Budget is more friendly to bonds than equities, asset managers say

Finance Minister Pravin Gordhan’s budget was more bond-friendly than equity-friendly, Mark Appleton, the head of South African strategy at Ashburton Investments, says.

Appleton says the reduced fiscaldeficit targets presented by the minister did not differ markedly from those envisaged in the Mediumterm Budget Policy Statement presented in October last year.

The deficit before borrowing is projected to reduce from 3.4 percent in 2016/17 to 3.1 percent in 2017/18, and to reduce further to 2.6 percent in 2019/20. As a result, credit ratings agencies are not likely to view the budget negatively, despite very real risks to economic growth, as there always are with tax hikes, he says.

“There is little doubt that the minister is doing what he can within a set of significant constraints. It is acknowledged that real economic gains are only likely to come from economic reforms, which the budget is not tasked to deal with,” he says.

The reduction in the deficit and a potentially less negative credit ratings outlook should be seen as positive for the bond market, but at the same time, government plans to increase the number of bonds in issue (mainly in the local market), partially to build cash to fund large redemptions in 2019/20. Ashburton regards the overall effect as neutral, he says.

Nazmeera Moola, the co-head of fixed income at Investec Asset Management, says the persistent increase in the issuance of bonds – forecast to increase by eight to 10 percent a year over the next three years – is disappointing.

She says that, to date, issuance increases in recent years have been swallowed by foreign and local investors because of low interest rates globally, a stabilising China and sluggish local growth.

“However, at some stage the buyers could dry up. We would rather see further commitment to supporting growth and cutting expenditure than higher taxes and increased issuance,” she says.

Marie Antelme, an economist at Coronation Fund Managers, says the planned issue of bonds leans heavily on local funding, and could put pressure on local ratings in time, but, in Coronation’s view, the change is insufficient to be a concern yet, given the conservative economic and fiscal context. “We therefore think that ratings agencies will maintain their current ‘vigilant-but-unchanged’ position, in the absence of a political shock.”

From an equity-market perspective, the increase in dividends tax is negative, because investors will get less out of their investments aftertax, Appleton says.

However, the growth outlook for the economy is gradually improving, and this will ultimately filter through to an improved earnings outlook, he says.

For equities, leaving the corporate tax rate unchanged is a relief.