Can financial services intermediaries count on the consumer through 2011?
Insurance remains a grudge purchase. Whether short-term (where as many as two thirds of the country’s motor vehicles remain uninsured) or long-term (where the Association of Savings and Investments SA estimates the life insurance gap at some R18.3 trillion) consumers seem to defer “protection” expenses for as long as possible. And when times get tough, as they did through 2008 and 2009, the numbers of policy lapses and surrenders spike significantly.
During 2010 insurance product providers clawed back some of this “lost” ground – and we expect they’ll be eagerly awaiting the Q1 2011 results to see whether the new business drought is over... One of the best ways to get a “feel” for what the New Year holds is to consider the state of the domestic consumer. If consumers have money to spend on the necessities – and some spare cash to top up on so-called big ticket items like appliances and cars – you can be sure they’ll channel a little something to the insurance and savings space. How is the consumer faring as we enter 2011? Is Average Joe buying cars and appliances? And is inflation under control?
New car sales show marked improvement through 2010
At first glance we can probably answer each of these questions with a qualified “yes”. The National Association of Automobile Manufacturers of South Africa (Naamsa) reported a 29.6% increase in vehicle sales for December 2010 compared with the same month last year – or 39 504 vehicles versus 30 407! “New vehicle sales reflect an encouraging and impressive performance across all sectors, particularly the new car segment,” said Naamsa. The country’s vehicle manufacturers will be breathing a collective sigh of relief as the dismal 2009 new vehicle sales statistics finally reverse.
Although the 38.9% improvement in overall new vehicle sales for 2010 was welcome, Naamsa warned that these numbers still lagged the average annual sales achieved between 2005 and 2008 by some margin. But we’re less interested in the historic data than what the latest annual figures reveal about consumers. Clearly South Africans are ready to spend money on motor vehicles again. And – job cuts aside – this spending frenzy is likely to support all consumer-backed industries through 2011.
Can the Christmas bonanza extend to the New Year?
Local retailers are benefiting from the consumer resurgence too. The country’s largest grocer, Shoprite, recently reported a 9.5% improvement in first half turnover. Analysts point to lower interest rates and renewed economic growth as reasons for increased consumer activity. But perhaps the best news from the retail giant’s half-year is the 4.3% improvement from its furniture unit. Consumers have moved on from the defensive “food only” stance and are once again purchasing furniture and appliances.
Nino Frodema, a portfolio manager at Metropolitan Asset Management, told Fin24.co.za retailers would report better numbers in Christmas 2010 thanks to interest rate cuts, and upward trending growth rates. He expected the momentum generated by the November 2010 retail sales data to carry over to December. Chris Gilmour of Absa Capital agreed: “All economic indicators are pointing to an improvement. Yes, we’re still grappling with household debts and unemployment, but most people are no longer worried about losing their jobs. We’ve also had above-inflation wage increases, which will have helped consumers.”
The strong rand will keep inflation in check – for now
Consumers are finding further assistance from an unexpected ally – the rand. And you can be sure they won’t be backing the call by local trade unions and exporters for the Reserve Bank and National Treasury to do something about the strong currency. The truth is regulators are powerless against the international macroeconomic forces which are influencing international currencies right now. Although the fundamentals point to a continuation of rand depreciation against the dollar, Euro and pound over the long-term, there are a range of factors which prevent rand weakness. FNB economist Cees Bruggemans explains: “To the extent that our own foreign exchange accumulation, lower interest rates, exchange control relaxation and widening current account deficit do not neutralize incoming excess capital, the rand has further upward potential.”
The situation is exacerbated by systemic weaknesses in the developed world. “Dollar weakness is driven by US forces – a combination of slow growth, repressed inflation and maximum policy aggression, both fiscal and monetary,” says Bruggemans. Likewise, Euro weakness is driven by sovereign debt, banking scares and market anxieties! He expects the rand to remain strong deep into 2011. “Precious metals have yet to start losing their shine, our bond yields remain reasonably attractive, and our equities have embarked on a new earnings cycle – so we should be prepared for more rand strength,” he says.
The media often focuses on the negatives of a stronger rand, most notably the inability of local manufacturers to compete in offshore markets. But there are numerous benefits too. A strong rand helps to keep consumer price inflation in check – with the obvious knock-on effect on interest rates. Provided the rand remains pegged at levels better than R7.00/$ we can bank on inflation remaining within the Reserve Bank’s 3% to 6% target range. Some analysts say we could even average 4.5% CPI for the full year. As long as inflation remains under control, consumers will be free to spend on goods and services rather than mortgage and hire purchase repayments.
Editor’s thoughts: It looks increasingly likely the consumer will enter 2011 on the front foot and reclaim their rightful place as the driving force in the domestic economy. And financial services intermediaries should find it easier to “sell” product in this environment. Have you sensed a more relaxed attitude from your clients early in the New Year, or is it too early to tell? If you’d like to share your experiences please send your comments to [email protected]
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