What does the rest of 2009 hold for South Africa?

"History doesn't repeat itself, but it does rhyme” - Mark Twain

2008 is a year that will go down in history. The “live now, pay later” lifestyle culminated in the worst global financial crisis and subsequent world recession most investors have yet lived to experience. The year saw large scale failures in the banking system. Confidence and trust were eroded almost completely, not only between clients and their banks, but also between bankers themselves. This has left approximately 60% to 70% of world economies in a recession, including the US, Germany, UK, and Japan. While many developed and undeveloped economies have been severely impacted by the global meltdown, South Africa has not been left unscathed.

Economic activity over the last two quarters in South Africa has slowed substantially; particularly consumer spending and export activity. The first half of 2009 has been tough. Uncertainty and volatility has permeated the financial markets and political state of the economy. Looking ahead, some believe we could begin to see economic recovery as soon as the latter part of 2009 going into 2010. Declines in consumer inflation (leaving room for further interest rate cuts), planned fiscal stimulus and increased infrastructure spending in the build up to the Soccer World Cup in 2010 all bode well for economic recovery.

However the verdict is still out. The current economic, business and investment environment remains extremely challenging as equity markets have taken a beating, key commodity prices have fallen sharply, (with the Economist Metal Price Index down 51% in Dollar terms during 2008) and South Africa’s current account deficit is still a significant risk to the rand. Corporate earnings in SA are at risk, with much room for further disappointment. On the contrary an economic recovery could take longer than expected.

Given this uncertainty and intensified investor fear, we can at best expect further volatility in our equity market in the short to medium term. However, many commentators believe that a prolonged recession (or even a depression) has already been priced into the equity market. If history is anything to go by, our equity market will recover and if the recovery is anything like past recoveries it will be swift and strong.