MoneyMarketing May 2017

1 31 May 2017 | First for the professional personal financial adviser WHAT’S INSIDE YOUR MAY ISSUE NAVIGATING THE POST- DOWNGRADE MARKET TURMOIL WHY INVEST IN UNIT TRUSTS? Good advisers play a valuable role in managing their clients' investment behaviour. Page 12 When investing in unit trusts, your investment term must be determined by your goals. Page 15 WIN Chances of rate cut signifi cantly reduced B efore President Jacob Zuma’s axing of Pravin Gordhan, many economists had predicted that the SA Reserve Bank (SARB) would cut interest rates during the course of 2017. Th e rand had fi rmed and infl ation was dropping. Now, South Africans will be lucky if they see even one small rate decrease. “Before the cabinet reshuffl e, my point of view was that there was a good chance for SA interest rates to come down,” Mike Schussler, chief economist at told MoneyMarketing. “I thought that this year we could see two interest rate cuts as we’ve had good infl ation numbers and very good current account defi cit numbers. “Up to April next year, I thought that we would have three or even four interest rates cuts, but now, these chances have been reduced signifi cantly. We may now get one rate cut of 25 basis points and that’s not going to make a signifi cant diff erence.” Last month, following the cabinet reshuffl e, both S&P Global Ratings and Fitch ratings, downgraded SA to junk status citing recent political events as the reason. Th ey’re also worried that policy direction has now changed. “I’m not sure we would have averted a down-grade altogether. But we would have had more time – say six months to a year – to sort out our problems and get things on the right track, as last year’s low growth wouldn’t have helped our ratings,” Schussler says. State-owned enterprises “Right now, the change in the direction that the ratings agencies fear is quite real, because we see many of the state-owned enterprises (SOEs) really just spending money which the taxpayer will have to guarantee. Under these circumstances it’s clear that not all our SOEs will be able to be pay back the debt.” Th e total in state guarantees to SAA stands at around R19 billion. “Th e airline probably needs another R4 billion to R5 billion in guarantees and they’re unlikely to pay any of that back. Th at would add 0.5% of GDP to our government debt.” Schussler says that under the present situation, SA has been downgraded for the perceived lack of a copy of one of these ma gnifi cent publicati ons. SEE PAGE 30 accountability and also the perceived change in policy direction. “Minister Gigaba says this is not going to happen, but other forums mention ‘radical economic transformation’, which is what people are worried about.” The rand Th e rand, relative to other emerging market currencies, has fallen badly, but Schussler reminds us that our currency is a double-edged sword, as a soft er rand favours exporters who earn more under these conditions. “Farming and mining will do well. However, the problem is on the consumer side.” All indications are that Moody’s Ratings Agency – which currently has SA at two notches above non- investment grade, will cut the country’s rating too. “It’s very likely that Moody’s will act within the next three months. If they move us down two notches that would be very serious. I do, however, believe Moody’s will move SA down one notch with a negative outlook and then the country will be on the borderline.” Schussler predicts that a lot of money would fl ow from SA markets, “Which we’ll have to replace with our own pension fund money.” “With government bonds, we’ll probably fi nd ourselves closer to rates of 10%. Th e rand will see a huge outfl ow of up to R130 billion – or a large part of it. Th is is unless something happens that reins in the current leadership of the ruling party.” Another downgrade? Th e downgrade he expects fi rst aft er Moody’s in June, will probably come between June and December 2018 when S&P will again downgrade the country. “Th is time I expect they’ll downgrade our local bonds. Given this, I think we can say that within a two-year view, the rand will be under serious pressure.” Internationally, there are also concerns that the US Federal Reserve may raise rates more than anticipated. “Th is will put more pressure on the rand which means there’ll be an increased risk that the SARB actually hikes rates.” Continued on page 2 We see things differently. Shift your perspective to take advantage of unobvious investment opportunities. Our experienced and highly qualified investment team have a long track record of managing hedge funds in South Africa, delivering consistent superior risk adjusted returns. SHIFT YOUR PERSPECTIVE We know hedge funds T +27 11 263 7700 E Laurium is an authorised financial services provider (FSP No 34142).Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. 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