THE ECONOMIC VIRUS

The pandemic has had an effect on our health, psyche, social lives, but above all I believe it has centralized power to the political core and usurped our right to information and freedoms.

I also believe that it has and will continue to provide cover for the ills of corruption, nepotism, inept cadre deployment and the failure of state centralized economics.

A government is an enabler and a referee, not a contestant! One only needs to read about the litany of state marauded companies, plundered and pillaged to the point of extinction to understand why they are not only unable, but also an unwanted participant in the economy! The pretext, naturally is to address the wrongs of the past, financial redress…how spectacularly they have failed even in that! More and more workers in those state managed companies are losing their jobs. Management stays only long enough to enrich themselves, and then leaves with a golden handshake.

What a sad state of affairs!

It is the private sector, and in particular the small business sector that provides the majority of jobs, and such should be championed and supported by government, not paid lip service by the likes of the current and past ministerial incumbents.

We now owe over R4,4tn on a GDP of R5tn. Interest on this debt is now over 21% of all state income. Most of our budget (read taxes) is spent on salaries and social grants. Coupled to the interest expense, this leave little room for anything else. Less maintenance, development, infrastructure…more of the same, just more intense.

So, what of the consequences?

Skilled emigration and the debasement of the tax base is now undeniable. Taxes will rise, as will CGT, estate duties, levies (but not on alcohol and cigarettes),.

Then you get the non-sensical arguments from opportunistic opinionates that our estates are best bequeathed to the state. Yip, all of our estates. Imagine that…Nice one Prof de Vos! You certainly got your moment in the sun!

The latest numbers released by the Reserve Bank show that the first quarter – prior to the Covid-19 crisis – saw the outflow of over R96-billion from bonds and shares. Foreigners, showing decreasing confidence in the local economy, sold bonds worth R74,4-billion and equities worth R23,1-billion. However, we are now the proud recipients of $4.5bn in loans from the IMF and also R5bn from the African Development Bank. Read higher taxes to repay this lot.

 This Government is policy-rich, but poor in implementation. I am sure that even the president has lost count of the commissions that he has foisted on us! They just go on and on, and ultimately, its an appeasement to the weary public, but the outcome is always the same.

 The interventionist state is not going to improve “the ease of doing business” or create the economic circumstances required to get the economic engine revving; and that’s the bottom line.

 I am angry, as this need not have been the case.

 To see how easily the state security machinery turned on its own citizenry was also appalling; just when the opposite was called for.

What are we doing?

Our interests are aligned with yours. Your success is our success and as such, we take decisions that we believe will lead to better financial outcomes.

The Rand has steadily improved, and may continue to do so over the short term. The billions of debt flowing in, the lack of imports due to the absence of economic activity and Moodies having done their dastardly deed, is the probable cause of this. The bad news is priced in and there seems to be a relook at emerging currencies. The SA Rand in known to be a freely convertible currency, and in many respects acts as a proxy for some of the other less convertible currencies, hence the volatility.

However, the honeymoon will be short-lived! Eventually the real economy will be reflected in the value of the currency and in time will depreciate, I believe substantially. Certain commentators have for some time been advocating a fully offshore portfolio. I believe however, that all local expenses need to be met with local funds and all growth strategies, with offshore funds. We are unlikely to strike an optimal exchange rate, so to this end, we advocate a tranched approach to Dollarization, with a local conservative portfolio to meet your annual liabilities.

 On the local investment scenario, we still advocate a high sovereign bond holding, low local equities but nuanced toward the Rand hedges. We are avoiding property, particularly in view of the effect of the virus on virtual offices and the decimation of the retail sector. We are also negotiating with our platforms to allow us to use retail hedge funds as a tool to stabilize portfolios.

 Our view is that CGT will be increased, and to this end, a steady realization of this tax in the current year makes sense.

We will be doing this, to utilise your tax free allowance, as well as to capitalize on the lower current CGT rate.

Michael Jnr prepared a piece on tax saving possibilities using financial products, which makes for interesting reading. We will need to use these more and more if we are to avoid an excessive tax regime!

 Internationally, we have struck a deal with DMA for the lowest cost online platform. We will be utilizing this for the equity model portfolios as well as for fund portfolios for smaller investments. The most important factor, is to ensure that you have an endowment wrapper in place to ward off undue local and international taxes.

 In terms of communication, our team issues a daily financial information bulletin, a Thursday offshore equity report and trade reports whenever we make a change to your portfolio or trade an equity, with the underlying reasons for the trade. I trust that you find these useful.

 Our team stands ready to assist wherever you have the need, and their details are available on this link.

 Its been a particularly difficult time for all, however certain businesses and whole industries have been more severely impacted. A large number of restaurant and leisure businesses are unlikely to reopen again. Spare a thought for them and the thousands of people that have lost their livelihood.

I thank you for your indulgence.

Mike Papageorge