Investment advice from the tea boy

By Magnus Heystek, Investment Strategist and Director Brenthurst Wealth

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First waves of financial tsunami already lapping at our shores…

ABOUT six months ago I penned a rather gloomy outlook on the financial prospects for the economy as a whole and the individual consumers in particular.

This article seemed to have got up the noses of certain of mainstream economists with one, Dr. Roelof Botha, adjunct facility member at GIBS, who penned a rather scathing and condescending reply to rebut my gloomy prognostications. You can read if for yourself here but I wish to highlight one particular paragraph in his reply which seemed- to me at least- an unwillingness by Dr Botha and the other institutional economists to honestly confront the avalanche of bad economic data heading our way.

In his reply he said the following:

“Higher economic growth is being forecast for South Africa in 2017 by both National Treasury and the World Bank, which should ease fiscal pressures and soon abolish the debt downgrade debate to the archives.” (Moneyweb, 9th November 2016 : Talk of ‘financial meltdown’ quite absurd.

Now, in the glaring headlights of what has unfolded since then ( firing of Pravin Gordhan, credit downgrades,# Guptagate, unemployment at record levels and finally this week, the news that SA is now officially in a recession) these words no doubt ring hollow. In fact, just the opposite is happening. How is that for accurate forecasting? Imagine you basing your personal financial decisions on such a confident but misplaced prediction?

Relying on Treasury for your economic forecasts has also become dangerous as virtually every forecast contained in the Budget speeches since 2009 have been over-optimistic, most of the times sounding more than a wish-list than a serious forecast of what the economy is likely to do.

I have previously also written about the herd-like thinking of our economists, with very few prepared to speak to conscience and tell it like it is. Being too negative can be career-limiting at our large financial institutions, as we saw many years when Nico Czipiyonka from the Standard Bank Group got the heave-ho when he was considered to be too negative by the suits in head office. More recently we had Andrew Canter from Futuregrowth who expressed concerns about the risks in taking up bond issues from parastatal organizations, indicating he was not prepared to invest more money in them.

Boy, did he get his gonads put through the wringer, with parent company Old Mutual jumping on him, forcing him to recant and apologize. But Canter has been right as subsequent bond-issues by Transnet and Sanral, for example, have been dismal failures and were either cancelled or attracted only a portion of the funds it was seeking.

The few economic commentators who from time to time deliver their warnings of the economic grim reaper tend to be the independents and those who work for themselves, a small grouping of which I consider myself to be one. I would count amongst them Mike Schussler, Dawie Roodt, George Glynis and Azar Jammine.

THE BLUFFERS GUIDE TO THE ECONOMY

Bear in mind I don’t consider myself to be an economist. In reality there is no such profession as being an economist, in contrasts to doctors, lawyers, architects and chartered accountants. Anyone who has read The Bluffers Guide to the Economy can hang up their shingles and call themselves an economist.

Even though I studied the arts and humanities, economics was an additional course I took, mainly because a cousin of mine, prof. Geert de Wet was the economics lecturer at university (RAU) many decades ago. This lack of a more formal education in the field of economics, most probably  prompted Moneyweb commentator who calls himself Miela to compare my musings about the economy to be less trustworthy than the tea-boy in his office.

In November last year Miela writes: ”Like I said before, Magnus is not qualified or equipped to comment on such matters. He is only qualified to bring me tea to my office and not comment on economic affairs”.

Well, to Miela I say: Ou boet, sometimes the tea boy sees things you suited chaps in mahogany row don’t see or want to see. Why? Because I talk to people; lots and lots of people. Mainly about money and their personal financial lives.

And the narrative the past number of months has been one of middle-class and even upper class people finding themselves in the grips of a financial anaconda: all financial life is being squeezed out of them. The stock market is not performing (negative in real terms over 3 years now),  average residential property prices down 23% in real terms over 8 years and wage and salary increases below inflation.

The portion of your salary that is annually paid in taxes has risen constantly over the years. Tax freedom day, as calculated by the Free Market Foundation (FMF) this year was on  23rd of  March—two days later than last year and the worst ever. In 1994 tax freedom day was five weeks earlier, on 18th April.

Tax freedom day means that up to that day you have been working for government and taxes in one way or the other.

All these contributory trends have slowly been building up over time, but was suddenly accelerated by the lagging effects of a currency declines and, in February this year, the sharp increases in personal taxes as well as the increase in dividend taxation in the annual budget.

Even a tea boy could work out that this represented an additional R4bn per annum which was overnight diverted from consumers’ pockets to that of the taxman.

ERNST HEMINGWAY

As Ernst Hemingway once famously said: At first you go broke slowly and then suddenly….” We have now reached the “sudden” part and it didn’t take an economist or tea boy to work this out.

A more  careful analysis of the GDP figures released earlier this week shows that ALL sectors in the economy with the exception of agriculture and mining showed negative numbers. The turnaround in the fortunes of agriculture was mainly due to base effects and the above average rainfall the past summer. Fortunately we cannot thank the ANC for the better rainfall, much as they would like to take credit for it.

Mining fortunes too were driven by improved global commodity prices and unrelated to local conditions or policy interventions by government. In fact, government with its newly released Mining Charter seems hell-bent on further scaring away investors from our fragile mining industry.

Noticeable in the GDP figures is the collapse in spending by consumers in the first quarter of this year. Annualized growth of minus 5,9% was recorded in the retail, wholesale trade, accommodation and restaurant sector. These are sectors directly related to how confident the average consumer feels.

Even the largest sector in the economy—financial services and real estate—showed a decline of 1,2%  YoY in the first quarter.

In short: consumers have run  out of money and even if they had money, are now fearful to go out and spend it.

And remember: these numbers do not measure what the midnight firing of Pravin Gordhan on 31st March by our esteemed leader Jacob Zuma has done to consumer and business confidence. That is still to come, as well as the effects of the downgrades by S&P Global Ratings and Fitch. The decision by Moody’s whether to downgrade SA’s local and foreign currency rating was still pending at the time of writing of this article and could happen any day.

Moody’s has been the one credit rating agency more optimistic than the rest and kept our rating at two grades above investment grade. A one-notch downgrade will put us into fragile-  but still investment grade-territory but a two-notch downgrade, which is not inconceivable, will announce the arrival of one of the Horsemen of a Financial Apocalypse.

Foreign investors who have been selling SA equities EVERY MONTH for the past 19 months (R70 billion sold so far this year) but have been buying our bonds with juicy yields of above 8% will then be forced. A double downgrade by Moody’s will mean a disorderly withdrawal from our local bond and currency market with very obvious consequences for all.

Even an economically illiterate  tea boy can the see the troubles in the tea leaves by now….

*Moneyweb in conjunction with Brenthurst Wealth is holding its annual SA Quo Vadis seminars countrywide in the next two weeks. First seminar takes place on Tuesday 13th June at Rivonia Village, followed by Cape Town (20th June) and Stellenbosch (21st June) For more information go to the website ww.brenthurstwealth.co.za. For bookings http://www.quicket.co.za, search for Brenthurst.

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