Newsletter – Week 8 2024 – Budget fallout

We hope you have all had a great start to the new year. The podcast of the newsletter is available and you can download it HERE. We welcome all your input so please don’t hesitate to contact us if you’ve got any queries or suggestions.  

Market watch:

The markets and currencies did not treat us kindly following the lacklustre and unimaginative Budget. There is little doubt that we are just going to have to tread water until the elections. If you want things to change, please go out and vote, even if it’s cold and the queues long and miserable. 



We are watching Argentina because RSA INC might be able to learn from their experiences.

Whisper it quietly, but Argentina’s embattled markets are showing signs of doubling down on the country’s no-holds-barred libertarian leader Javier Milei, betting he can pull the economy out of crisis. I think most of us know intuitively, but the only way to stop a sinking ship is with a dramatically different Captain. 

Amid a painful economic downturn and with the Argentinian government strapped for cash, Milei has made tough austerity a key focus since taking office in December, helping the country post its first monthly fiscal surplus for over a decade in January, music to the ears of investors after years of over-spending (does that sound familiar?)

Milei, who made the bold pledge of erasing a nearly 3% fiscal deficit from last year, has sought to make good on his word. His government has slashed spending, bought over $5 billion (USD) to build up depleted reserves and rolled over import debts with a successful issuance of ‘Bopreal’ bonds.

For now that’s bolstering market belief that Milei will follow through on his pledges to stabilize the economy, no easy task with studies suggesting poverty has risen towards 60% (ours is 55%) and with increasing protests on the streets.

The South American country’s debt, however, remains risky with Argentina having defaulted nine times, most recently in 2020 before a major restructuring. Milei’s economic fixes face serious hurdles and push-back on the streets and in Congress. Sentiment has been helped by improving exports, with a trade surplus in two straight months on stronger grains production after last year’s harvest was battered by drought.

Meanwhile, moves to mop up pesos in the market, including via short-term Treasury bills, have bolstered the currency and trimmed the gap between the controlled official exchange rate and popular parallel markets where dollars are more expensive.

There’s been a strengthening in peso futures – a signal of where investors think the currency is heading – reflecting lower expectations of a sharp devaluation on the horizon following a mega 54% devaluation in December.

That said, the June futures contract still sees the peso at around 1,060 per dollar versus the current 838 peso spot rate, though down from predictions previously of over 1,400. This shows the magnitude of the task at hand to turn a broken socialist system around.

We like to think that we aren’t in the bond-defaulting super-league usually reserved for the South Americans, but we have defaulted 3 times to Argentina’s 8 (and not since 1994). That’s one league we don’t want to be part of but with the doubling of % of debt to GDP since 1990 this needs to be watched carefully. South Africa still has options available to it, as was highlighted by the Finance Minister when he announced that R150billion will be withdrawn from the Gold and Foreign Exchange Reserve Account. This will happen over 3 years to help meet the obligations of the medium-term expenditure framework.

Grey Listing

The United Arab Emirates, home to the financial hub of Dubai, has been dropped from a global watchdog’s list of countries at risk of illicit money flows. 

The Financial Action Task Force (FATF), a body that groups countries from the United States to China to tackle financial crime, on Friday dropped the UAE from its ‘grey list’ of around two dozen nations considered risky (like us).

I suppose harbouring billions in ill-gotten state capture funds and dodgy bad actors doesn’t count – let alone the Russians and other Middle Eastern bandits who are under UN sanctions. The bar that we must clear to get out of grey-listing is lower than I thought. To be fair, the Europeans aren’t fooled and the FATF is politely being called “ineffective”

This reminds me of the shenanigans of the Ratings Agencies in the run-up to the credit crunch, where they listed toxic securitised notes, filled with junk bonds, as AAA and were one of the major culprits and enablers of the 2008 implosion. Securitization is the packaging of assets into a financial product. As an example: mortgage debt, particularly subprime mortgages, were packaged into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs)).

Investors are inclined to almost blindly lean on the opinions of such rating agencies. Are government relying on the FATF any different? Unfortunately, so-called counter-terrorism measures are going to depend on who you consider a terrorist…


U.S. Deputy Treasury Secretary Wally Adeyemo said on Friday that he is concerned about China’s excess manufacturing capacity spilling over to the global economy, even if China’s current economic woes are unlikely to slow U.S. growth in the near term. 

China’s heavily subsidized manufacturing capacity for electric vehicles, solar panels and other goods has followed industries such as steel and aluminium in producing more goods than China can consume, he added.

“Fundamentally that overcapacity is going to go somewhere,” Adeyemo said, adding that U.S. tariffs and tax credits for EVs and their batteries will help keep Chinese EVs out of the U.S. market and allow American firms to compete more fairly.

It is in the globe’s interest for China to return to at least moderate growth, but there is growing unease over their expansionism ambitions, which can only have been emboldened by Putin’s recent resurgence and Trump’s outrageous comment that Russia could ‘do whatever the hell they want with NATO countries not paying ‘enough’. If Trump is re-elected President he will have the golden opportunity to finish what he started – the destruction of the US as a Global Powerhouse and Influencer.  


