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Investment views

2019 budget: market reaction

21 February 2019
Author: Malcolm CharlesPortfolio Manager, Fixed Income

Malcolm Charles unpacks the market reaction and likely response from rating agencies following the 2019 budget speech.


Lindsay Williams: Let’s talk about the budget now with Malcolm Charles, Portfolio Management at Investec Asset Management in Cape Town. An austere budget, Malcolm. How was the market in the first half-hour after the speech was delivered to an unsuspecting public and then after that as well, after people have considered it? Interesting stuff – what happened?

Malcom Charles: It was a crazy, crazy afternoon. I think there was a lot of nervousness in the market beforehand and the way I would describe it, I think there were a couple of wishful bears out there because the minute the headline numbers came out, which were – you know when you look at the debt matrixes and the budget deficit matrix compared to the October mini-budget, they are substantially worse and everyone jumped on those things and the rand went crazy, bonds went nearly 30 bps.

Lindsay Williams: Wow!

Malcolm Charles: I mean the rand was trading around like 14.15. It touched 14.40 or just below, so you know more than 20 cents in like a matter of minutes, but then half an hour later everything was back to where it was before it started when people suddenly realised that the reason for the increase was because they had made an allowance for Eskom of R69 billion over the next 3 years.

So if you took Eskom out, the actual normal business of the budget was actually across all 3 years slightly better than the October budget. So National Treasury actually did a little bit of cutting of expenditure and it seems to be that they are looking to cut in the right places as well.

Lindsay Williams: Yes, it was a responsible budget, which has been liked and, as you say, the rand nearly went to 14.40 at round about 2.30 p.m. South African time and I am talking to you now – here we are, what is it? – round about 5.30 p.m. and it is now 13.98. What an extraordinary turn-around!

Malcolm Charles: Yes, absolutely and, as I said, I think there were a lot of people almost positioned that way and they were wishing, you know, for a worse budget so therefore the headline numbers confirmed their fears or their wishes and therefore tried to get the bear market going but I think anyone that bothered to read and do a bit of research realised that net-net Treasury had actually delivered quite a tight budget, considering the circumstances. Really, as we all went into it, we [are all going] the worst job in the country is to be the Finance Minister right now because you haven’t got much to work with but he still managed to actually put quite a respectable, decent budget together.

Lindsay Williams: Isn’t it fantastic that someone with all that experience has actually come – as you say, put it all together and delivered a budget that doesn’t please everybody but I mean it is the best he could do? What about the capital market? What about the bond market? What about the future? What about you as a fixed income Portfolio Manager? You must be excited about getting to your desk tomorrow morning.

Malcolm Charles: Yeah, look, I am relieved. I mean our view was that the market had got a bit carried away on the negative side. The market has sold off quite a bit this week, really since the Eskom load-shedding last week Tuesday I think it was when we went to level 4 and there was like the (indistinct).

So the market had started pricing in a lot of negative news and, if you look at us relative to our emerging market peers, we were not a long way from the levels we last saw going into the ANC elective conference in December ’17 when there were fears that Cyril wasn’t going to win. At that stage, if Cyril didn’t win, I think Moody’s would have downgraded us immediately and you would have seen rand weakness and bond weakness but that is what was almost priced in, you know a similar sort of risk premium priced in.

We felt that there was a very small chance that Tito would deliver an irresponsible budget and we thought that someone with that experience in these markets would actually more than likely deliver, at worst, a budget similar to October. So the fact that they actually managed to tweak those numbers a little bit, the market is actually giving him credit for that.

Lindsay Williams: Yeah. Will the rating agencies give him credit for that as well, given what he has done, made a silk purse out of a sow’s ear?

Malcolm Charles: Yeah, look, I think they – I mean the normal course of business is that straight after he has spoken to us as the nation, he then goes and makes phone calls to S&P, Fitch and Moody’s so I think he is having those tough conversations as we speak and then Moody’s will consider their plan.

Our view is that Moody’s will see the budget in a reasonable light. They will say look, there is commitment to cutting expenditure and delivering on improving deficit matrixes over the next 3 years. However, I think they will wait to see what the actual turn-around strategy is from the Presidential Advisory Board and they will see who and when this super [tsar] that the Minister announced that will be the turn-around strategist is announced. I think that needs to happen sooner rather than later and I think they will look and see what powers he is given in order to perform this role to turn around Eskom.

So I think they will take a view on a combination of things. You know they won’t rush into a decision just yet. I think they will probably tick the budget as okay, that’s enough but the proviso is that those other elements need to be announced sooner rather than later.

Lindsay Williams: Malcolm, thanks so much for your analysis. That is Malcolm Charles, Portfolio Manager at Investec Asset Management in Cape Town.

Malcolm Charles
Malcolm Charles Portfolio Manager, Fixed Income

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