How to Beat the Zuma Factor

By Richus Nel Certified Financial Planner and Head of Brenthurst Wealth Stellenbosch

richusnelapril2016

Navigating through extreme uncertainty is now a fact of life for all South African investors. Ideally one should stick to a well-designed financial plan and long term investment strategy.

South Africans, as by their nature, adapted to “life after a junk status rating” rather quickly and continue to take the regular political scandals in their stride. Thankfully South African business try to focus on doing business, rather than to look at political leaders for inspiration.

The political / economic situation unfolding over the last 12 months remains serious and dampens investor confidence, creating extreme volatility at times. Volatility is good to capitalise on the mispricing of assets. Investors however need nerves of steel to sit tight through this rollercoaster of emotions, while the political traitorous acts of scandalized individuals take its course.

The storm (after initial junk status rating from S&P and Fitch) seems to be calming and investors are generally looking for new direction from Moody’s in particular.

The reasons for the calm are mainly:

  1. EM Markets prospects are looking better than during the “Nenegate” saga and receiving record foreign investor flows;
  2. The local currency credit rating of Standard &Poor and Moody’s are still “investment grade”;
  3. The majority (90%) of foreign bond investment in RSA is via our local currency credit rating;
  4. A marginally better economic outlook for SA, lower inflation and fuel prices [linked to the easing of the drought (in most parts)] and better resource prices than end of 2015.

 

 

What to expect from “Zuma in charge”:

  1. Lower economic growth – growth expectancy for 2017 is lower than expected “pre-Gordhan firing”. South African continues to grow sub-optimally as we continue to focus on political survival and patronage, rather than economic policy 5-10 years out;
  2. Economic growth vs. the population growth – a country’s GDP per capita decreases if the economic growth rate is lower than the population growth, which results in its citizens getting poorer. RSA population growth is +-1.65% per year (Source: Trading-economics – 2015);
  3. Wastage of state resources having to be replaced by increased government debt and taxes.

Rising unemployment is expected with youth unemployment currently at an inexcusable 54%. Higher unemployment results in a reduction in South Africa’s tax revenues through lower personal income tax and VAT receipts. It also balloons the dependency on the state from a government social / unemployment grants perspective.

 

Government debt to GDP ratio is expected to increase in two ways:

  • GDP shrinkage due to lower economic activity
  • Increased Government budget deficits can only be financed through higher taxes (already on the brim of a tax revolt) or increased government lending. Bear in mind that the SA government debt servicing cost (BEFORE the downgrade) accounted to 13 cent of every RAND spent in the National budget… If we ever needed financial discipline in Government spending and procurement, it is now. National Treasury’s drive to save R16Bn on better procurement, is a step in the right direction.

Lower productivity per capita and higher taxes impedes economic growth and our financial well-being as a country. This effects the overall attractiveness as a global investment destination negatively.

Out of Individual investor’s control:

  1. Job losses or lower salary increases;
  2. Rising costs due to rising inflation from a weaker currency;
  3. Higher or stable interest rates to keep inflation and the RAND in check;
  4. Higher taxes;
  5. Less discretionary spending ;
  6. Lower returns in equity markets;
  7. Local bond market risk if RSA’s local currency credit is downgraded by Moody’s by two notches and Standard & Poor by one notch.

What can Investors control:

  1. Hang onto your current job, work harder and contribute more to the business. Do not quit your job unless you have something else (fail proof) lined up. Enhance your career through continuous career development;
  2. Create additional sources of income by conversion of existing assets or monetizing hobbies;
  3. Reduce private expenses and save more, where possible. Fewer holidays away (abroad), less spending on imported products or lifestyle items (it does not need to be boring, be creative with your entertainment). South Africa and its diversity is ideal for this creativity;
  4. Reduce or pay off debt. Do not expand your lifestyle or refurbish on credit;
  5. Aim to become financially independent as soon as possible, then retire / start your second career.

Be “TS” (tax smart):

Expect increased personal income taxes and pursue careful tax planning in future.

What is your plan B?:

Plan a second career with something that excites you. Identify something with limited start-up / conversion capital that could subsidize your retirement income during retirement.

Financial dependents:

Difficult economic times require additional financial support to dependents at death / disability. Make sure your insurances are adequately analysed, sufficient and well understood, to ensure financial survival for those staying behind.

Reach out:

Contributing to a worthwhile cause in South Africa, gives a taste of the fantastic people and ideas this country has to offer.   This provides an incubator for great ideas, aspirations, relationships and mutual goal-setting. Generally the thoughts and views of contributing individuals are uplifting and refreshing, which goes a long way during challenging economic times.

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