Budget low-lights

In case you missed my Wednesday Budget Newsletter special, you can find it HERE, but in a nutshell: There was a lot of smoke and mirrors and what I like to call Lies, Damn lies and Statistics. The Fuel levy wasn’t increased, which Minister Enoch Godongwana would like us to believe was an R4Bn gift. Unlike income tax, the General Fuel Levy (GFL)is not levied as a percentage but as a Rand amount and is R3.96. Let’s get real here Minister.. Brent is at the same level as it was a year ago – it is just our exchange rate that is fighting for the top spot in the Banana Republic Category. Then RAF levy (you know those guys who keep going bankrupt because it is used as a slush fund) is another R2.16. If you thought that the GFL is used to protect and expand our infrastructure – you’d be wrong. It’s not ring-fenced but just goes into that slop bucket of funds that the government has it’s snout embedded. This is how our money is being spent:

The debt servicing needs are alarming. That debt is there because the government, not content with the proceeds they are already getting, are not living within their means. Since 1994, as a percentage of GDP this debt has doubled. If the government was an individual, they would not just be in debt review, they would be on the fast track to being declared bankrupt. There is no getting away from it, the explosion in grants is directly correlated to this rise in debt. There is an important distinction to make here: It is one thing to go in debt to pay for a capital project (build a house/road) and quite another to use that debt to buy consumables. The failure of the government to invest in capital projects, and infrastructure has got us the joys of where we are today – load-shedding, water-shedding, failure of Transnet and Portnet etc. 

Tax brackets were not adjusted for inflation ( for the first time in years) which is a de-facto tax increase of at least 5% (a phenomenon called bracket creep).

(Andrek Panyaza) Lesufi, Premier of Gauteng, in a media briefing following the budget, made a very odd pledge to ‘buy back’ 18 private hospitals. You can only buy back something that you sold in the first place – which they didn’t. This would also cost at least circa R8bn (and cost an ongoing R5Bn). He intimated that Unions (National Worker’s Front) are going to pony up the funds. The NHI allows for the contracting out of services from private sector hospitals (which is why you haven’t heard quite as much blowback from those groups as the medical aids who will be shut down in their entirety). I am currently updating my NHI post and hope to have it out next week. 

Global Investors and Traders were not fooled by the budget and punished our Rand accordingly. We are unlikely to see the start of interest rate decreases until after the election – and that could be a watershed moment. If the ruling party do not lose as much ‘market share’ as expected, and/or gets into an EFF coalition then there could be a sharp further decline. If sanity prevails and the populist narrative can be (at the very least) kept at bay, then the Rand may stabilise, but there is unlikely to be a sudden appreciation. 

Nvidia and global liquidity

Another month and another beat for Nvidia as its size continues to mushroom. The stock is now approaching $800. This is interesting as most people around the world didn’t even know about Nvidia a few years ago. Most people now know it’s a tech company run by a guy who seems to wear leather jackets…. Basically nothing in depth but enough to allow you to own the stock despite its rising valuation.

I have written in a past newsletter about Nvidia and its volatility profile – which is nothing new especially for the semiconductor industry. What people may not know though is that the stock market continues to be the beneficiary of rising liquidity, especially in the West, and it is this that finds its way into the stock market.

What better place to put this than in the poster child of parabolic growth?

Make no mistake, what Nvidia is achieving is amazing. Here is it’s Net Operating Profit After Tax going back 10 years:

What this business recorded in profits a decade ago in comparison to what it records today dwarfs in comparison. What did they produce a decade ago? $454 million which was already an amazing achievement in the highly competitive field of semiconductors. So why was this stock at $120 in September of 2022? The answer lies in their dwindling returns on invested capital from mid 2017 until they abruptly turned around in 2023. Clearly their investment paid off and they are now not only the beneficiaries of their business success but also rising global liquidity. As with anything, this will subdue, and investors are sure to ask themselves why they paid lofty valuations even for a great business like Nvidia.

The persistent problem which is sure to become a 2024 phenomenon as well, is the un-investable bond market globally. When rates started rising this was an obvious no-go for capital. The bad news for bonds continued though 2023 as yields continued to move higher whilst inflation was reducing. This was completely out of character for bonds and the reason stems from the number of US bonds that are coming up for redemption. This can shift the whole yield curve profile. This is playing itself out at present. Capital tries to find a home where there is certainty. Against other asset classes, the Nvidia miracle relative to other assets seems worth considering. The Nvidia success story isn’t just about their own business success but also about a macro landscape which just happens to benefit them. Well done to all Nvidia shareholders who experienced the benefit of the confluence of all of this! Will you be selling soon?   

The Dollar strength, as measured by the DXY Index continues to trade in a tight range, currently at 103.96 

The DXY Index:

The Rand/Dollar. The Rand/Dollar weakened quite sharply on the back of the Budget now at R19.31 (R19.03, R18.80,  R18.78, R19.03).


The Rand/Pound is also down at R24.48 (R24.03, R23.87, R23.86, R24.15.)

The Rand/Euro closed the week at R20.90 (R20.51, R20.38, R20.40, R20.72.)

Brent Crude: Brent closed the week up at $81.96 ($80.91, $77.36, $83.66, $78.33). Middle East tensions continue to weigh on the commodity price, and Russia’s recent wins in the Ukraine war won’t be helping.

Bitcoin was up again at $50,960 ($47,195,$42 897, $41,608, $41 680)

Cobie Legrange and Dawn Ridler, 
Rexsolom Invest, Licensed FSP 45521.