2011 was a year dominated by a number of events which certainly weren’t on the radar at the beginning of the year. The horrific Japanese tsunami, the Eurozone debt crisis, a downgrading of US debt and uprisings in the Middle East, all of which were unpredictable and resulted in huge volatility across the markets. Consequently high returns were generated in unexpected places like global bonds and global property. Offshore assets did well, benefiting from a blow-off in the Rand in late 2011, while local equities returns were disappointing. We managed to navigate our funds through a very uncertain 2011 to deliver returns in excess of both cash and inflation on the back of our defensive asset allocation strategy and high offshore exposure.
Returns in 2011
The question is where to now? At this stage there are a number of positive trends both offshore and locally.
• Although world growth is expected to slow to 3.3% from 3.8% according to the IMF, this is not a massive fall and growth still remains above 3%. Encouragingly, better US job data, manufacturing and housing data all point to firm growth in the US of around 1.8%. This combined with positive growth in Asia will help offset the drag from recession-stricken Europe.
• The risk of a global banking crisis was reduced in December when the European Central Bank lent 489 billion Euros at 1% for 3 years to 523 Eurozone banks across the 17 Eurozone countries. This dramatically reduced the risk of a systemic crisis in Europe for the year ahead by ensuring that banks have adequate liquidity.
• Global inflationary pressures are easing with both oil and world food prices lower compared to this time last year. This will allow emerging market policymakers to ease rates while monetary policy in the developed world will remain stimulatory. In fact, over the last 5 months there have been 62 cuts in interest rates around the world, whereas in 2011 there were twice as many interest rates hikes as cuts, all of which will be growth supportive.
• On the local front, growth is expected to reach 2.8% this year, slightly less than last year. This will be largely driven by consumer spending as disposable income has been boosted by 7%-plus wage agreements, record low interest rates and public sector employment growth. Manufacturing and mining remain sluggish.
• Inflation which is running at 6.1% is expected to remain above 6% for the rest of the year due to high administered price (electricity, water, fuel etc) increases as well as the recent Rand weakness. The extent to which these price pressures will impact inflation will be influenced by the strength of the domestic economy which is currently slowing, thereby creating less opportunity for companies to pass-on cost increases.
• At this stage the inflation rate is unlikely to pose a significant concern for the monetary authorities. The Reserve Bank seems reasonably comfortable in tolerating an inflation rate slightly above the target, especially in an environment where economic activity is subdued and global inflation is projected to moderate during the course of the year. Hence the Reserve Bank is expected to leave interest rates unchanged well into late 2012.
Although developments on the economic front do seem to be more positive there are a number of risks out there that we are very cognisant of, such as: the ongoing sovereign debt crisis and the potential restructuring of the Eurozone, tension around Iran, slower growth in China, presidential elections in the US, the weak US housing sector, the large US deficit and the potential for a global banking crisis if policymakers blunder.
These are a few of the major risks we can identify for 2012 but as in the words of Donald Rumsfeld “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” And the latter could well end up dominating the headlines once again!
Fund overview and positioning
Given the risks mentioned above, we maintain our cautious stance within the funds with an overall neutral weight to equities. Within that we are overweight offshore equities and underweight local equities. Given the current attractive valuations and positive growth story we will look to add to equities opportunistically. Our view remains that we want low cash holdings, given the negative real yield offered and favour inflation-linked bonds as a hedge to rising inflation. We will also look to add to our global property exposure as it offers more attractive yields than global bonds.
To access the latest fund fact sheets, click here.
Ursula Maritz
Chief Investment Officer
Budget 2012 – The Southern Charter Analysis
Posted at 12:41 by Mark ThompsonOn the 22nd February the Minister of Finance, Pravin Gordhan, presented a budget that tries, as usual, to balance a range of competing objectives such as fiscal discipline as well as job creation and a reasonable level of social assistance.
The Budget Numbers
For the 2011/12 fiscal year the Minister of Finance expects the budget balance to record a deficit of 4.8% of GDP. This is better than the 5.5% the Minister projected in October 2011. This will please the rating agencies, and should help South Africa avoid an outright ratings downgrade over the coming months.
The surge in the budget deficit over the past few years comes at a high cost.Government debt has risen from a low of 27.2% of GDP in 2008/09 to 36.0% of GDP in 2010/11 and is projected to rise to 41.0% of GDP in 2012/2013. This is the largest debt level, as a ratio of GDP, that South Africa has experienced since 2001/2002.
