By Dave Mohr, Chief Investment Strategist, and Izak Odendaal, Investment Strategist at Old Mutual Multi Managers (OMMM).
Monday’s rare supermoon – where the moon will be the closest to the earth at any point between 1948 and 2034 – appears to be the apt metaphor for this year’s string of unlikely events. Some will say it started when the odds on Leicester City winning the English Premier League went from 5000/1 to 1/5 in May.
Then Brexit happened, the United Kingdom’s withdrawal from the European Union membership, followed by Donald Trump’s election as president of the United States.
As unlikely as his candidacy seemed a year ago, he clearly tapped into some of the same anti-immigration, anti-globalisation and anti-establishment discontent that drove the Brexit vote.
It is ironic, since the UK and US economies have outperformed most other developed countries since 2009, and have relatively low unemployment. Crucially, though, both have higher income inequality. Looming elections in Europe – Italy, Austria, the Netherlands, France and Germany –will have key votes over the next 11 months, and these will now draw much closer scrutiny.
There is clearly unhappiness with the liberal global economic order that has been in place since the fall of the Berlin Wall in 1989.
Limited market fall-out so far
Despite being a shock, the Brexit vote had little lasting impact on markets (apart from the pound, which remains very weak). As it became clear during the night that Trump would win, the immediate market reaction was a sell-off on Asian equity markets, a plunge in the Mexican peso (Mexico is heavily reliant on free-trade access to the US economy), and falling US equity futures.
However, by the end of the day US equities closed higher, reversing the early losses. The following day, Asian equities rebounded sharply. As with Brexit, this cautions against a knee-jerk reaction to unexpected events. Few predicted a Trump win, but those who did warned of a market correction.
This hasn’t happened, and illustrates why it is so difficult to build portfolios around specific events where the outcome is uncertain even if the timing is known (elections, referenda, ratings announcements). Sensibly diversified portfolios are still better than concentrated fearful ones.
The US is of course a much bigger economy than the UK, and what happens there truly has global implications. Trump’s campaign promises to block immigration and tear up trade agreements would be negative for the US and the global economy. On the plus side, he also promised to upgrade US infrastructure. US government infrastructure spending as a percentage of gross domestic product is close to a 60-year low.
By the end of the week, US and other developed equity markets were up strongly. The equity market is therefore pricing in a stronger economy and more business-friendly economy (with lower taxes and less regulation) under a Trump presidency.
However, the longer-term implications are unknown until we have a better idea of what his policy proposals are and if he will get backing in Congress.
As far as the global economy and markets are concerned, the most important building in Washington, D.C for now is not the White House but the Federal Reserve’s Eccles building four blocks to the South West.
Aggressive interest rate hikes are much more likely to cause a US recession and deep bear market than Trump’s policy changes. The likelihood of a rate hike in December implied by futures markets fell from 80% to 50% on the election news, but have risen since.
Barring a change in the underlying economic reality, the Fed is still expected to hike interest rates gradually without upsetting the markets or the economy.
Since the Trump campaign attacked the Fed for its failure to raise rates, the longer-term outlook is unsure. However, the Fed is an independent institution with a mandate from Congress to achieve stable prices and full employment. Also, Janet Yellen will stay on as Chair until 2018 and will remain a board member until 2024.
Therefore, abrupt monetary policy changes are unlikely, but it does appear that there might be a shift in emphasis away from using low interest rates to stimulate the economy to using fiscal policy (tax cuts and government spending).
This would be welcome and is exactly what many prominent economists were calling for (ironically, most of them were also stridently anti-Trump). However, it also implies more government borrowing and potentially higher inflation and therefore upward pressure on bond yields.
This is clearly what the market sees: The US 10-year treasury yield rose above 2% for the first time since January. However, this could be an overreaction, since no-one knows exactly what Trump’s plans are yet.
What does all this mean for us in South Africa?
To continue with our metaphor, the supermoon is expected to result in extreme tides. As much as we grapple currently with political uncertainty and the fall-out from policy own goals, South Africa’s history also points to the influence of big global tides on our economic shores, specifically on commodity prices, sentiment towards emerging markets and global capital flows.
