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
5 Businesses You Should Start in 2019
Here’s the lowdown on consumer and technology opportunities in 2019 and beyond.
Savvy entrepreneurs should keep a close watch on consumer and technology trends in 2019. This, according to Silvertree Internet Holdings Co-founder and MD, Manuel Koser. Having invested in and grown a number of highly successful South African brands (among them Faithful-to-Nature.co.za, UCOOK.co.za, Pricecheck.co.za, CompareGuru.co.za, Petheaven.co.za, Cybercellar.com, and CarZar.co.za). Silvertree’s management team sees several business opportunities set to grow exponentially over the coming decade.
Here’s the lowdown on consumer and technology opportunities in 2019 and beyond.
1. Indigenous and ethical: Personal and home care products
2019 Sees growing potential for personal care products – ‘Those with local and indigenous ingredients, ethical sourcing which is kind to nature and the body,’ Koser explains. ‘There is a lot of room to play in the African haircare market particularly, as it’s often overlooked by the major FMCG companies.’
The Silvertree MD also sees increasing room for innovative natural home cleaners as consumers become increasingly environmentally conscious. ‘Until now, it was all about the well-known cleaning products the major chemical manufacturers put on the shelves. Now, there’s increasing space for new, exciting entrants.’
2. New beverages
‘Locally-sourced ingredients and an earth-first mindset will also play an increasing role in the consumer beverage market. Add to this the fact that major soft drink manufacturers will struggle to produce drinks for increasingly health-conscious consumers. They’re often just not quick enough to adjust to changing consumer tastes – particularly the tastes of millennials. Think less about a standard fizzy drink, but rather one that’s kind to the body, with natural ingredients. Non-alcoholic: water plus, say, cucumber, or another indigenous ingredient. The market for this will grow.’
3. Ethical snacking
Plant-based, vegan, ancient grains, ethical, protein-rich snacks – these are just some of the trends Koser sees dominating in the snack segment in 2019 and beyond. It’s about unique, tasty, functional foods that cater to the modern, time-starved consumer, Koser explains.
4. Buy, sell and compare online
In the technology space, marketplaces, e-commerce sites and classifieds will all gain momentum in 2019 and beyond. This encompasses aggregators as well as more unusual online businesses, which are increasingly able to find and reach consumers interested in niche products and services.
‘Consider an online ice-cream business. Once, something like that would have been unthinkable,’ Koser explains. ‘But as consumers demand greater choice, room for niche products like this grows.’
Yet, dabble online and seamless execution and delivery become make-or-break factors. ‘Many South African consumers use services such as Google, Amazon, Uber and Spotify daily – world-class products that function on a global scale. You can call an Uber and wait for just two minutes before getting a ride,’ Koser explains. ‘It’s quick and totally seamless. Consumers have come to expect that level of service across the board. Aligned to this is the fact that the millennial wave is currently hitting Cape Town right now, and Joburg secondarily, meaning a number of opportunities are opening up. Go after products and services in the right space and consumers will follow.’
5. Reinvent the wheel – and make it better
The final type of business entrepreneurs should keep an eye on is those that currently have low Net Promoter Scores. ‘This means that very few people like them, or the services they provide are of very poor quality,’ Koser explains. ‘Think of postal service providers or telecoms companies. With any monopolistic or oligopolistic structures, the service is often terrible because the heavyweights hold so much power. There’s a huge gap here.’
An allied approach for entrepreneurs is to assess opportunities for automation, or cutting out the middleman with technology. ‘Once, many markets – such as real estate were opaque, meaning you needed a middleman to help you transact. However, as the capabilities of technology have grown, markets have become far more transparent – making it easier for buyers to match with sellers safely. Today, a lot of this is easy to automate services – think about connecting a homeowner to a prospective renter through a digital solution where renters can be qualified, for example, in terms of their finances, personal information and criminal records. Quick and simple. And no middleman.’
The biggest opportunities here centre around where consumers spend the greatest amounts of time and money, Koser notes. ‘Housing and rent are always major costs. In terms of where consumers spend their time, on the other hand, much of it is, on a mobile phone, or PC.’
However, entrepreneurial success is never down to any one magic formula, Koser emphasises. Nor does Silvertree invest in prospective entrepreneurs solely on the basis of the product or service they offer. ‘It’s about passion, perseverance and tenacity as much as it is about the quality of the product.’
Silvertree Internet Holdings is an investment growth partner who aims to understand, grow and scale business, consumer and digital brands to unlock the brands’ exponential growth.
What To Watch For In Tito Mboweni’s First Budget Speech
By Rob Cooper, tax expert at Sage, and chairman of the Payroll Authors Group of South Africa.
Finance Minister, Tito Mboweni, delivers his first Budget Speech on 20 February at a difficult time for the South African economy. Even though President Cyril Ramaphosa has done much to restore business confidence in his first year in office, GDP growth remains weak, government finances are in relatively poor shape, and renewed load shedding is hurting business confidence.