Expenditure
Key areas of growth in government spending during 2012/2013 remain education, health, housing and community development, public order and safety. The Minister also announced an increased focus on infrastructural activity, with Transnet at the centre of the strategy. Transnet is expected to spend R300bn over the next 7 years.
Revenue
Total government revenue is budgeted to increase by a relatively modest 9.0% in fiscal 2012/2013, which seems realistic given the downward revision to the 2012 growth forecasts. In addition, the composition of tax revenue is not expected to change significantly over the coming year, with the bulk of the revenue still being derived from direct taxes in the form of personal income tax (36% of total) and company tax (21% of total).
Indirect taxes, such as VAT and the fuel levy, have grown steadily over the years and now comprise an indispensable component of tax revenue. In fact, the revenue received from VAT (26.2% of total) consistently and significantly exceeds corporate tax receipts, with 2012/2013 not expected to be an exception.
The Minister announced a number of tax changes in the budget. The largest tax change was an adjustment to the thresholds and tax brackets applicable to individual income tax. This is really to alleviate some of the effects of inflation, or what is referred to as ‘fiscal drag’. The value of this adjustment is R9.5 billion, which is enough to compensate for the effects of inflation or fiscal drag; and above the R8.1 billion tax relief that was granted to individuals in last year’s budget.
The Minister left the top marginal tax rate of 40% unchanged, although the threshold at which this is reached was increased modestly from above R580 000 to above R617 000 (a rise of 6.4%, which is broadly in-line with inflation). The change in threshold/brackets means that someone earning R100 000 a year will get annual tax relief of R685, while someone earning R1 000 000 will get tax relief of R4 795 a year.
The budget included a shock 20c/l increase in the fuel levy as well as an 8c/l increase in the fuel price for the road accident fund. The increase in the fuel levy is expected to raise an additional R4.5 billion in revenue. Unfortunately, South Africa is currently also experiencing a significant daily under recovery on the domestic petrol price of around 34c/l. This means that at the beginning of March the local petrol price could rise by a further, 53c/l, taking the price of 95 Octane in Johannesburg to another record high of R11.48c/l. This will negatively impact inflation as well as consumer activity.
The Minister also announced the customary increase in excise duties, which is projected to provide the government with an additional R1.84 billion in revenue.
Other tax changes included the introduction of the long-expected withholding tax on dividends (levied at 15%, and not the expected 10%), and a rise in the capital gains tax. On the plus side, the individual is encouraged to save more through a proposed adjustment to retirement taxes. To see comments by our tax expert, Michael Smythe, click here.
Overall, although the Minister provided some tax relief to individuals in order to compensate for the effects of fiscal drag, this was mostly offset by the increase in the fuel levy as well as the excise duties. Correspondingly, this was not an especially consumer friendly budget, which ultimately reflects the need for the Minister to contain the budget deficit.
In conclusion
Overall, the budget does a good job in meeting a broad range of competing demands. The Minister has managed to reflect a focus on fiscal discipline, but still provide a stimulus to the economy in the form of increased infrastructural spending. Of course, the government itself is not really embarking on an expanded infrastructural program; rather this is being conducted mainly through Transnet and Eskom. Nevertheless, the upgrading of South Africa’s energy, rail and port infrastructure is vital to our economic success; and long overdue.
The road to restoring fiscal discipline will not be easy. In particular, the government is likely to struggle to contain the overall increase in their wage bill. In addition, the growth in tax revenue will only be achieved if there is a reasonable pick-up in economic growth.
Lastly, while South Africa’s public sector debt parameters remain very acceptable by world standards, the total debt as well as the cost of servicing that debt is clearly on the rise. If left unchecked, government debt will quickly become a major hindrance to achieving many vital policy objectives. Already the cost of debt exceeds the total budget allocation to police services. Hence the Minister’s decision to focus on maintaining fiscal discipline, despite difficult circumstances, has to be applauded.
Fund overview and positioning
Global prospects have started to improve over the last few weeks, as the ECB provided liquidity to the European banking system and the outlook for the US economy improved. On the back of this the prospects for the equity market have improved. Within our funds, we are overweight offshore equities and underweight local equities. Given the current attractive valuations and positive growth story we will look to add to equities opportunistically. Our view remains that we want low cash holdings, given the negative real yield offered and favour inflation-linked bonds as a hedge to rising inflation, which is now more likely given the various budget announcements. We have also recently added to our global property exposure as it offers much more attractive yields than global bonds or cash.
Categories: Asset Allocation, Monthly Commentary
Tags: Budget 2012, Medical Tax Credits