DEATH AND TAXES: Weekly Wrap - 23/10/2020

By Bianca Botes and Jordan Weir

We all know the saying, “The only constant in life is death and taxes.” And these two facts of life have come into even more focus this year than in the past. The COVID-19 pandemic has taken a terrible toll, while tax policies are a key topic of discussion in the run-up to the US elections.

GLOBAL DATA AND POLITICS

The total number of COVID-19 infections globally has risen to 41.3 million, of which 1.13 million people have died – with the US topping the list with 222,000k recorded fatalities. However, the pandemic’s mortality rate is noticeably lower than a number of other deadly infectious diseases.

Dividing the total number of deaths by the total number of infections, the coronavirus’ mortality rate is currently at 2.7% (in line with the 3-4% published by the CDC). By comparison, the World Health Organisation’s data indicates that an estimated 10 million people contracted tuberculosis or TB in 2019, and that 1.4 million people died of TB during the same year, meaning that TB currently has a mortality rate of 12.4%.

With this in mind, considering the dire economic consequences of governments’ attempts to curb the spread of the virus and global lockdown measures, one has to question whether these efforts were worth the cost – especially as these measures now seem to have been somewhat futile.

The conundrum of saving lives versus saving livelihoods has thus become a political hot potato, as while leaders want to be seen attempting to save lives by enforcing lockdown measures, they simultaneously risk courting anger and resentment down the line as a result of the economic implications of life preservation policies. But, on the other hand, high mortality rates would also stir the wrath of electorates. Ultimately, it seems as though governments have been caught between a rock and a hard place this year, and all that is left to do now is to try and rebuild what has been destroyed. 

We are rapidly approaching the US elections, and the common goal of both Joe Biden and Donald Trump is without a doubt to rebuild the US economy and “make America great again”, as the sitting president would say. However, the two party leaders, with two completely different ethos, also have two very different strategies or approaches to accomplish this aim – both centred around taxes.

One the one side, Donald Trump – a capitalist at heart – is seeking to reduce taxes on companies and the wealthy. His argument is simple: they are the drivers of the economy. The fewer taxes a company pays, the higher the profit the company makes, which in turn leads to fixed capital formation, the expansion of output and job creation. On the opposite end, Joe Biden is looking to dramatically raise taxes on the wealthy and corporations in order to increase support for vulnerable citizens and foot the government bill – also a logical argument. It remains to be seen which policies Americans believe will achieve the objective of growing the economy in the fastest and most sustainable manner, while also maintaining an ethical compass.

Here it is worth noting that from a government perspective, imposing a wealth tax offers two key benefits. First, this means that government sources a higher proportion of its revenues from those who have achieved the greatest income gains. Second, it counters social and economic inequality. However, the overtaxation of the wealthier tiers of society ultimately leads to the erosion of the middle class, a decrease in investment and capital formation, and a slowdown in economic growth. Overall, maintaining the balance between death and taxes, and livelihoods and lives, is therefore something of a catch-22.

Market attention thus remains keenly focused on the US, as the president and his policies, as well as sentiment towards the reigning regime, will dictate the world order and social fabric for years to come. In a world that is highly interconnected, no action or event takes place in isolation. The ripples of each government decision and policy spreads out to every corner of society, dictating sentiment, behaviour and economic data.

As the actions of a nation and its government dictates economic activity, and economic activity is assessed by evaluating a combination of economic data, it is always important to keep an eye on data releases. This week’s releases included: 

US:

·        Initial jobless claims brought some relief, at 787k down from 842k

EU:

·        Consumer confidence remains sluggish in negative-reading terrain of -15.5 points

UK:

·        CPI met expectations of 0.5% year-on-year in September

CN:

·        Unemployment decreased from 5.6% to 5.4%

·        GDP grew by 4.9% year-on-year during Q3

·        Retail sales outperformed expectations, adding 3.3% year-on-year in September

·        Loan prime rate remained flat at 3.85%

GLOBAL EQUITIES

Trading around 2% lower this week, US markets continue to hang onto hopes for further stimulus before the elections. However, it’s coming down to the wire as Washington appears deadlocked over fiscal stimulus talks. Global equity markets are expected to remain undecided in terms of direction ahead of the US elections.