Typically the risk is always there that the heavily traded rand sells off with negative consequences for the local inflation and interest rate outlook. The rand lost 5% against a US dollar that firmed against most currencies. However, the rand had strengthened quite a bit prior to the election.
On the positive side for the rand, commodity prices have firmed up this year as China’s economy seems to have picked up some speed (with the key manufacturing gauge in positive territory again).
There are concerns that the US could hike tariffs on Chinese imports, but starting a trade war with the world’s second largest economy would be an extreme move even for Trump.
China can also hardly be called a currency manipulator when the falling yuan is accompanied by falling, rather than rising, foreign exchange reserves. It is clearly capital flows rather than government buying of dollars that has pushed the yuan to a six-year low.
More infrastructure spending in the US could also be positive for commodities. Trump has promised to dial back America’s commitment to fighting climate change, which is supportive of coal and energy producers, but obviously bad news for the environment.
However, sentiment towards emerging markets has taken a knock, given their general reliance on trade. South Africa’s preferential access to the US market under the African Growth and Opportunity Act (AGOA) was recently secured until 2025.
No African country makes it into the top 30 list of US trading partners and there is no reason to expect any anti-trade backlash against AGOA.
Moreover, while the US is an important export market for us, South Africa exported more to the BLNS countries (Botswana, Lesotho, Namibia and Swaziland) than to America in 2015. China was our single biggest export destination. However, other emerging markets are very dependent on exporting to the US.
Finally, capital flows are greatly influenced by the risk-free rate – if US Treasury yields rise further, it could place pressure on the rand and local rates, and higher yielding emerging market assets in general. However, if US yields are rising on hopes of faster growth, that would also be a good sign for the global economy.
Chart 1: Impact on US markets
Chart 2: Impact on South African markets
Improve Your Cash Flow: Manage Your VAT
Viresh Harduth, Vice President: New Customer Acquisition (Small & Medium Businesses) for Sage Africa & Middle East on the increase in VAT in South Africa and how it affects your business.
If you went shopping on 1 April, you likely encountered aisles and aisles of products with no price tags as retailers updated their shelf pricing to reflect the new VAT rate. As a consumer, this was probably a slight inconvenience because you didn’t know how much something cost until you had to pay.
Yet, as a small business owner, the VAT increase was more than a slight inconvenience. Not only did you have to update your systems and train your teams but you likely had to spend money printing new price tags and ensuring you were compliant – this was, after all, the biggest tax change in 25 years.
The VAT increase will also impact your cash flow because you will need to pay more money to SARS. But now that the dust has settled, Small & Medium Businesses have an opportunity to review their operations and uncover ways to improve their cash flow and offset the higher VAT payments.
Here are five ideas to free up cash that are easy to implement and don’t require major changes to your business:
- Negotiate extended payment terms with suppliers. When you receive an invoice, you generally have 30 days to pay. Try to negotiate longer payment terms with your suppliers – like 60 days – so that you have cash in the bank for longer.
- Enforce your own payment terms for customers. The time between issuing invoices and waiting to get paid is a danger zone for small businesses, especially when you need to pay VAT to SARS. Reduce your payment terms for customers from one month to 14 days, for example, and stick to it. Send regular reminders on overdue accounts and follow up on the phone.
- Incentivise customers to pay earlier. Offer various payment methods that make it easier for customers to settle their accounts sooner. Issue invoices promptly and offer discounts for early – and full – payment. This will also increase loyalty.
- Reduce stock on hand. If you have surplus stock, it means you haven’t aligned your stock with your sales, which ties up available cash. Stock management is as important as financial management. Knowing what’s in your stock room – and bank account – at all times, is crucial to maximise cash flow.
- Work with an accountant. While cloud-based accounting solutions like Sage can help you keep track of your cash flow and stay compliant, an accountant can identify areas to save money and cut costs, freeing up working and investment capital.
When you improve your cash flow, you reduce the need to rely on bank overdrafts and loans. The key to the success of any business is to free up as much cash as possible. And, with the VAT increase, you need more cash than you did yesterday.
*Remember, you have until 31 May to reflect the VAT increase in your product and service prices. Until then, you can apply the additional 1% at the till point, as long as you put up signs informing customers that you will be doing this.
