, cutting corporate tax rates and encouraging investment. Sigh. Japanese stocks are up sharply, obviously in response to the strong US rally. US stock futures are mixed, slightly lower. Hey {insert sarcasm}, the oil price could swing stocks any old way today!


 

Vestact budget “special”

We know you are budgeted out. However …. it was budget day yesterday. Like we said, everyone hypes it up as the most important thing ever, ask them what they remember from last year and there is a whole lot of head scratching going on. It is almost like the non-farm payrolls number (that comes around every month), where the numbers and the data is so important, and then all of a sudden it is not. Although in fairness, this is seemingly a more important budget than before. Simply as a result of the outcome may be a ratings downgrade, and whilst we can sit here and say we don’t really care that much for Moody’s, Fitch and Standard & Poor’s, the mandates of big bond funds are to buy and hold investment grade bonds, and if you are not there, you exclude potential buyers.

Whilst every economist would have worked feverishly on the budget and their summaries, and what it may mean ahead, perhaps the cheerfulness of the recovery leading to higher collections is a little overdone. Treasury growth forecasts are more rosy than those of the IMF, Michael points out. I am guessing that government (and most organisations for that matter) believe in their ability to score on the revenues front and contain their own costs at the same time. I did watch a few market commentators yesterday, talking about our own fiscal cliff and the like. The suggestion is that if we keep up the current borrowing pace and increases in social security and government employment (and costs of running big government), there will only be place for servicing interest and those other two items by 2026. Low growth = lower tax collection = revenue projections must be lowered = higher taxes to support big government = lower economic activities, then repeat the cycle.

I think what this budget has in it is no big tax increases, in an election year I would like to think that voters would be more sensitive to that. There is a “soda tax” to be implemented in due course and a tyre tax, I can’t really understand that one. Higher house prices, those in excess of 10 million Rand see a transfer duty payable of a whopping 13 percent (up from 11, a new band here), the duty itself would buy you the average sized house in South Africa. When one thinks about it like that, it seems pretty hefty.

The best collection method, at the fuel pumps, saw a 30 cent hike. I still think that whilst it is not quite a user pay method, it is the best collection. You can’t ask the petrol pump attendant to ignore the taxation part when you are filling up. The current levies and taxes (or the old one) was 423.33 cents up here on the highveld, an extra 30 cents, you do the math to see that it is comfortably ahead of inflation. In fact, as a motorist and someone who fills up, per litre you pay less than half for the actual basic fuel price. Up here in Gauteng we pay 12.15 ZAR for 93 Octane Unleaded fuel. (see Octane rating for your daily Chemistry lesson).

Herewith the breakdown, visually, via SAPIA. So there you go, now you know where cents go when you fill up.

OK, the other thing that I noticed was that State Owned Entities (SOE’s) had assets valued (using what valuation, I am not too sure) at 1 trillion Rand with state guarantees on SOE debt of 467 billion Rand. There must of course be other debts associated with these entities. The speech pointed out that the value was 27 percent of GDP. Would you think that Transnet, SAA, Eskom, Denel, Safcol and Alexcor were all worth 1 trillion Rand? Ummmm …. not so sure, call me a cynic. Total government debt is projected to cross the 2 trillion Rand market for the first time next year, that is net government debt -> (according to the speech).

Here is where treasury expects to collect all of their taxes:

And here is how your taxes will be spent. The biggest component in the budget is education with basic education taking 15% of the budget and then servicing debt being the fasted growing expense going forward. A ratings downgrade would mean that the debt servicing expense will grow even faster.

Growth is the one component that will make or break the budget and solve a whole host of other social problems, the forecast for 3 years out is only 2.4%. Given that 20% of our GDP is from “Finance, real estate & business services”, I would like to see government policies that set us up as a global services/skills centre. When multi-nationals look at South Africa we are still seen as a low cost centre, add to that some basic training, fast internet and less cumbersome labour laws and I think that we will see a stream of FDI. One way to address our very high youth unemployment.


 

Company corner

MTN released a statement yesterday which the market responded to in a Goldilocks way. Not the best via the website white labelling: MTN-update on fine imposed and cautionary renewal. In short, the company will make “without prejudice good faith” a payment of 250 million Dollars. At the unicorn rate (the official rate) that is 50 billion Naira, at the street rate i.e the real life rate of 370 Naira to the Dollar, that is equal to 92.5 billion Naira. I swear, you cannot make this up, National newspapers are talking about the parallel rate in Nigeria on their websites: Nigerians Shun Money Transfer Agencies as Exchange Rate Gap Widens, the quote:

“THIS DAY learnt that on advice of friends and family members in the country, Nigerians that live abroad now prefer to send dollar cash and other foreign currencies to the country, so that the beneficiary would be able to convert it at the black market rate at higher value. This, they do by giving the cash to anyone coming into the country to help them deliver to the beneficiaries.”

I love the way that the newspaper learnt this. Friends and family taking part in the illicit trade of currency, the shock and horror of it all. What the article does point out is that Nigerians send back home around 21 billion Dollars a year, making it the 6th largest recipient of such diaspora remittances. Wow. To put this number into context, it is around 50 percent more than our entire education budget here in South Africa. If the rate of the Naira were to float freely, what impact would that have on the official inflation rate? And more importantly, what does this mean for MTN? I suspect that prices would adjust. And perhaps the country would get stronger inflows.

Anyhow, for our purposes, what does this actually mean? It means that MTN have accepted that there is likely to be some larger fine, and to appease the authorities and to come to a speedy conclusion, they have paid some money over. I guess this is progress, I suspect however until it is “solved” it will not be and there will still be an overhang of sorts. We continue to hold and monitor the situation, the poor share price underperformance is certainly testing the nerve of the most tenacious and patient “buy and hold” crowd.


 

Home again, home again, jiggety-jog. The Rand is weaker today, stocks are trading up sharply as a result of catchup, Discovery have results this morning, we will analyse this and report back. And of course the biggest news of the day for hipsters is that the Lumineers have pre released a song (called Ophelia) ahead of their whole album release on the 8th of April. Are you as excited as me? You bet yourself I am, that is my genre of music, even if I don’t drink craft coffee or have a long beard. Byron is wearing a a borderline hipster shirt today. Talking Byron, wish him huge amounts of happiness and luck ahead of him getting married NEXT Saturday.


 

Sent to you by Sasha and Michael on behalf of team Vestact.

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