PayPal jumped to all-time highs this week, trading at levels of around $213.00 per share, following its historical announcement that has introduced Bitcoin into PayPal’s universe of online payment options. This unprecedented announcement enables customers to pay the over 26 million vendors who have partnered with PayPal in Bitcoin.

Although cryptocurrencies haven’t been widely accepted in the financial realm, discussions over the value of money are arising again and again, especially given the amount of stimulus flooding across the globe from central banks (CB). The question now is for how much longer can CBs such as the Fed continue to realistically manage the value of the underlying US dollar or currency, when continuously printing stimulus cheques simply depreciates and undermines the value of money? It’s still early days, but with a move like PayPal’s into the cryptocurrency space, the beginning of a larger psychological shift in terms of where the value of money may lie could get interesting.

Hyundai Motors and its 33.8% investment in Kia Motors saw earnings being knocked to the tune of around $2.9 billion, mainly owing to ‘quality-related’ costs. These costs are largely related to engine replacements resulting from the recall of its Theta II GDI engines. This followed an investigation launched in 2017 which revealed that the engine increased the risk of a motor vehicle crash. Over 1.7 million cars have been recalled, with the engine used in cars such as the Hyundai Sonata and Santa Fe SUVs in the US, as well as Kia’s Sorento, Optima and Sportage models. Further provisions for these recalls will impact financials up until the end of September 2020, but the future seems positive once the faulty engines have been successfully addressed and dealt with.

This week saw the public roll out of the Apple iPad Air, which is questionably better than the iPad Pro owing to Apple’s new in-house A14 bionic chip which easily outperforms the previous iPad Pro’s A12Z bionic chip. With less storage built in at entry-level products, the iPad Air starts at $599.00 (64GB storage), and the iPad Pro at $799 (128GB storage). Apple’s share price was only marginally up this week, trading at $116.00 per share on Thursday.

This week, Intel announced its plans to sell its flash memory business, NAND, to one of the world’s largest chip makers, SK Hynix, for $9bn. Intel plans on directing the proceeds of the sale straight into its artificial intelligence and 5G infrastructure businesses. Intel traded around 1.40% lower this week, nearing $53.30 per share by Thursday.

Q3 earnings continued to roll out this week, with data tending to fall flatter and closer to analyst expectations than in Q2. Here are some of the larger-cap releases from this week:

·        Netflix: Earnings per share (EPS) at $1.74 versus expectations of $2.13; revenue $6.40bn versus $6.38bn expected

·        Procter & Gamble: EPS at $1.63 versus expectations of $1.42; revenue $19.32bn versus $18.38bn expected

·        Philip Morris: EPS at $1.48 versus expectations of $1.42; revenue $7.45bn versus $7.28bn expected

·        Coca Cola: EPS at $0.55 versus expectations of $0.46; revenue $8.65bn versus $8.36bn expected

·        AT&T: EPS at $0.76 versus expectations of $0.21; revenue $42.3bn versus $41.6bn expected

·        IBM: EPS at $2.58 versus expectations of $2.58; revenue $17.56bn versus $17.54bn expected

·        Verizon: EPS at $1.25 versus expectations of $1.22; revenue $31.5bn versus $31.6bn expected

·        Tesla: EPS at $0.76 versus expectations of $0.57; revenue $8.77bn versus $8.36bn expected

·        Abbott Laboratories: EPS $0.98 versus expectations of $0.91; revenue: $8.85bn versus $8.40bn expected

Next week also holds some interesting results in store from the likes of Amazon, Tesla, Verizon, Netflix, Intel, Coca Cola, AT&T, American Express and Philip Morris.

In lesser news this week, Adidas announced that it is in early discussions regarding selling its Reebok arm by March 2021. Meanwhile, energy company Exxon Mobil Corporation is expected to share job cut numbers over the coming week to public. So far, BP and Royal Dutch Shell have also disclosed that they will be looking to reduce their workforces by around 15% - this can be used as a guideline.