R350 000 Worth Prizes To Help Boost Entrepreneurs’ Businesses
Find out more here.
Even more prizes to help entrepreneurs grow their businesses have boosted the entrepreneur competition being run by The Workspace and MiWay. These include communications strategy, responsive design website, a share portfolio worth R10 000 and estate planning.
The competition, launched in March to celebrate the collaboration between co-working and serviced office solutions company, The Workspace, and MiWay business insurance, is open to entrepreneurs based in South Africa, who have valid identification documents, who run a business with four or less employees and are making an impact in their industry.
The Workspace and MiWay have joined forces to launch an entrepreneurial hub and business development programme at the newly developed Village Road premises in Selby in Johannesburg’s central business district. MiWay’s presence at Village Road will afford The Workspace members the convenience of having business insurance and a host of other requirements fulfilled at their place of work whenever it suits them.
Entrepreneurship key to SA’s future
Mari Schourie, chief executive officer of The Workspace, says President Cyril Ramaphosa’s recent SONA reflected on how important small businesses and entrepreneurship is to South Africa’s future.
“I was thrilled that President Ramaphosa recognised how vitally important it is for everyone – business, government and citizens – to support entrepreneurs and small businesses. It is something that as a company, we’ve made a core part of our business. Being in the co-working and serviced office industry, we work with entrepreneurs and small businesses every day. They are the backbone of our business,” she said.
Schourie emphasised how the company had developed in-house programmes to support them. “When we can utilise their services ourselves, we do. We run workshops and knowledge hubs to encourage ongoing skills development and the joy of learning. We’ve even put some of our entrepreneurs at the centre of our marketing campaigns; we live and breathe the business lives of our entrepreneur members. And we learn from them too.”
Schourie said recognising entrepreneurs and small businesses sometimes means changing our thinking and looking a little bit further than our immediate surroundings. For this reason she believes the entrepreneur competition is so important to help give businesses a leg up.
Related: Register A Company In South Africa
The prizes – worth R350 000
The winning business will not only receive 12 months free office space for up to four people, free Wi-Fi, free phone rental, free business insurance and business advice, as well as all risk equipment insurance, free tea and coffee, free usage of meeting and board rooms, free security and 24-hour access, free parking and a new laptop, but even more valuable business prizes have been added too.
These include a brand new responsive design website and content management system, logo and corporate identity design, SEO and social media set up as well as training in how to keep digital collateral up to date worth R24 500.00 from Webartist.
Opulentus Wealth are offering the winner a bespoke share portfolio for the business worth R10 000, business life stage Risk Assessment, Estate plan for the Directors and shareholders valued at R15 000 per plan, Advice on managing and improving cash flow with the business (R10 000) and Tax advice for the business (R5000) Oxigen Communications will build the company a compelling brand communication strategy as well as offer two strategic sessions worth over R50 000.
“The entrepreneur competition is a call to action to those vibrant entrepreneurs out there. Start-ups always need a bit of a hand and the winner of this competition will have a serious advantage once the it has gone through its paces,” said Morné Stoltz, Head of Business Insurance at MiWay.
“We are looking for an entrepreneur who has created or is busy creating a special environment where employees can flourish, and in the process, potentially create more jobs. Stoltz adds, “An entrepreneur who makes an impression on the judges due to aspects such as the business’ social impact, attitude, positive entrepreneurial outlook and a good business mind will definitely stand a good chance of walking away with the prize.”.
The prize on offer – worth over R350 000 – will help set-up the winning entrepreneur for a period of 12 months, giving them a boost to help build their business.
Closing date: 15 May 2018
For details, click here.
For queries, please email firstname.lastname@example.org
Entries can be uploaded to the website, or delivered to One Chadwick Avenue, Wynberg, Sandton
Why Is It Important To Grow Manufacturing?
Manufacturing Indaba will take place at the Sandton Convention Centre in Johannesburg on the 19th and 20th of June, 2018 and will be facilitated with the collaborative backing and strategic partnership of the Department of Trade and Industry (the dti) and the Manufacturing Circle, a corporate association of manufacturers.
One of the aspects of the conference will be to focus on South Africa’s manufacturing as a fundamental driver of GDP growth and associated with direct employment, as many services sectors are likely to increase their employment capacity on the basis of an increased GDP.
