Tax hikes will hit retail stocks
SPENDING POWER SEVERELY STRAINED
Retail stocks will likely bear the brunt of tax increases, should Finance Minister Tito Mboweni target consumers with revenue-raising measures in his budget today.
Consumer spending power is under severe strain, with confidence at a two-year low against a backdrop of a 30% unemployment rate and an economy that hasn’t achieved a 2% annual growth rate since 2013.
Economists see an outside chance Mboweni will increase the valued-added (VAT) tax rate, with such a move predicted by five out of 19 surveyed by
Bloomberg.
The blow from a higher VAT rate would be felt more by clothing retailers than by food stores as consumers adjust, said Henre Herselman, a derivatives trader at Anchor Private Clients.
Increasing taxes could further reduce consumer spending and perpetuate the economic malaise, said Sandy McGregor of Allan Gray.
The market hasn’t priced in a VAT increase and a decision to do that could knock retailers, said Investec Wealth and Investment chief investment strategist Chris Holdsworth.
Higher taxes would translate to lower disposable income, which would filter through to stocks, said Casparus Treurnicht, a money manager at Gryphon Asset Management.
More broadly, investors will be looking for signs of a plan to rein in debt and stave off the loss of SA’s last investment-grade credit rating in a review by Moody’s Investors Service due next month.
“The key objective of this budget should be to table a plausible plan to manage the wage bill and interim funding for Eskom,” McGregor said.
For Holdsworth, the primary concern for investors is the outlook for debt as a ratio of gross domestic product. He cited Treasury projections showing debt surging to 81% of GDP in the 2028 fiscal year unless urgent action is taken.
Here are more views from investors on what they would like to hear from Mboweni:
Holdsworth:
Increased spending on infrastructure to spark growth. Greater allocation to the SA Revenue Service to enable it to tackle tax issues.
Higher funding for the National Prosecuting Authority.
Treurnicht:
The state payroll is bloated and any indications to deal with this would be beneficial. It would be positive if state employees’ compensation was linked to productivity.
No more free bailouts to state-owned enterprises. No increase in VAT.
McGregor:
The public wage bill must be managed so it does not grow faster than inflation. Plans to restore parastatals to solvency.
Herselman:
Allocating funds to alternative energy production. Stop additional funding to non-key state-owned enterprises.
Reduce the government wage bill and expenditure.
Adrian Cloete, PSG Wealth:
Plans for a legal framework to attract investment.
A government focus on cutting expenses and end to wasteful expenditure.