Forget the gloom and invest for the boom times!
Last week we attended a round table discussion hosted by Sanlam Private Investments (SPI). The panel included Daniel Kriel (chief executive SPI), Alexandre Tavazzi (asset allocation strategist at Swiss bank Pictet & Cie), Kokkie Kooyman (head of Sanlam Investment Management Global) and Alwyn van der Merwe (director of investments at SPI). The topics ranged from the stability of the international financial system, to speculations on the stability of some of the country’s major financial institutions, to the outlook for the domestic economy.
In today’s newsletter we’ll focus on the key points made regards prospects for the domestic economy. There’s no doubt South Africa is in the firing line as its major international trading partners take strain. Van der Merwe reminded us that “global activity is under pressure with export sectors like mining and selective manufacturing” bearing the brunt of the slowdown. “The pressure on the manufacturing sector was very evident in the release of the February manufacturing production numbers suggesting an 11.1% decline on a year-on-year basis,” said Van der Merwe.
The ugly side of softer demand
This sentiment was confirmed by the results of the latest Bureau for Economic Research (BER) manufacturing survey. Their manufacturing business confidence index has almost halved since the final quarter of 2008 – from above 30 points to just 16. “The unprecedented pace of decline in international order volumes in particular is testament to the abrupt halt in foreign demand,” said BER economist Christelle Grobler. This international fallout coincides with one of the most difficult periods for South African consumers on record. The two-year long period of rising interest rates has left many of us struggling with record levels of debt. Arguably the worst hit local sector is the motor vehicle industry, where new passenger car sales have plummeted to levels last recorded in the 1980s.
This negative manufacturing sentiment has a knock-on effect on every section of the economy. As sales volumes decline, manufacturing institutions have to take action to ensure their survival. Grobler says “survival mode [has] kicked in, with producers shifting fixed investment plans to the bottom of their agendas.” This trend is repeated at many of the country’s major resources companies. Anglo American recently announced major reductions in mine development and exploration, while Sasol slashed its three-year capital investment projects by around 40%. Job cuts are inevitable as large corporation struggle to balance revenue and expenses and maintain profit margins.
Taking the fight to tough business conditions
Local regulators are doing what they can to soften the blow. Van der Merwe notes that “economic authorities have used all the tools available to provide relief to the ailing economic activity.” The most obvious intervention comes from the South African Reserve Bank which has cut rates by 150 basis points in recent months. We expect another 100 basis points when the Monetary Policy Committee reports back later this afternoon (24 March 2009). Although many accuse the Reserve Bank governor of acting too late we applaud him for sticking to the central bank’s monetary policy stance. A disciplined macro economic strategy is more rewarding than the knee-jerk reaction many have been calling for.
The other plus is that government remains committed to infrastructure projects and has confirmed massive public sector expenditure in the 2009/2010 budget. These projects should underpin many sectors of the economy to 2014 and beyond. We refer to major road, rail and electrification projects currently underway – including soccer stadiums for the 2010 world cup and Gautrain.
Consumers can look forward to more interest rate relief in coming months, provided the inflation outlook improves in line with expectations. And there’s also the possibility that government comes to the rescue of ailing industries through specific financial interventions.
Long-term outlook yields best result
Although technical recession is already confirmed, we shouldn’t have to wait too long for an economic revival. Van der Merwe says we should see a lightening of economic conditions in the second half of this year. Consumers should return to the fray as lower inflation and interest rates take hold – and this impetus should continue through 2010. The best advice for investors right now is to stick with their long-term plans. He believes property and equity (where valuations are starting to look attractive) will provide the best return on a three year view.
“Markets go through cycles and investors should try to stay in the markets, while structuring their portfolios accordingly. We’re going to experience a tough few months, but before the end of the year, we are likely to see a less gloomy picture. The signs are there. The key is to read them and invest smartly with a view that suits your risk profile and investment objectives,” concludes Van der Merwe.
Editor’s thoughts:
With so much economic opinion doing the rounds it’s difficult to know who to believe. When shares go higher, half the analysts declare the end of the bear market, while the rest warn of a bear market rally. Do you agree that the local recession will be of short duration and that the economy will be firing on all cylinders in 2010? Add your comments below or send them to [email protected]
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