SA's consumer and infrastructure booms still have plenty of steam
The strong expansion in both consumer and investment spending underway in SA still has some way to run, underpinned by numerous positive macroeconomic factors, according to Old Mutual Investment Group (SA) (OMIGSA). And although household spending growth is likely to slow from the heady pace of the past three years, accelerated government infrastructure spending should help fill the gap, helping to sustain the country's growth in gross domestic product (GDP) at around 5% a year over the medium-term.
SA's real household spending growth (as measured by household consumption
expenditure (HCE) has averaged 6.9% year-on-year growth over the past
three years, compared to only 3.0% y/y in the two preceding decades. At
the same time, investment spending growth (as measured by gross fixed
capital formation (GFCF)) has accelerated to 10.7% y/y on average between
2004 and 2006, compared to only 1.1% y/y between 1980 and 2003.
OMIGSA chief economist Rian le Roux says he believes that the impact of
key macroeconomic changes in recent years, including strong global growth,
deep structural adjustments in the local economy and growth supportive
macro-economic policies over the past four years, have not been
sufficiently recognised as driving forces behind these spending booms.
"We have achieved macroeconomic stability and predictability, which in
turn has benefited the consumer through strong income growth thanks to job
creation, tax cuts, strong company earnings, faster growth in investment
income and improved balance sheets through the strong growth in house
prices and equities. As a result, consumer confidence remains near record
highs and this optimism has lasted far longer than at any other time in
the past 20 years."
The absence of shocks from politics, inflat ion, the exchange rate and
other economic policies has also been an underrated factor, notes Le Roux.
Relatively low interest rates and strong household balance sheets have
created favourable borrowing conditions, and a strong rand has helped
combat inflation, making goods more affordable.
And although household debt levels have been building up quickly, he
points out that consumer interest burdens remain under control, with
interest payments still at less than 10% of after-tax income and household
debt actually falling as a percentage of assets to 16.6% from a peak of
17.8% in 1995.
The past three years have seen strong positive contributions from all of
the principal factors influencing household spending: income growth, asset
growth, policy support, an absence of shocks, favourable consumer durable
pricing and favourable borrowing conditions. Le Roux says there is no
reason why these trends shouldn't continue. "We do expect sustained solid
consumer spending going forward, albeit less robust than in the past three
years." He adds that with structural GDP growth of around 5% a year likely
to continue, structural HCE growth of between 4% and 5% is possible over
the medium-term.
When it comes to fixed investment, the private sector has already been
spending heavily on many projects, driving the acceleration in fixed
capital formation to its current buoyant 10.7% growth rate. The public
sector has only just embarked on its own infrastructure drive, observes le
Roux.
"Thanks to its improved fiscal position, the government is finally able to
commit substantial amounts - some R460bn through 2014 - to improve and
expand the country's infrastructure after two decades of underinvestment.
Underpinned by this, we believe GFCF growth of 10% or more is sustainable
for the next three years, thereafter slowing to between 5% and 8%."
Key risks to sustained consumer and investment spending include a further
w idening of the current account deficit, rising inflation and capacity
constraints in the economy, he cautions. "We are dependent on large
capital inflows to finance the deficit, and this financing could become a
problem at some point. At the same time, consumer inflation may now be
well contained, but investment costs (at the capex level) are rising
rapidly. At some point there is certain to be a cyclical downturn, but
these cycles should be more moderate than in the past."
What does this sustained spending scenario mean for investments? According
to Jeanine van Zyl, OMIGSA's Head of industrial sector research, the
"obvious" choice of construction shares is no longer a wise one. "We
believe most shares in this sector are fully priced," she says. "Their
prices are discounting strong order books, which we already know about,
and it is not easy for the companies to add capacity."
She points out that local construction shares' price-earnings (PE) ratios
are already trading at a huge premium relative to those of the broader
financial and industrial sector. And when compared to other countries with
similar investment booms, local market pricing is quite high.
"SA construction shares are trading at a PE relative of 1.45 times, while
GFCF is around 19% of GDP. By comparison, in Australia construction
shares' relative PEs are below 1.5 times, but their GFCF is at 26% of GDP.
In Spain, the construction sector is also at a 1.5 times PE relative, with
GFCF above 31%. Finally, in the US, where GFCF is similar to SA at around
19% of GDP, construction shares' relative PEs are at 1.45 times."
OMIGSA's view is therefore rather to invest in downstream industries
benefiting from the infrastructure boom, including the cabling, circuit
breaker and steel industries, Van Zyl advises. Companies supporting the
corporate sector should also outperform, such as those providing
technology and office automation.
"Consumer-related shar es will also continue to benefit from high consumer
and investment demand, and many of these aren't looking expensive," she
comments. "These include semi-durable and durable retailers, cellphone
groups, and gaming and leisure operators. Other excellent opportunities
are in strongly growing areas like security and placement companies