Judging from his Medium-Term Budget Policy Statement in October last year, I expect Minister Mboweni — backed by the team in the National Treasury—to deliver a relatively cautious budget. Much of the focus will be on refinancing the state-owned enterprises and putting them back on to a sustainable footing.
We probably won’t see much in the way of radical thinking since the room for manoeuvre is so limited. Click each header below for an indepth video on the upcoming topics.
Renewal of the country’s public healthcare system with a mandatory health insurance fund and free healthcare at the point of need has been the ANC government’s policy for years, but progress has been slow to date. There isn’t much money in the country’s coffers to fund something as ambitious as NHI, yet the government will want to show that it is advancing the concept ahead of the elections.
With an NHI bill to be tabled in Parliament soon, we could learn more about how NHI will be funded in this year’s Budget Speech — it’s still not clear whether we will pay for it through payroll taxes, VAT increases or other fundraising measures. As an initial step, we could see medical aid tax credits reduced (or at least not adjusted for inflation) to free up some funding for the NHI.
The ETI Act came into effect on 1 January 2014; as a fan of this incentive, I was delighted that President Ramaphosa announced that it will be extended for 10 years another decade in his state of the nation address. However, I have also long argued that the scheme is not performing to its true potential because it is so complex for payroll managers to administer.
The introduction of the national minimum wage adds even more complexity— until and unless the ETI Act is amended, SARS is of the opinion that the National Minimum Wage will not qualify as a “wage regulating measure”. I hope the Budget Speech will announce steps to align the ETI with the national minimum wage and take other measures to simplify administration.
I don’t expect any major increases to corporate or personal income tax this year since the taxpayer doesn’t have much more to give. I think the top 45% rate will remain unchanged, while tax bracket creep relief (to compensate for inflation) will be limited to lower income earners. It seems unlikely that the Minister will increase VAT again this year, given last year’s increase.
That means the Minister is likely to look at ‘moral’ taxes (sin and sugar taxes) to raise more money; we can expect another steep increase in the fuel levy. Perhaps we’ll also hear about efforts to improve SARS’ revenue collection after several years of under-performance. The agency seems ripe for a turnaround strategy, with high-powered team looking for a permanent chief to take the reins at SARS.
Follow us on @SageGroupZA on 20 February 2019 for LIVE expert insights from the annual Budget Speech.
For more information about Sage’s annual tax seminars, please visit: https://get.sage.com/PRL_19Q1_C4L_ZA_EVCU_NPS_AnnualPayrollTaxSeminar2019
Top SA Entrepreneurial Competition Praises Sector Optimism And Calls For 2019 Entries
Entrepreneurs interested in entering the competition can enter online here.
Even in the face of ongoing sluggish growth, exacerbated by widespread allegations of corruption and muted domestic economic activity, South African entrepreneurs remain overwhelmingly optimistic. This was revealed in the Real State of Entrepreneurship Survey 2018, which found that the vast majority of over 1000 business owners surveyed feel very positive about the business climate and outlook for the 12 months ahead.
It is these resilient individuals who will have their deserved time to shine in the 2019 Entrepreneur of the Year® competition sponsored by Sanlam and BUSINESS/PARTNERS, says Kobus Engelbrecht, spokesperson for the competition, who says entries for the renowned competition – now in its 31st year – are officially open.
Entrepreneurial competitions of this nature, however, serve a greater purpose than just celebrating South Africa’s spirited self-starters, notes Engelbrecht.
“Credible platforms such as the Entrepreneur of the Year® competition also act to inspire the next generation of budding entrepreneurs, who have the potential to drive real economic growth at a time where the country needs it most.”
Engelbrecht refers to the World Bank’s recent downward revision of South Africa’s projections for economic growth in 2019 to just 1.3% – 0.6% lower than the South African Reserve Bank’s earlier prediction of 1.9% in November.
“Despite these challenging economic conditions, year on year we still find exceptional entrepreneurs who continue to identify gaps in the market and transform these into viable businesses.
“It is our aim, through this long-standing competition platform, to continually recognise, encourage and support the hard-working entrepreneurs who continue to do well despite the challenges they are faced with. We use the competition to convey our appreciation for the role they play in inspiring others to venture into the world of business,” he says.
In addition to offering valuable mentorship support, networking opportunities and national media exposure, Engelbrecht says that the2019 Entrepreneur of the Year® competition, sponsored by Sanlam and BUSINESS/PARTNERS, offers prizes valued at over R 2 million, which includes cash prizes of R 70 000 for each main category winner, and R200 000 for the overall winner.
“All South African businesses are eligible to enter this competition, and prizes will be awarded across six categories, namely: Overall Entrepreneur of the Year®; Emerging Business Entrepreneur of the Year®; Small Business Entrepreneur of the Year®; Medium Business Entrepreneur of the Year®; Job Creator of the Year; and Innovator of the Year.”
Entrepreneurs interested in entering the competition can download entry forms online at www.eoy.co.za as well as interact with fellow entrepreneurs and entrants on the competition’s social media platforms www.twitter.com/@EOY_SA and www.facebook.com/EOY.SA. The closing date for the competition is 31 May 2019.
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