Year-to-date, the Dow Jones is now down 0.61%, the NASDAQ up 28.23%, and the S&P 500 up 6.89% for the year. In South African rand-terms, add 15.94% against each of these return-figures to account for the currency-effect.

COMMODITIES

Trading around the $42.40 per barrel level over the course of the week, Brent Crude stayed within a tight trading range of $42.20 to $43.00. Like Brent, WTI also went through the motions, although remaining more stable than Brent and trading around the $40.38 per barrel level during the week.

Examining the Energy Information Administration’s data for the week, crude oil reserves dropped one million barrels last week (analysts expected a 240,000 barrel draw), lifting oil prices on Thursday. This followed Wednesday’s oil price drop which resulted from the American Petroleum Institute reporting an unexpected build in oil inventories on US shores.

In 2014, major oil production conglomerates estimated that by 2025 it would cost $90 a barrel to produce 100 million barrels per day. Since then, it’s been interesting to see the effect of improved cost efficiencies in oil production. In 2020, Rystad Energy revised this cost all the way down to between $50 and $55 a barrel.

Brent traded at $42.45 per barrel on Friday morning, while WTI traded at $40.62

After breaking above its descending triangle pattern, the price of gold remained above the $1,900 an ounce level this week, trading in a sideways manner. Platinum, on the other hand, traded around 3% stronger during the week, while palladium also traded 1.85% higher since last week.

The risk of inflation rising into 2021, coupled with further stimulus measures, has seen analysts turning slowly bullish on commodity prices going into 2021. For the moment, Goldman Sachs has favoured the energy sector moving into 2021, while precious metals follow in second, with an 18% return expected by Goldman in 2021. However, 2020 has shown us how quickly expectations for a year can be crushed. Caution should always be taken, and the worst-case scenario should always be factored into investment decisions.

For now, commodities have been treading lightly around current market levels in the run-up to US elections. This is expected to continue until further stimulus announcements or the results of the US election have been confirmed and disseminated.

On Friday morning gold traded at $1,905.57, platinum at $886.58, and palladium at $2,390.50 an ounce.

SOUTH AFRICAN FUNDAMENTALS

Taxes will also be the dominant theme in South Africa in the upcoming week, as we prepare for the delivery of the Medium-Term Budget Policy Statement (MTBPS). While we are all aware of the current state of the fiscal coffers, here is a recap on some of the key numbers:

·        Government debt-to-GDP was at 62.2% in 2019

·        During the February 2020 budget, government committed R129bn to SOE bailouts

·        Finance Minister Tito Mboweni announced an expected tax deficit of R300 billion during the June emergency budget

With the alarming rise in government debt, the ongoing financial burden of SOEs, and an ever-declining tax base, the MTBPS may be less than popular. Hard decisions are needed, and ratings agencies will certainly be watching. The dire state of South Africa’s fiscal position coupled with weak economic growth mean that the budgetary task is enormous, even before considering the cost of the economic recovery plan.

South Africa is on the economic ledge, and analysts, ratings agencies and investors be watching for:

·        Decisive action on the unbundling and turnaround of Eskom, as well as clear guidance on the plan of action for other embattled SOEs

·        The measures that government will be taking to reduce its debt burden

·        Policy certainty on topics such as land redistribution

·        Steps to address the bloated public sector wage bill

·        Taxes

The MTBPS normally does not delve into tax details, but this time around may very well be more tax-centric. Some of the new tax measures expected by analysts and economists include:

·        A three-year temporary tax on high net worth individuals and companies

·        Permanent wealth and inheritance taxes over and above the current estate duties

·        Possible digital taxes

With so much focus on increases in taxes, especially on the wealthy, concerns are now creeping in over what tax threshold might actually see the wealthy exit the country in totality, or erode the prospect of companies and the wealthy investing and spending, leading to even more economic turmoil.

