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Is this irrational exuberance?

22 November 2007 BDO Spencer Steward

It may well be, says Rhodes University Tax Professor and well-known columnist Matthew Lester (pictured right), speaking at a recent BDO Spencer Steward function. Here’s how to play it smart and safe in 2008.

It’s not easy being an emerging economy, what with interest rates that change direction depending on US consumers’ appetite for shopping and the apparently unquenchable thirst of the oil-guzzling-fire-breathing dragon that is China. As we prepare to welcome the New Year, it appears the only certainty is economic uncertainty, and those who wish to enter 2009 smiling will need to read the signs of the times and tread very carefully.

How high will they fly?

South Africa’s interest rates are on the up and up again, although according to Rhodes University Tax Professor Matthew Lester, we’re unlikely to see the super-high rates of the late 1990s.

“The past few years have seen generally lower interest rates under the watch of Reserve Bank Governor Tito Mboweni,” says Lester. “But he’s fast running out of options and regrettably the only way forward for the foreseeable future is up.”

The boom in US consumerism since 2001 has been one of the greatest contributors to our lower rates, although now American spending appears to be slowing down, reducing the demand for raw materials from South Africa.

“This, however, is not the main reason that Mboweni is being forced into a corner,” says Lester.

His real problem is thick and sticky…and we’re not talking about any presidential candidates.

Black Gold

In 2002 oil cost around $20 per barrel. Now it’s close to the $95 mark and it’s showing no sign of slowing down. But, according to Lester, the particularly disturbing development is that where oil prices usually drop back at the beginning of winter once the northern hemisphere has stocked up on oil ahead of the cold weather, this year the price has not dropped.

“Oil is dissolving our foreign exchange, leading to a situation where Mboweni is forced to raise interest rates in order to attract more forex into South Africa,” says Lester.

It’s not just oil that’s the problem, however. Massive expenditure on capital equipment, cheap overseas cars - and basically, cheap everything - is putting a lot of pressure on the Reserve Bank Governor.

“The volume of imports is overwhelming and the cost of oil, coupled with a downward trend in South African consumer spend, is just making things worse,” says Lester. “And with the presidential debate coming up and the accompanying uncertainty, chances are that Mboweni will have to raise interest rates even more. He really doesn’t appear to have a choice.”

Is property still a sure thing?

It depends on who you speak to and which graph they’re waving in front of your nose, says Lester.

“The ubiquitous ABSA property index, used by every estate agent who wishes to add a little pressure to a sale, is misleading because it doesn’t show the volume of transactions,” says Lester. “But if you dig a little deeper you’ll find that the 18 month property boom which started around 2003 has been over for quite some time. The property market is well and truly overcooked.”

According to Lester, if you’re serious about making a decent return on your property investments, you should forget about trying to make a quick buck off the back of 2010 and investigate commercial property where you’re likely to make real money over the long term - say 20 years.

Equity anyone?

As with investing in the property market, investing in the equity market carries the same health warning – don’t do it unless you’re happy to avert your eyes while the market dives and wait patiently for it to rise, as it always does, over the long term (10-20) years.

“If you want a return in under three years, stick with cash products; if you want to be a bit more adventurous with bonds or shares, it’s going to be closer to 10 years before you get a good return.”

“When it comes to investing in the equity market, South Africans need to stop switching so darn much and learn that patience reaps the greatest rewards,” adds Lester. And if you really want to make 25% return or more, you had better start getting lucky with the horses, he advises.

Uncertain Times

As Finance Minister Trevor Manuel predicted in 2006, it appears that the financial flows that have been benefiting us up to now are beginning to swing away from emerging markets, says Lester.

“We seem to be entering a time that’s reminiscent of the 1980s, the only difference being that the Cold War has been replaced by the war in Iraq.”

The US has been dropping interest rates to encourage spending, but the turnaround is not happening fast enough. Also, US consumers have continued to borrow on their properties, but now that property prices are slowing down, they’re forced to curb their spending with the result that US orders for imported goods from China and India have dropped too.

As an emerging economy, South Africa is vulnerable to catch Asian flu when the US sneezes:

“Reduced orders spell trouble for South Africa because basically, we dig for China and India, and if we’re exporting less, our forex levels drop too, again placing pressure on interest rates,” says Lester.

And with no control over an oil price that’s likely to keep on rising as Asian growth increases (there aren’t enough refineries to supply oil demand), the government has little choice but to adjust interest rates as the primary tool for keeping a lid on inflation…leaving Tito with one very earnest request for Santa Claus this Christmas – a super-sized festive shopping spree for America.


Matthew Lester’s top tips for 2008:

* Curb borrowing
* Invest over the long term
* Get a currency hedge
* Limit exposure on the property market


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