In a televised address to the Nation at 8pm last night, South African President Cyril Ramaphosa provided an update to the coronavirus vaccine rollout program as well as announcing a return to Covid-19 alert level 1 from the current adjusted alert level 3. Coincidentally, this aligns well with our businesses’ intentions to return the majority of our staff to the office from today, the first of March; particularly for our Gauteng and Port Elizabeth-based businesses. Our East London offices had already mostly returned prior to today. This comes as the world continues to grapple with coronavirus, as demonstrated by Brazil’s imposition of a 15-day lockdown beginning just as our President began speaking last night. At 255,000 confirmed coronavirus-related deaths, Brazil has the second highest count after the United States which exceeded half a million deaths a few weeks ago.
Also note-worthy since we last wrote to you here was Finance Minister Tito Mboweni’s annual budget speech for which you can find our commentary here so we won’t repeat ourselves now. The one element that is worth reflecting on here is that proposed changes to Regulation 28 of the Pension Funds Act was forthcoming at the time of our budget speech commentary. Those proposed changes were communicated on Friday the 26th of February. The two main sets of changes were to clarify what infrastructure is though not to define it as a separate asset class and to place a limit of 45% on domestic infrastructure assets and a further 10% for African infrastructure assets. The other proposed set of changes was to separate private equity, hedge funds and other assets from each other and to replace the total maximum allocation of 15% with individual allocation limits of 15%, 10% and 2.5% respectively. These changes are still in proposal format. We have until March the 29th to respond to this though both of these sets of changes appear to be sensible, so we don’t expect too much pushback from the industry and/or investors. Regulation 28 of the Pension Funds Act governs how much investors can allocate to equities, property, and offshore assets, as examples, within their provident and pension funds. The NFB Stable and Managed Funds and the NFB Defensive and Managed Growth Fund of Funds, also as examples, are designed to be Regulation 28 compliant so you can reasonably anticipate that changes to this piece of legislation are important to us and our investors.
Moving on to financial markets: even though all the technical indicators we regularly observe are suggesting that market volatility remains low, it’s hard to argue that the last week or two haven’t been at least interesting. South African 10-year yields moved from 8.45% to 9.05%, which is good if you haven’t bought SA bonds yet but not so great if you’re amongst the majority that already had. Still, at 9% from here (and many recent investors will have bought at those sorts of levels), that’s nearly 3x the current inflation rate and therefore provides significant protection from an increase in inflation in years to come. More significantly though, US 10-year treasury yields have moved higher quickly from under 1% a few months ago to at or around 1.4% now (going some way to explaining recent rand weakness). This is the first time in a year that US treasuries yields have been greater than the S&P500 dividend yield. We must note though that the treasury yield is a forward yield and the dividend yield on the S&P500 is historical, these are two completely different time periods. The JSE All Share Index continues to remain elevated, trading between 66,000 and 68,000 and the rand has popped above 15 to the US dollar again. Bitcoin has come off meaningfully since reaching highs of nearly 60,000 dollars a coin and is now trading at 46,000. Looking ahead, about the only macro-economic event worth keeping an eye on in the next few days is the Reserve Bank of Australia’s monetary policy committee meeting later this week at which we expect no changes to interest rates.
Some of the increase in US treasury yields must relate to the partisan passing over the weekend by the House of Representatives of US President Joe Biden’s $1.9 trillion Covid-19 stimulus package which includes $1,400 checks directly to qualifying US citizens. The bill now goes to the Senate for their vote. As this is likely to be followed by a meaningful infrastructure development program in June, investors must be asking themselves how all of this will be funded. If, as is likely, it’s mostly to be done through increasing levels of debt (rather than through tax increases as an example of potential funding sources), the US balance sheet must be weaker post these spending programs that it was before, and which expresses itself in rising yields. Given that an argument can be made that all debt around the world is priced off US treasuries, then some of the rise in South Africa’s 10-year yields is not just about our budget deficits but recent increases in our yields are also related to how the US attempts to restart its economy.
As always, please stay safe, wear a mask and take care of those around you. You can find our weekly chart book here. Please also note that this will be the final Monday Mailer in the current sequence. We will return to Monday emails should alert levels change or should market conditions warrant it. In the meantime, our regular publications like Proficio, The Rationalist and Wood for the Trees will all be available to you on their normal publication schedules.
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