Weekly Squawk - by Stewart Dando

Digital Edition 2020 | Volume 19

Weekly Squawk - by Stewart Dando

South Africa’s debt levels will exceed 100% of gross domestic product (GDP) by 2024-25 and rise to almost 114% by 2028-29, according to a document presented by Finance Minister Tito Mboweni.

Mboweni made the presentation to the National Economic Development and Labour Council on Friday, according to posts on his Twitter and Facebook pages. It shows gross government debt will climb to 80.5% of gross domestic product in this fiscal year, compared with a projection of 65.6% as recent as February. The trajectory presented shows no sign of stabilising by 2028-29. The ‘curve’, so to speak, is not flattening.

“The Herculean task of closing the hippopotamus mouth” – Tito Mboweni, via Twitter, 20 June 2020.

CLOSING THE HIPPOPOTAMUS MOUTH, MBOWENI TO NAVIGATE OUR SOVEREIGN DEBT MAZE, AND COMPASSION ABOVE ALL ELSE AS WE ENTER A NEW AND DANGEROUS PHASE

WEEKLY SQUAWK

Closing the hippopotamus mouth...

Stewart Dando Investment Specialist | MIFM

Squawk Editor in chief

The Finance Minister will deliver a special supplementary budget this Wednesday that will both highlight and lament the devastation wrought on the economy by COVID-19, as well plans to fund a R500 billion stimulus package.

Weekly Squawk - by Stewart Dando

INTERESTING STUFF“The budget process is in its final stages and still being finalised,” Treasury spokeswoman Mashudu Masutha-Rammutle said by text message. “This includes data and estimates. In this regard, any information published now especially from unverified leaks, is potentially inaccurate compared to what will be tabled.”

Our country’s finances have deteriorated rapidly over the past decade, largely due to pervasive corruption, malfeasance at many levels of government, and a series of bailouts for loss-making state-owned enterprises including Eskom and South African Airways. Mboweni on Thursday told lawmakers that the government must cut spending to avoid a sovereign debt crisis by 2024. A debt crisis would force South Africa to seek help from the International Monetary Fund, which would result in public service and state pensions being slashed, along with “all kinds of structural reform programmes we do not want,” Mboweni said at the parliamentary meeting.

Those are ominous words from a habitually jovial and upbeat man. It makes me very nervous for Wednesday my friends…

Great minds: During times of crisis, it is interesting to note how correlated similarly mandated portfolios’ asset and stock allocations become. If you take a look at the three largest balanced mandates in the country – those of Allan Gray Balanced, Coronation Balanced Plus and Ninety One (formerly Investec Asset Management) Opportunity – you will quickly see how aligned the different managers are in their thinking and expectations. Apart from Allan Gray’s lower allocation to local bonds, and Ninety One’s underweight position in local equities, these portfolios look a lot more similar than one might ordinarily expect, including their relatively large cash holdings and commodity exposure.

“I think the local asset management industry is very extremely positioned. I don’t remember everyone being so similarly positioned except for 2001 and maybe 2008,” said Duncan Artus, co-portfolio manager of the Allan Gray Balanced fund.

This ‘similar positioning’ takes the form of large exposures to locally-listed rand hedge stocks, being at or near the 30% limit allowed to offshore equities – generally in growth stocks – and an overweight position in South African government bonds, because of historically juicy yields.

Contrarian investors get very excited at times like these. Some strategic style diversification in your portfolio may well be worth considering.

Better safe than sorry: On Monday last week, Discovery announced their bold and prudent step of making a provision of R3.3 billion available to cover the potential impact on claims and of lapsed policies due to COVID-19. The announcement was accompanied by a full-year profit-projection fall of between 70% and 90%. It also said it would not pay an annual dividend, with the payouts to be considered when appropriate, sending its shares down 5.5% before recouping some losses.

“Discovery is confident that the group is strong under high stress scenarios, with sufficient liquidity and solvency to weather uncertain conditions,” it said, adding that capital ratios and cash buffers were expected to remain within or above target. The provision, according to Discovery, was intended so that all of the currently expected impact of the novel coronavirus as far ahead as 2022 was carried in this financial year.

If you hold shares in the diversified financial services giant, you might be a little grumpy. But, considering the bigger picture, I believe that history will applaud this move.

Weekly Squawk - by Stewart Dando

Has the beginning begun: Last week, millions of South Africans would no doubt have been delighted at hearing/reading the news that 8 people suspected of illegally siphoning R2.3 billion ($133.87 million) from small lender VBS Mutual Bank, which collapsed in 2018 because of the corruption scandal, had been arrested.

Godfrey Lebeya, head of South Africa’s Directorate for Priority Crime Investigation, said four were already in custody, three were due to turn themselves in on Thursday and an eighth suspect had agreed to appear after clearing COVID-19 quarantine. “As soon as all the relevant processes are completed, we will be securing the attendance of the eight suspects in court,” he told a news conference.