Newly elected President Cyril Ramaphosa delivered his maiden State of the Nation Address (SONA 2018) and alluded to addressing the decline over many years of South Africa’s manufacturing capacity, which has deeply affected employment and exports. As a result, poverty levels have risen, economic growth has weakened, with the President stating that it has become imperative to re-industrialise on a scale and at a pace that draws millions of job seekers into the economy. Unemployment levels have risen due to looming investment downgrades; hence he emphasised the need for a focus on local manufacturing and production.
Nicholas Kaldor (Zalk, 2014) developed a set of hypotheses to explain the central role of manufacturing in the process of economic development. He contended that manufacturing reveals a unique characteristic: The capacity to generate ‘dynamic increasing returns’, displaying a positive correlation with GDP growth while other primary and tertiary sectors generally do not. That is, indicating that the faster the rate of growth of output in manufacturing, the faster the rate of growth of both manufacturing and economy-wide productivity (Thirlwall, 1983, as cited in Zalk, 2014). Thus, clarifying that manufacturing is the core driver of GDP growth and employment while other sectors, particularly many services sectors are only likely to grow on the basis of the growing demand derived and resulting from an increasing GDP. Therefore, growth and employment in most services sectors follow rather than lead growth in GDP (Zalk, 2014).
In accordance with the vital importance of this sector’s encouraged growth, the President undertook to promote greater investment in key manufacturing sectors through the strategic use of incentives and other measures. Accordingly, and further stimulating manufacturing by forging ahead with the localisation programme, through which products like textile, clothing, furniture, rail rolling stock and water meters will be designated for local procurement. Ramaphosa also reiterated that the country had spent more than R57 billion on locally-produced goods that otherwise might have been imported from other countries.
The Industrial Policy Action Plan (IPAP) 2017/18 – 2019/20 report as part of the National Development Plan (NDP) 2030 outlines sector specific goals and a vision for South Africa to be achieved by the year 2030 and referred to inherent structural challenges within the economy that remain difficult to overcome. These challenges include weak growth and domestic demand reflecting and contributing to persistent unemployment, resulting in unsustainable race and gender-based inequality and rural marginalisation. Value-add in manufacturing lagged behind the economy as a whole from 2008, and investment in manufacturing has declined since the global credit crisis. The IPAP report also indicated that investment as a share of GDP is also below the 25% level required for sustained economic expansion.
In light of this aspect, Ramaphosa at SONA referred to the special economic zones that will remain important instruments that SA will use to attract strategic foreign and domestic direct investment and build targeted industrial capabilities in order to establish new industrial hubs. He also emphasised that the process of industrialisation must be underpinned by transformation, and that through measures like preferential procurement and the black industrialists programme, a new generation of black and women producers will be able to build enterprises of significant scale and capability.
The objective industrial financing and incentive support has played a key role in supporting private sector investment and black economic empowerment in critical industrial areas. Another example and a high point of 2016/7 has been the Automotive Investment Scheme with R8.7bn on investment leveraged through 2 new projects with an estimated investment value of R548.9m, projected to create 1 140 jobs. Included in this buoyant mix is the Manufacturing Competitiveness Enhancement Programme (MCEP) which has reopened a R1bn loan component with 270 projects supported, and R8.24m disbursed thereby supporting R3.38b of investments & 62 2353 jobs.
Bearing these examples in mind, and Ramaphosa’s affirmation at SONA that, “…at the centre of our national agenda in 2018 is the creation of jobs, especially for the youth”, Philippa Rodseth, executive director, Manufacturing Circle (2016, in The importance of Manufacturing for SA’s economic growth), stated that in order to promote a resilient, sustainable manufacturing environment, three goals were identified in order to secure the long-term sustainability of South Africa’s manufacturing industry.
Hence, these following aspects will ultimately contribute to the economic growth of the country-: the achievement of a competitive manufacturing environment, the attainment of a supportive international trade position and the advancement of the reputation of SA manufactured goods.
These issues and other pertinent topics relating to Manufacturing in South Africa and the continent will be considered, evaluated and debated at the upcoming prestigious Manufacturing Indaba conference in June, in this year of “hope and renewal.”
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