Mboweni is certainly on a tightrope. The threat of a sovereign debt crisis is looming, as analysts expect that South Africa can face a debt crisis as early as 2024. The time for idealistic policies and the poor implementation of structural reforms are over. The minister has the unenviable task of making the hard and potentially unpopular decisions now if we are to remain in control of our own economic future.

The local currency held steady against the greenback this week, breaking below the technical level of R16.40/$ on Wednesday as the dollar remained under pressure amidst the ongoing US stimulus package debates.

SOUTH AFRICAN EQUITIES

The JSE All Share Index (ALSI) was helped around 1% higher this week, mainly on the back of SA Inc. stocks enjoying the stronger South African rand against the US dollar. While one would expect that an undecided US equity market would see funds rather flowing towards more diversified asset classes such as emerging markets and commodities, the reality is that emerging markets simply aren’t catching foreign investor interest at present. An average of around R16 billion in value was traded though the ALSI this past week, and liquidity has definitely dried up slightly from its historic R23 billion a day average.

Anglo American has announced that a class action lawsuit had been placed against the company regarding its Zambian mines and operations. Up to 100,000 Zambian civilians living around Anglo’s operations are involved in the lawsuit, which is spearheaded by law firms Mbuyisa Moloole and Leigh Day, international human rights and mass environmental claims specialists.

The claim alleges that these 100,000 civilians, and mainly the young, have been suffering from lead poisoning symptoms ranging from organ failure and infertility to brain damage. Lead traces have been found in the dust, soil, vegetation, and water around the Kabwe zinc and lead mine. But as lead has been mined in an environmentally irresponsible way since 1906 in Northern Zambia, the issue is one of a generational matter. Anglo traded around 2% lower during the week to levels of around R415.00 per share.

Steinhoff recently incurred a R7.5 million fine relating to historic financial reports that were ‘incorrect, false and misleading’, as per JSE’s listing requirements. An additional R6 million fine was levied for missing reporting deadlines in 2017 and 2018. The total fine thus amounted to R13.5 million. These fines are simply part and parcel of the ‘healing process’ that Steinhoff will have to bear until all past financial misdeeds have been set straight and addressed, and only then will the company be able to focus on a forward-looking survival and growth strategy. A few more of these kinds of speed bumps can be expected for Steinhoff in the short-to-medium term. Trading around R0.85 per share on Thursday, the share price fell around 9% during the week.

For now, no other major equity news was seen on SA shores, aside from turbulent moves among smaller cap stocks owing to larger bid/ask spreads as liquidity dries up ahead of the local MTBPS and the US elections.

Year-to-date, the JSE ALSI is down 4.01% and the Top 40 is down 1.23%. Sector-wise, industrials are now up 6.97% for the year, resources up 7.23%, and financials down 33.81% for the year so far.

LOOKING AHEAD

Today will see yet another US presidential debate, and markets are fixated on the two candidates as they yet again battle it out for the Oval Office. The debate could quickly turn heated and is expected to cause some volatility as we head into the US trading session.

The dollar is on track for a weekly loss as the stimulus prospect continues to add pressure to the greenback. The dollar hitting a 7-week low has helped the rand gain momentum, breaking below key technical levels after numerous attempts.

Meanwhile, all eyes locally are on Finance Minister Mboweni as he takes the stage on Wednesday to deliver the budget update. While global events have largely overshadowed local economic and political events, the “mini budget” is sure to capture some market attention and impact the local currency.

From a data and events perspective, we will keep an eye on:

Monday:

·        US new home sales

Tuesday:

·        CN industrial profit

·        Local unemployment

·        US durable goods orders

Wednesday:

·        Local CPI

Thursday:

·        Local private sector credit and PPI

·        EU sentiment and confidence numbers

·        US GDP, consumer spending and initial jobless claims

·        ECB monetary policy statement and interest rate decision

Friday:

·        EU CPI, GDP and unemployment rate

·        Local trade balance

·        US corporate profits

The rand started the day trading at R16.22/$, R19.15/€ and R21.21/￡.