Has The MTBPS Changed Our Investment Approach?
At Heritage Wealth Partners, we focus on investment strategies that make sense for individual clients. We are guided by an underlying belief that a sensible strategy includes a healthy dose of geographical diversification.
Did Finance Minister Tito Mboweni’s speech unveil anything that changed our minds?
The MTBPS is an important strategy document
Every year, the Finance Minister presents an annual budget. This usually tells us all the good news stories we’ve come to know and love, like:
- Losses at SAA
- Further debt guarantees to SOEs
- Real economic growth staying just above water
This was the storyline before lockdown. It’s obviously gotten worse – a lot worse.
The Medium-Term Budget Policy Statement (MTBPS) sets the strategy for the next few years. It’s by no means a formal budget but gives the market an idea of where we are headed as a country.
Where we are headed doesn’t look pretty
We advise clients to diversify their wealth, not just because diversification as a core concept is the correct tool for risk management, but because keeping all your economic eggs in a South African basket simply isn’t a smart thing to do.
Our economy will shrink 7.8% this year. It will not even claw that back over the next three years.
In stark contrast, the International Monetary Fund (IMF) expects a global contraction this year of 4.4%, followed by growth of 5.2% in 2021. Our economy does not have the ability to bounce back like the rest of the world does (on average), because we tried to weather this storm in a ship that was already badly damaged.
Against this backdrop, the South African government will bail out SAA (another R10.5bn). We are borrowing R2.1bn every day as a country, so the frightening reality is that we are borrowing an amount equivalent to the SAA bailout every week.
Ouch.
We will get worse before we (might) get better
One must be careful of making sweeping assumptions like “South Africa will never recover!”
Never is a long time.
However, on any reasonable investment horizon, South Africa is in serious trouble. Our 2020 budget deficit is over R700bn. We aren’t even running a primary surplus, which means we are borrowing money every year just to meet our debt service costs.
That doesn’t sound sustainable, does it?
We have a tax shortfall this year of over R300bn because of unemployment and lack of profits in corporates. Tax increases of R40bn are planned over the next four years, so you can expect your personal contribution to SAA every year to increase.
The government is going to war with the unions, with potentially significant political consequences in the South African context. There is no choice but to deliver significant cost savings (over R300bn has been promised over the next three years), yet the unions will make it as difficult as possible because that is their mandate.
A loss of earnings in the public and private sectors will have a negative impact on consumer spending. That will hurt small businesses in South Africa, driving unpleasant knock-on effects across the board.
What should this mean for your investment strategy?
Our last article touched on how hard it is to justify long-term investments in South African-focused companies. On average, these companies are unlikely to do well when the macroenvironment in which they operate is so broken.
Yes, there will always be standouts, but it’s risky to try and pick them and it requires significant skill and time to do so. Most of our clients are seeking long-term wealth creation opportunities, not shiny trading profits that are here today and gone tomorrow.
The MTBPS has simply reaffirmed our view that the right strategy is to look beyond South Africa’s borders when making investments. The annual exchange control limits allow you to make sizable investments offshore (up to R10m a year with permission).
If South Africa was a company, everyone would be terrified of a huge rights issue and the share price would be crashing. If you are serious about your long-term financial prospects, it’s time to take an objective view of South Africa and treat it as a company.
There are other companies that we believe are far more appealing.