Years of fiscal consolidation - cutting expenditure and raising revenue mainly through tax increases, have failed to deliver the desired outcome. The risk is that bond market participants decide the government is not in a position to run a surplus and that the upward debt trajectory is heading into runaway territory. If so, they would dump government bonds, signaling the onset of a debt trap. Fortunately, we are not at this point at present and the government has options.
Trade tariffs, which came into took effect on September 1, set the tone for financial markets for the rest of the month. Nevertheless stock markets still managed to end the month in the black, brushing off geopolitical tensions and worsening economic statistics, which highlighted the adverse impact the trade war was having on global growth.
Developed country stock markets were notching up steady gains until the last day of the month when the US Federal Reserve upset markets by putting paid to market expectations that a 25-basis point rate cut may be the beginning of an aggressive rate-cutting cycle. Developed market stock markets still managed to gain ground for the month but emerging markets lost ground.
Derivatives are often associated with complexity, risk and leverage but in reality they allow fund managers to put in place insurance that protects investments against downside risk. Used for hedging, they are particularly useful in times of great volatility and uncertainty, like now.
Financial markets are in choppy waters, with conditions profoundly changing direction overnight on a Trump tweet or expectations for the world economy. Sanlam Select navigates these challenging conditions by following a dynamic approach that gives advisers access to next generation asset managers that offer additional sources of return.
South Africa’s government finances are cause for grave concern. The only plausible way forward is to tackle the problem now, before it becomes insurmountable and government finds itself in a debt trap.