Who turned off the lights?

As February 2008 draws to a close, there is one prominent cry that dominates investment circles. "The party is over." The unprecedented five year boom in equities and house prices which helped GDP growth near 5% has sung its last.

Instead of the year-opening stock market surge that greeted investors in 2005, 2006 and 2007 the New Year has started on a more sombre note.

JSE plummets on global concerns

Local equities were heavily sold in the first 31 days of 2008. The JSE All Share Index dropped 2 515 points to close 8.68% below its 28 958 opening level. And it is more than 16.13% off its 2007 high.

Initially this sell-off was driven by global market developments. International investors have been dumping stock on concerns that the US economy is headed for a fullblown recession. Various US indicators (including housing starts and employment numbers) indicate the country might be closer to disaster than previously thought. Making matters worse, the sub-prime mortgage crisis which gathered momentum through 2007 shows no sign of letting up. Experts believe recoveries in the banking and financial sectors in US and European markets will be on hold till September this year.

While the JSE still takes its lead from US and other major markets there are a number of domestic challenges to performance in 2008 too. Aside from developments at the ANC Polokwane conference, the major obstacle facing South Africa is the country's growing infrastructure and skills shortage.

The blame game

South African consumers will remember 2008 as the year the lights went out. Eskom, the country's state owned utility company is no longer able to meet local energy demand. It has resorted to a series of damaging power outages to avoid the total collapse of the energy network.

Exacerbated by coal supply problems and unscheduled maintenance, the situation got so bad that Eskom had to cut electricity to the country's main industrial users. Large gold and platinum mines lost almost a week's production, sacrificing revenues in the region of R330m per day. A short-term solution has since been implemented. Miners will reduce their demand by 10% in return for uninterrupted power going forward. Household consumers (and small business) will suffer 'load shedding' till the end of February, and rationing until at least July.

Government has apologised for its oversight in refusing Eskom's repeated requests for infrastructure funding. But assigning blame will not solve the problems the domestic economy now faces. It is up to electricity consumers to reduce demand by 20% as the infrastructure expenditure that should have kicked off a decade ago finally gets underway.

Economic growth targets derailed

Analysts who dismissed the electricity problem as insignificant at the beginning of the year are probably eating their words today. Eskom's appeal to government and big business to place a moratorium on power intensive developments until 2013 will prove immensely damaging.

As the extent of the problem becomes clearer, government's already ambitious plans to achieve 6% GDP growth and halve unemployment by 2014 are surely doomed. Economists believe South Africa will be hard pressed to achieve 3% GDP growth in 2008 should problems persist.

Plenty of petty politics to contend with

The New Year brings with it a changed ruling party. Jacob Zuma and his backers trounced the Mbeki faction at the ANC's Conference in Polokwane, held in December 2007. The new faction has already shown its intention to assert its will on government. Of concern to independent analysts is the return to popularity of a number of politicians convicted for post-apartheid crimes. The Mail & Guardian ran an article recently in which it revealed that "16% of the ANC's National Executive Committee (NEC) are either post-apartheid convicted criminals or suspects in criminal investigations or trials."

The NEC has wasted no time in employing defences against the possibility of large-scale criminal investigations thwarting their social delivery objectives. They have set about disbanding South Africa's most successful crime-fighting unit – the Directorate of Special Operations (DSO) more commonly known as the Scorpions.

Luthuli House versus government

Zuma, the newly elected ANC president, was quick to call for unity in the party. But his pleas are largely inconsequential as his supporters struggle to assert their authority. Those who oppose these decisions have been threatened with swift action. "If President Thabo Mbeki can take instruction from the organisation, then who are you as councillor or premier to refuse to do the same? If you do not take instruction, then you are asking for marching orders," said ANC treasurer general Matthews Phosa, addressing premiers and mayors at the ANC's 96th anniversary rally.

Consumers losing the fight

Whatever happens on the political front, consumers are in for a tough time. Latest figures show retail sales are waning.

JD Group (owner of credit furniture outlets Russells, Joshua Doore, Bradlows and Morkels) revealed a 13% decline in credit sales for the four months to 15 January 2008.

Consumers have finally admitted defeat as they feel the full impact of eight consecutive interest rate hikes since 2006. Although inflation remains high, the consensus is Mboweni will be unwise to hike rates further against the backdrop of the Eskom debacle. And consumers can hold thumbs for an interest rate cut toward the third quarter.

Short-term insurers may struggle

Short-term insurers face a difficult year. Huge amounts of rain have already caused flooding in parts of the country – and claims from power disruptions are likely to keep them on their toes. In addition, the usual cost pressures, particularly in the motor vehicle industry, will force premiums higher. Cash strapped consumers are likely to resist increases in motor, household and other personal lines insurance.

A win-lose for medical schemes

We believe medical schemes will also suffer in 2008. The year kicked off with an unlikely partnership as government and two medical scheme representative bodies tackled proposed private hospital tariff increases of between 8% and 33%. The private hospital groups stepped down and agreed in principle to limit increases to the level of inflation.

Subsequently government turned on the medical schemes bodies saying those medical schemes that had passed higher than inflation increases to their members needed to come up with a plan to reduce premiums. Players in the sector are going to struggle in the coming year as government increasingly intervenes in its quest to annex the private healthcare sector to cover shortcomings in the public sector.

Outlook for the year

The analysts we've spoken to believe we should see real returns from all investment classes in 2008. But they have warned that investors should brace themselves for substantially lower returns from equities and property. The gap between the best performing asset class (equities) and the worst performing (bonds) is likely to narrow substantially, meaning investment returns will probably be in the 6% to 16% range rather than the 6% to 40% range investors have become accustomed to.