Market commentary

We all know the saying, “The only constant in life is death and taxes.” And these two facts of life have come into even more focus this year than in the past. The COVID-19 pandemic has taken a terrible toll, while tax policies are a key topic of discussion in the run-up to the US elections.

THE GLOBAL COVID-19 CONUNDRUM

The total number of COVID-19 infections globally has risen to 41.3 million, of which 1.13 million people have died – with the US topping the list with 222,000k recorded fatalities. However, the pandemic’s mortality rate is noticeably lower than a number of other deadly infectious diseases.

Dividing the total number of deaths by the total number of infections, the coronavirus’ mortality rate is currently at 2.7% (in line with the 3-4% published by the CDC). By comparison, the World Health Organisation’s data indicates that an estimated 10 million people contracted tuberculosis or TB in 2019, and that 1.4 million people died of TB during the same year, meaning that TB currently has a mortality rate of 12.4%.

With this in mind, considering the dire economic consequences of governments’ attempts to curb the spread of the virus and global lockdown measures, one has to question whether these efforts were worth the cost – especially as these measures now seem to have been somewhat futile.

The conundrum of saving lives versus saving livelihoods has thus become a political hot potato, as while leaders want to be seen attempting to save lives by enforcing lockdown measures, they simultaneously risk courting anger and resentment down the line as a result of the economic implications of life preservation policies. But, on the other hand, high mortality rates would also stir the wrath of electorates. Ultimately, it seems as though governments have been caught between a rock and a hard place this year, and all that is left to do now is to try and rebuild what has been destroyed. 

We are rapidly approaching the US elections, and the common goal of both Joe Biden and Donald Trump is without a doubt to rebuild the US economy and “make America great again”, as the sitting president would say. However, the two party leaders, with two completely different ethos, also have two very different strategies or approaches to accomplish this aim – both centred around taxes.

One the one side, Donald Trump – a capitalist at heart – is seeking to reduce taxes on companies and the wealthy. His argument is simple: they are the drivers of the economy. The fewer taxes a company pays, the higher the profit the company makes, which in turn leads to fixed capital formation, the expansion of output and job creation. On the opposite end, Joe Biden is looking to dramatically raise taxes on the wealthy and corporations in order to increase support for vulnerable citizens and foot the government bill – also a logical argument. It remains to be seen which policies Americans believe will achieve the objective of growing the economy in the fastest and most sustainable manner, while also maintaining an ethical compass.

Here it is worth noting that from a government perspective, imposing a wealth tax offers two key benefits. First, this means that government sources a higher proportion of its revenues from those who have achieved the greatest income gains. Second, it counters social and economic inequality. However, the overtaxation of the wealthier tiers of society ultimately leads to the erosion of the middle class, a decrease in investment and capital formation, and a slowdown in economic growth. Overall, maintaining the balance between death and taxes, and livelihoods and lives, is therefore something of a catch-22.

Market attention thus remains keenly focused on the US, as the president and his policies, as well as sentiment towards the reigning regime, will dictate the world order and social fabric for years to come. In a world that is highly interconnected, no action or event takes place in isolation. The ripples of each government decision and policy spreads out to every corner of society, dictating sentiment, behaviour and economic data.

As the actions of a nation and its government dictates economic activity, and economic activity is assessed by evaluating a combination of economic data, it is always important to keep an eye on data releases. This week’s releases included: 

 US:

  • Initial jobless claims brought some relief, at 787k down from 842k

EU:

  • Consumer confidence remains sluggish in negative-reading terrain of -15.5 points

UK:

  • CPI met expectations of 0.5% year-on-year in September

CN:

  • Unemployment decreased from 5.6% to 5.4%
  • GDP grew by 4.9% year-on-year during Q3
  • Retail sales outperformed expectations, adding 3.3% year-on-year in September
  • Loan prime rate remained flat at 3.85%


SA ANXIOUSLY AWAITS BUDGET UPDATE

Taxes will also be the dominant theme in South Africa in the upcoming week, as we prepare for the delivery of the Medium-Term Budget Policy Statement (MTBPS). While we are all aware of the current state of the fiscal coffers, here is a recap on some of the key numbers:

  • Government debt-to-GDP was at 62.2% in 2019
  • During the February 2020 budget, government committed R129bn to SOE bailouts
  • Finance Minister Tito Mboweni announced an expected tax deficit of R300 billion during the June emergency budget


With the alarming rise in government debt, the ongoing financial burden of SOEs, and an ever-declining tax base, the MTBPS may be less than popular. Hard decisions are needed, and ratings agencies will certainly be watching. The dire state of South Africa’s fiscal position coupled with weak economic growth mean that the budgetary task is enormous, even before considering the cost of the economic recovery plan.

South Africa is on the economic ledge, and analysts, ratings agencies and investors be watching for:

  • Decisive action on the unbundling and turnaround of Eskom, as well as clear guidance on the plan of action for other embattled SOEs
  • The measures that government will be taking to reduce its debt burden
  • Policy certainty on topics such as land redistribution
  • Steps to address the bloated public sector wage bill
  • Taxes


The MTBPS normally does not delve into tax details, but this time around may very well be more tax-centric. Some of the new tax measures expected by analysts and economists include:

  • A three-year temporary tax on high net worth individuals and companies
  • Permanent wealth and inheritance taxes over and above the current estate duties
  • Possible digital taxes


With so much focus on increases in taxes, especially on the wealthy, concerns are now creeping in over what tax threshold might actually see the wealthy exit the country in totality, or erode the prospect of companies and the wealthy investing and spending, leading to even more economic turmoil.

Mboweni is certainly on a tightrope. The threat of a sovereign debt crisis is looming, as analysts expect that South Africa can face a debt crisis as early as 2024. The time for idealistic policies and the poor implementation of structural reforms are over. The minister has the unenviable task of making the hard and potentially unpopular decisions now if we are to remain in control of our own economic future.

The local currency held steady against the greenback this week, breaking below the technical level of R16.40/$ on Wednesday as the dollar remained under pressure amidst the ongoing US stimulus package debates.

LOOKING AHEAD

Today will see yet another US presidential debate, and markets are fixated on the two candidates as they yet again battle it out for the Oval Office. The debate could quickly turn heated and is expected to cause some volatility as we head into the US trading session.

Meanwhile, all eyes locally are on Finance Minister Mboweni as he takes the stage on Wednesday to deliver the budget update. While global events have largely overshadowed local economic and political events, the “mini budget” is sure to capture some market attention and impact the local currency.

From a data and events perspective, we will keep an eye on:

Monday:

  • US new home sales

Tuesday:

  • CN industrial profit
  • Local unemployment
  • US durable goods orders

Wednesday:

  • Local CPI

Thursday:

  • Local private sector credit and PPI
  • EU sentiment and confidence numbers
  • US GDP, consumer spending and initial jobless claims
  • ECB monetary policy statement and interest rate decision

Friday:

  • EU CPI, GDP and unemployment rate
  • Local trade balance
  • US corporate profits


The rand started the day trading at R16.22/$, R19.15/€ and R21.21/£.

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