The head of the National Prosecuting Authority Shamila Batohi added that they were due to appear in court on Thursday. She described it as “probably the biggest bank robbery in this country” before adding, “We have an obligation to all South Africans to deliver justice in this matter ... It is our duty to the direct victims of corruption.”

Dare I ask it, but could this be the beginning of the beginning of some accountability? Persons guilty of large-scale corruption have operated with almost farcical impunity up to now.

“We have an obligation to all South Africans to deliver

justice in this matter ... It is our duty to the direct

victims of corruption”

Weekly Squawk - by Stewart Dando

Weekly Squawk - by Stewart Dando

JSE 54,224.40 POINTS

GOLD $1,751.87/OZ

DOLLAR/RAND $1/R17,3434

R186 YIELD 7.63%

BRENT CRUDE $41.51/BL

REPO 3.75%

CPI/INFLATION4.1%

INDICATORSAt the close, or at 06:00 SAST today:

Weekly Squawk - by Stewart Dando

Weekly Squawk - by Stewart Dando

ARTICLEOF THE WEEK

JARGONOF THE WEEK

South African government bond yields are climbing ahead of this week’s adjusted budget as investors contemplate what could be the widest fiscal deficit since World War I.

https://www.moneyweb.co.za/news/south-africa/deficit-seen-widest-since-wwi-weighing-on-south-african-bonds/

What is an ‘Initial Coin Offering’?

An Initial Coin Offering (ICO) is the cryptocurrency industry’s equivalent to an Initial Public Offering (IPO). ICOs act as a way to raise funds, where a company looking to raise money to create a new coin, app, or service launches an ICO. Interested investors can buy into the offering and receive a new cryptocurrency token issued by the company. This token may have some utility in using the product or service the company is offering, or it may just represent a stake in the company or project.

Source: Investopedia

Weekly Squawk - by Stewart Dando

QUOTEOF THE WEEK

“In the era of COVID-19 it is vital that prosecution services are – and are seen to be – upholders and defenders of the rule of law. Prosecution services need to be independent of overbearing political executives to fearlessly prosecute society’s most powerful. Independence must be modulated by accountability to ensure prosecutors’ actions are beyond reproach” - National Director of Public Prosecutions at the NPA, Advocate Shamila Batohi

IN CONCLUSIONA new and dangerous phase...

The new coronavirus pandemic is now in a “new and dangerous phase”, the World Health Organisation said on Friday, with the disease accelerating at the same time as people tire of lockdowns and governments around the world reopen their economies.

WHO chief Tedros Adhanom Ghebreyesus urged nations and citizens to remain extremely vigilant, as the number of cases reported to the UN health agency continues to hit new peaks. “The pandemic is accelerating. More than 150 000 new cases of Covid-19 were reported to WHO yesterday - the most in a single day so far,” Tedros told a virtual press conference.

He said almost half of those cases were reported from the Americas (Brazil and the US), with large numbers also being reported from South Asia and the Middle East. “The world is in a new and dangerous phase. Many people are understandably fed up with being at home. Countries are understandably eager to open up their societies and economies,” he said. “But the virus is still spreading fast, it’s still deadly and most people are still susceptible.”

Weekly Squawk - by Stewart Dando

As of this morning, COVID-19 has killed at least 470 000 people, and the number of infected people has breached the 9 million mark. By the time I write the next Monday Squawk, by almost all projections and estimations, 500 000 people will have perished and 10 million will have been infected.

What we do now, and how we behave, is critical. We cannot let boredom and frustration manifest into complacency. By now, you should know what to do and what not to do, you don’t need a lecture from me. But please remember, like I wrote last week: It’s not about you. It’s about everyone else around you.

“Our human compassion binds us the one to the other – not in pity or patronizingly but as human beings who have learnt how to turn our common suffering into hope for the future.” – Nelson Mandela

Weekly Squawk - by Stewart Dando

© 2018 - 2019 Zapiro (All Rights Reserved) Originally published in one of these publications: Daily Maverick, Sunday Times, The Times, Mail and Guardian, IOL, or Sowetan in 2019. Printed/Used with permission. More Zapiro cartoons at www.zapiro.com The Squawk thanks the following sources of inspiration: Daily Maverick, The Economist, Bloomberg, News24, Moneyweb, Financial Times, Investopedia and Anchor Capital.

“The opinions and views expressed in this newsletter are those of the author and do not necessarily represent those of the attooh! Group or its affiliates. Content stated as fact was fact at the time of writing. The information in this newsletter is not intended to constitute financial advice as contemplated in the Financial

Advisory and Intermediary Services Act”

Des

igne

d by

:

Until next week, make good decisions, and happy investing.

Be safe everyone, and look after each other.