The Fairtree Monthly Market Insights provide our clients with a brief summary of the diverse and affluent range of solutions we offer.  "Insights" outlines performance attribution characteristics, accompanied by monthly analysed risk-return metrics’ on their portfolios.

Click here to download the latest Monthly Market Insights (31/01/2016).

In this month's edition of the Market Overview, the "chart of the month" reveals a downward move in the pound as investors are pricing in uncertainty with respect to the implications of a potential Brexit on the back of Boris Johnson’s comments to support the campaign for Brittain to leave the European Union (EU).  Among other benefits is the fact that Brittain currently enjoys the free movement of capital, goods and services to and from the EU – a value restored only to member nations, which may be lost in the event of a Brexit. Specifically, a particular concern is the outlook for U.K trade as exports to and imports from the European Union currently represents about half of British trade.

Click here to download the latest Market Overview.

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Jacobus Lacock, Macro Strategist at Fairtree Capital and Johan Steyl, Financial Advisor at Fairtree Private Client discusses some of the most prominent client questions.

JS:  There has been a lot of emphasis lately on South Africa’s credit rating and the risk of being downgraded to sub-investment grade. Finance minister Gordhan and business leaders, has made it their objective to protect South Africa from further downgrades. Do you think they have delivered enough during the recent budget and investor trip to Europe and the United States to keep rating agencies and investors happy? 

Yes, for now, but the hard work still lies ahead. The budget’s assumptions around growth and revenue generation were too optimistic given our current growth trajectory and some investors were disappointed that Value Added Taxes (VAT) and Personal Income Tax (PIT) were not raised. However, raising VAT & PIT taxes would have been more negative for growth. I prefer to see a VAT hike when growth is stronger and specific projects like the National Health Insurance or Nuclear Energy project are introduced. Both these projects have been put on the back burner for now. Mr. Gordhan also announced expenditure cuts, although most of these will only kick in next year. Social grant will continue to grow at a rate above inflation. The budget was less growth negative than feared and politically well balanced. The most disappointing aspect of the budget was the lack of detail on how the structural growth inefficiencies will be dealt with. Too many State Owned Enterprises (SOEs) are being mismanaged and risk asking for more money from the Treasury. I’m eagerly awaiting announcements from authorities on how structural reforms will we implemented. In my view, Pravin Gordhan has done enough to preserve our investment grade rating until December. However, without a clear growth plan and evidence of implementation, the country face being downgraded by S&P during their December review. The feedback from Europe is that international investors are sceptical around the government’s ability to perform structural reforms and that a downgrade towards sub-investment grade is inevitable. However, they feel that the risk is already reflected in the price of many assets and are willing to hold on to their current positions.  

JS:  How will the South African Reserve Bank (SARB) react in this environment of low structural growth, should they not cut rates given that inflationary pressures are supply driven?

JL: South Africa’s growth challenge is structural in nature. Cutting interest rates will do little to help. The SARB’s mandate is price stability. Their main aim is to ensure inflation expectations remain anchored. Given the rapid depreciation of the Rand, the effect of the severe drought on food prices and ever increasing utility prices, the SARB’s outlook on inflation has shifted higher. They now expect an average inflation rate of 7% during 2017.  To reflect this shift they hiked rates by 0.5% in January. However, the SARB realises that growth is weak and that future moves should be at a gradual pace. I doubt that they will raise rates in quick succession. With the US Federal Reserve on hold for now the SARB can afford to move gradually. My view is we get another 0.5% to 0.75% of hikes over the next 12 months.

JS:  Will gradual hikes by the SARB and the Treasury’s aim to address fiscal uncertainty be enough to support the Rand? Will we experience sharp currency depreciation?

JL: The Rand has been on a speedy depreciation course for the last couple of years. The reasons are both domestically and externally. Domestically, growth is weak, we spend more than we earn and we fail to compete with other international markets due to structural supply inefficiencies in labour, electricity and public enterprises. These factors will continue to impact business confidence negatively and weigh on the Rand. The Rand also faces severe political risks.  Externally, the risk of higher US interest rates and a weak China growth outlook has also weighed on the Rand. However, weak US data over the last few months has reduced the risk of sudden interest rate increases by the US Fed and Chinese data show some signs of stabilisation. These factors will continue to support the Rand over the short term. The Rand has reversed most of the sharp sell-off it experienced over December and January. We could see further Rand strength over the short term, but the risk of a credit downgrade by year-end and rising interest rates in the US may see the Rand testing the January highs by year end. That said, the Rand remains vulnerable to political event.  Read more
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