Economic downturn provides opportunities to buy businesses in SA

South Africa is comparatively better positioned for economic growth over the next few years says Horizon Capital CEO, John Witter. In fact, now is the right time to start looking to buy a business according to the investment specialist.

What Witter describes as a mere cyclical downturn in SA made worse for industrialised countries by the sub prime crisis, is an opportune period to look into investments in developing countries such as South Africa.

"The second half of 2009 should see markets begin to normalise," Witter predicts. "It started on a more positive note with inflation expectations dropping and the prime interest rate commencing a downward spiral on the back of lower inflation and vastly reduced gilt rates. In most cases, corporate profits are also lower than in 2007 and when multiplied by lower price earning ratios, prices have become much more realistic."

The country's economic climate in 2007 meant that many corporate profits were unnaturally swollen by the boom conditions being experienced in the economy. Price earning ratios of listed companies were at an all time high causing owners of businesses to demand very high prices for their businesses.

This continued into the beginning of 2008, seeing sellers clinging to high price earning ratios, whereas buyers who were very few and far between in the market, refused to pay these inflated prices given the unfavourable business conditions.

Towards the end of 2008 sellers expectations became more realistic as the high interest rates, inflation, food and petrol prices and the global recession started taking their toll on perceptions. Some had entered into other commitments and now needed to sell, others realised that after a year on the market they had received no offers and that they would not achieve the high prices they had previously hoped for.

"Buyers are starting to feel more positive, seeing the upside in the South African economy, especially once we have passed the election and start moving closer to 2010," explains Witter. The recovery in the economy should start to be seen as interest rates go down - a drop predicted to be as much as 4-5% to get back to the 10-11% levels. "This is thanks to the good faith associated with the Lions tour, Confederation Cup and Soccer World Cup down the road, the Governments infrastructure programme, the strength of South Africa's Banking sector and Eskom's infrastructure programme," Witter finishes.