Vicious Cycles, the budget, junk status and Zuma are all closely linked and are paving the way of the economy over the next few years.
SA has been the victim of some vicious economic cycles
But, cycles after all are not permanent. However, for the SA economy, the next up-cycle may be further away than normal and a change in government policy and spending is imperative to drive current growth. Therefore last weeks budget was so important, not only to avert a debt downgraded to junk status, but to pave a way for better financial management. To obtain a clear understanding of these Vicious Cycles Coronations Charles De Kock, writes a comprehensive article simply explaining the effect these cycles have had on the SA and global economies over the last 15 years. Click here to read article.
A budget with no teeth
The budget did not live up to financial market expectations as it did not set out a clear enough action plan on how to drive economic growth and reduce government debt. The concern is government policy will not stimulate the economy sufficiently and insufficient government spending cuts will take place, which together is unlikely to reduce government debt as budgeted.
Junk status is still looming
After the budget speech two rating agencies voiced their concern as primarily not enough is being done to grow the economy. Treasury economic forecasts are 0.9%, 1.7% and 2.4% for 2016 to 2018. Although low, these may be a stretch with higher interest rates and continued slow global growth.
President Zuma is not helping
Despite the Finance Minister appointment debacle in December last year, Mr Zuma does not appear to be providing his full support to Pravin Gordhon. This is fuelling financial management instability, which is the last thing the country needs when confidence in the Fiscus is necessary to support investment in the country.
The Rand
Although we believe the Rand is very undervalued, until stability returns to the Finance Ministry its likely the Rand will remain volatile.
We still recommend a conservative investment strategy into a select diversified unit trust portfolio until local and global economic uncertainties reduce.
The Prosperity Fund continues to produce solid returns up 13.8% over the last 12 months versus a negative 6.4% from the JSE All Share index.