By Chantal Marx.
The national Budget Speech is an event closely watched by market participants every year as it may have important consequences for both the bond and equity markets, as well as the currency.
Impact on bonds
A bond friendly budget: Bond yields generally will react positively (go down) if projected income is higher than expected, projected expenses are lower than expected, and borrowing is expected to stabilise or decline. It usually goes hand in hand with lower-than- anticipated debt metrics.
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Higher income could come in the form of better-than-expected tax takes emanating from higher economic growth (or a commodity price windfall), better tax buoyancy due to a better performance from the revenue service, or an increase in tax rates.
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Lower expenses typically come from cost cutting, or interest savings due to lower expected borrowing costs.
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Lower borrowing expectations could come from one, or a combination, of the above.
A bond negative budget: Bond yields will typically react negatively (go up) if projected income is lower than expected, projected expenses are higher than expected, and borrowing is expected to increase. It usually goes hand in hand with higher-than- anticipated debt metrics.
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Lower income could come from lower-than-expected tax takes emanating from macroeconomic pressure, poor tax buoyancy due, or a decline in tax rates.
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Higher expenses typically come from overspending, or interest payments due to higher expected borrowing costs.
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Higher borrowing expectations could come from one, or a combination, of the above.
Impact on equities
An equity friendly budget: Equity markets will typically react positively to business-friendly policy changes, lower tax rates or no tax rate changes, and higher planned expenditure.
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Business friendly policy changes, such as ensuring a steady electricity supply or reducing red tape, will be positive for companies and by extensions their prospective cash flows.
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Lower tax rates, be it on the personal income, company, or other front, will either boost company top or bottom lines.
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Higher planned expenditure by government could also be business friendly - particularly if it results in more "cash in hand" for consumers.
An equity negative budget: Equity markets will generally react negatively to increased regulation, higher tax rates, and lower planned expenditure.
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Increasing regulation may increase the cost of doing business.
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Higher tax rates, be it on the personal income, company, or other front, will either impact company top or bottom lines.
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Lower planned expenditure by government could be business negative since many businesses have the state as a client. It also depends on where expenditure cuts lie and if they result in less "cash in hand" for consumers.
Impact on the rand
The currency usually moves with the bond market as South Africa's sovereign risk rating has a knock-on impact on the attractiveness of most local financial instruments. A bond friendly budget should see the rand strengthen and a bond negative budget will likely have the opposite impact.
Implementation is key
Markets will react in the short term to the budget itself but longer term, execution will be key in determining asset class returns.
