What 2007 has in store for Investors
As has been the case this year, the rand, current account deficit and commodity cycle will be the biggest drivers of the markets for 2007, says Mark Appleton, Chief Investment Officer for Barnard Jacobs Mellet Private Client Services.
The recent trade numbers came in unexpectedly high and Appleton says that while the South African Revenue Services has downplayed the 12.9bn deficit due to oil stockpiling, the current account deficit is still very high. "Compared to other emerging economies our current account deficit relative to GDP is among the highest," says Appleton.
Like any balance sheet that is in the red, South Africa is spending more than it is making. Imports are outstripping exports with imports for the first eight months growing by 25.4% while exports only grew by 13.1%. While the countrys import dependency is on oil and capital equipment such as machinery and electrical products, import growth has also been driven by higher household consumption. "The consumer spending boom has seen our household debt to disposable income ratio reach all time highs," says Appleton who does however point out that due to relatively low interest rates our debt service costs have remained manageable. However recent rate hikes together with a further potential hike in February 2007 will make the consumer somewhat less comfortable going forward. The SARB remains particularly sensitive to inflation pressures at present
"We have already seen producer inflation numbers up at 10% which means the inflation pipeline pressure is building," says Appleton who says they expect inflation to average 5.6% for 2007. "The effect of increasing interest rates will tap the brakes on the economy," says Appleton who is forecasting GDP growth for 2007 to fall to 4.3%. from some 4.9% in 2006.
Against this backdrop, what should investors be doing? The market has performed well to date but shouldnt we be more cautious in a higher interest rate environment? Appleton says that their house view is that while the market is not particularly cheap, it is also not overbearingly expensive on a forward P/E ratio of just over 13.5 times. "Relative to bonds the market is in fair value territory. Certainly we expect the market to be volatile in the very short term, but longer term equities should provide returns of at least 5% above the money or bond market".
Appleton says that while the market still offers opportunities there are increased risks and investors would be advised to buy slowly into the market. "There are a number of variables in the state of flux right now such as the rand and interest rates. It makes sense to have a disciplined averaging purchasing programe in place". With regards to resource's, BJM's house view is that company earnings growth will be strong over the next 12 months but could turn negative thereafter as commodity prices come off the boil. "The sector looks more expensive than industrials and financials but the super cycle and rand uncertainly means some exposure here is wise," says Appleton.
With regards to listed property BJM are cautious in the short term due to potential interest rate hikes but forecast strong distribution growth. "Right now we prefer cash to bonds; and for income seekers, preference shares are looking increasingly attractive as new issues have depressed the market". BJM are bullish on offshore investments and believe that an offshore investment should be part of a diversified portfolio. "International equity markets have outperformed the JSE in dollar terms and international equity markets are still inexpensive," says Appleton. Some of BJM Private Clients' share picks for 2007 include BHP Billiton, Standard Bank, Reunert , Wilson Bayley, Firstrand and Richemont.
