Don’t expect fireworks through the economic recovery
A couple of weeks ago finance minister Pravin Gordhan warned that South Africa’s economic recovery would lag the recovery in the rest of the world. His view makes sense when one considers the time lapse between the developed world’s slide into recession and our own, with the US entering technical recession approximately a year before we did. Another of the minister’s observations was that the recovery would be a slow and drawn out affair. In other words we won’t see the stellar performances in equities and property witnessed in the last four to five years.
When will the recovery gain momentum? According to Moody’s Economy.com South Africa will be firmly on the front foot before the end of this year. Moody’s says the latest 50 basis point reduction in South Africa’s prime lending rate – announced by outgoing Reserve Bank governor Tito Mboweni on 14 August 2009 – was just what the doctor ordered. “This monetary stimulus will help steer the economy toward recovery in the second half of 2009,” said Moody’s. And their view holds despite the country’s third consecutive quarterly GDP contraction announced by Statistics SA in August. Our economy (on an annualised rate) contracted 1.8% in Q4 2008, 6% in Q1 2009 and 3% in Q2 2009.
Are interest rates the only ‘silver’ bullet?
The question many economists are asking is whether interest rate cuts will be enough to kick-start mothballed manufacturing plants and stem rising unemployment. There are also concerns about where government will obtain additional funding for ongoing fiscal stimulus. There is no doubt the current three-year R787bn public infrastructure programme has shielded the domestic economy from some aspects of the international financial meltdown. “The path back to self-sustaining growth will be long and require deft guidance by policymakers,” said Moody’s. Government will have to tighten up on all aspects of financial management – stamping out graft and corruption – if it wants to implement its development state ideals.
There are still plenty of challenges. Whether or not the Reserve Bank cuts interest rates through the remainder of this year, Moody’s expects “the pace and nature of the recovery [to] remain uncertain.” They warn that real statistics in the manufacturing, finance and trade arenas are still in decline – that joblessness is on the increase – and that domestic demand remains subdued. Add to this gloomy backdrop “ongoing labour disputes and frequent strikes” and one appreciates it won’t all be plain sailing. Under these conditions most fund managers are pencilling in moderate investment returns for the 2009 year. And 2010 is unlikely to shoot the lights out either.
Equities lead the way
Why have equities run so hard in recent months? The first signs of an economic recovery usually play out in equity markets. Shares are priced on expectations for future earnings. In the first quarter of this year analysts were forecasting gloomy numbers across the board. We’ve witnessed a number of these results as the country’s top listed firms report for the period ending June 2009. The ‘big four’ banks, resources giants and an array of industrial companies have performed dismally. But sentiment driven investors are already discarding these numbers and valuing shares based on how they expect companies to perform in the second half of 2009 and through 2010.
What does recent share price activity tell us about South Africa’s economic recovery? Writing in Sake24, Maarten Mittner warns that the JSE’s first half performance “pales against the recovery seen in other emerging stock markets.” At its 21 August 2009 closing level the JSE All Share Index is 15% stronger than at the start of the year. Measured in US dollars the gain is a more substantial 30%. But this is way short of dollar gains posted by exchanges in other emerging economies such as Brazil (+91.6%), China (+88.7%) and Russia (+62.2%).
Are South African investors missing out? At first glance our markets appear to be lagging the rest of the developing world. But we must remember that shares in Brazil, China and Russia were sold off heavily through the global financial crisis. Yes – our market fell 46% from our mid-2008 high to the March 2009 bottom – but other emerging markets fell harder. They’re simply recovering from worse positions.
Editor’s thoughts: The apparent ‘disconnect’ between the real economy and the stock market is best explained by the ‘forward looking’ nature of market pricing mechanisms. The problem is that investor sentiment often adds a multiplier effect, chasing share prices even higher than expected results warrant. Do you think share prices have outrun prospects for the real economy? Add your comments below, or send them to [email protected]
