Global equities suffered their worst weekly decline since March, as coronavirus cases in Europe and the U.S. resurged and election uncertainty weighed on sentiment. Waning U.S. fiscal stimulus hopes also weighed down on markets despite an already low expectation for a pre-election deal.
On Wednesday, Finance Minister Tito Mboweni delivered perhaps South Africa’s most important Medium-Term Budget Policy Statement (MTBPS) in decades. The budget sketches a bigger increase in the government’s debt trajectory, compared to what was recently published in the June Supplementary Budget Review (SBR). Under the ‘active scenario’, gross loan debt is now expected to stabilise at 95.3% of GDP in 2025/26, relative to the Supplementary Budget, which projected debt would stabilise at 87.3% of GDP in 2023/24.
Other key highlights include:
- The South African economy is expected to contract by 7.8% in 2020. Thereafter, the economy is forecast to grow by 3.3% in 2021, 1.7% in 2022 and 1.5% in 2023.
- Gross debt will rise from roughly R4 trillion this year to R5.5 trillion in 2023/24.
- Tax revenue collections will fall short by R300 billion. Government has projected tax increases of R5 billion in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25. Effectively tax increases of R40-billion over four years.
- The public service wage bill is proposed to grow by 1.8% in 2020 and average annual growth of 0.8% over the 2021 medium-term expenditure. Government targets to reduce the wage bill by R160 billion in three years.
- An additional R6.7 billion has been committed to the Social Housing Programme aimed at poor, working South Africans.
- Government aims to review Regulation 28 to make it easier for retirement funds to increase investment in infrastructure, but trustees are expected to put the interests of retirement fund members first. A draft gazette will also be released for public comment.
- R23bn was allocated to Eskom.
- 5 billion was allocated to South African Airways to implement its business rescue plan.
- The State Capture Commission of Inquiry was allocated an additional R63 million to finalise investigations and produce the final report.
The JSE All Share Index was under pressure this week, down -6.60%, led lower by the resource (-9.98%) and financial (-12.33%) sectors. Industrial shares (-1.96%) were relatively more resilient along with the rand which strengthened against the Euro and Pound Sterling despite a stronger U.S. Dollar globally. By Friday market close, the rand was trading at R16.23 to the U.S. Dollar. Brent crude oil tumbled over 9% this week to close at USD 37.89 per barrel.
South African CPI released during the week showed inflation increased by 3.0% on an annual basis in September, slightly less than the markets expectation of a 3.1% advance.
Market Moves of the Week
Technology giants Apple, Amazon, Alphabet (parent of Google), Microsoft and Facebook all reported quarterly earnings. Each beat consensus earnings and revenue estimates. With the exception of Alphabet, the market sold these companies down despite strong results. Equally, U.S. GDP in the third quarter came in ahead of expectations at an annualised rate of 33.1%, above consensus expectations of around 31%.
Nevertheless, in the U.S., the S&P 500 (-5.64%) and Nasdaq (-5.51%) suffered large losses. Similarly, Europe was under pressure with the Euro Stoxx (-7.52%) and FTSE 100 (-4.83%) losing ground, whilst Asian markets were relatively better off with the Nikkei (-2.29%) and Shanghai Composite Index (-1.63%) less impacted.
Chart of the Week
With U.S. Election Day just around the corner (3 Nov 2020), prediction markets currently places the likelihood of victory for former VP Biden at 64% and for a "blue wave" that would result in unified Democratic control of both the White House and Congress at 57%. Goldman Sachs Investment Research expects such a scenario would result in substantial fiscal stimulus, driving a rotation into more reflationary assets. Specifically, they see further room for equity gains, a continued cyclical rotation within equities, broad USD weakness and EM asset upside.
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