Category Investments

Nothing is smooth…

07 January 2005 Angelo Coppola

Neels van Schaik at Alphen Asset Management, says that the crux is that business cycles do exist in all their glory, which has a profound impact on profitability, job creation and prosperity in general.

It becomes much clearer when reminded of the circular flow between households and businesses, and product markets and factor markets. The one in essence feeds the other, which is of course all determined by supply and demand.

Bear in mind that this is pretty much how the theory works, which means that the picture can get hugely distorted by one country's dependence on imports as well as another's highly regulated markets.

One thing people often forget is that you have short cycles within secular cycles. In South Africa's case, for example, I am of the opinion that we entered a secular upswing in economic growth about a year or two ago.

This does, however, not mean that we would not see any cyclical dips in this prolonged period of prosperity. In fact we are already seeing a slowdown in manufacturing after the bumper third quarter economic growth, when all areas of the economy were running on full throttle.

GDP revisions from Stats SA and a movement in the base year, which is in line with statistical best practice, contributed to the growth rate for 2003 being revised up to 2.8% from 1.9%, and the third quarter seasonally adjusted annualised rate improving to 5.6% quarter-on-quarter.

This is of course a much better reflection of the underlying activity in the economy.

These revisions have brought South Africa more in line with our emerging market peers and is probably one of the key drivers for the capital flows into our financial markets as well as the economy in general.

On the consumption side of the economy the consumer still reigns supreme contributing around two thirds to economic growth. Low interest rates, expansionary fiscal policy and stable, relatively low prices have all contributed to this sweet spot.

Although the momentum in final demand is likely to continue due to the structural changes taking place in the South African economy, final demand remains cyclical and so does profits.

Some cycles last longer than others, and this one will probably be one of the longer ones we have seen for a while now. Inflation is likely to remain in the middle to lower end of the band over the medium term, but this does not mean that interest rates cannot trend upwards in that environment.

We have received conflicting signals from the South African Reserve Bank in terms of the factors they analyse to conclude the interest rate decision, but then again, why have a mind if you can't change it?!

Eventually cognisance will have to be given to a growing current account deficit and rising debt levels of the consumer.

We are, however, still in a relatively comfortable space in this regard.

The catch 22 is the fact that a strengthening currency, which is driven by monumental capital inflows, also acts as a tightening measure, one which is to some extent outside the control of the Reserve Bank.

Current net purchases of equities by foreigners for the 4th quarter is sitting at almost R18bn. Credit should be given to the Reserve Bank and the Treasury for not sterilizing all of these flows. This is a lesson of course that the Japanese still have to learn.

Interest rates will only rise in the latter part of next year, which will probably be because of overheated credit demand and not because of the inflation target being breached.

This will result in a slowdown in economic growth and a wobble in equity markets. The fundamentals for a long-term bull market however remain intact and the dips in the equity market should therefore be seen as a buying opportunity.

A supporting factor for the long-term growth story of this country will come from government's investment spending plans as well as the capex from the public-private partnerships.

South Africa is still operating at around 80% of production capacity and investment cycles have always been a good leading indicator for job and economic growth.

South Africa has just seen the start of this upswing, which will eventually feed through to job creation and economic prosperity.

Quick Polls


There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?


Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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