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Investments get a decent tailwind moving towards 2015

11 December 2014 Jonathan Faurie
David Crosoer, Executive: Research and Investments at PPS Investments

David Crosoer, Executive: Research and Investments at PPS Investments

In a constrained economic climate, there is increased pressure on investors to identify ways in which their client’s investments can become profitable. We all know about the strength of investment diversification, therefore we should look at current trends in the market to kick start profitability in the new year.

David Crosoer, Executive: Research and Investments at PPS Investments, said that the last quarter of the year was characterised by weakness in the South African equity markets, after the All Share Index failed to hold onto the all-time highs reached in the previous quarter. He added that the weakness in the commodity, foreign exchange and credit markets with the knock-on effects of the micro-lender African Bank (ABIL) being placed under curatorship in August was felt across the market.

Good overall performance

Despite being relatively protected from the worst effects of the global financial crisis, South Africa has felt the pinch in the protracted recovery from the crisis. We are all waiting for a cloud with silver lining, and it seems as if there has been a few glimmers of hope for investors.

“Over twelve months, financial markets have delivered strong returns with international equities (up 25%) and local equities (up 18%). Over the quarter, South African property (up 7%) and international equities (up 4%) continued to perform strongly, while South African equities (down 0.5%) and resources (down 6%) in particular, fared poorly against the backdrop of the falling commodity prices and a weak rand,” said Crosoer.

He added that households have repaired their balance sheets to some extent. Over the year, household debt-to-income was 83% in the first quarter of 2009 and 73.5% in the second quarter of 2014. However, household consumption expenditure has come under pressure recently.

Are we losing face?

There has always been an undercurrent of fragility that has been associated with the South African economy. Since 1994, we have been seen as a beacon of light for African democracy and African economic growth. However, the inability to create jobs is jeopardising this view.

“The private sector has only created 162 900 of the 449 100 jobs it shed in 2008/9, with government being the major net contributor to employment over this period by creating 256 900 public sector jobs. Both the mining and manufacturing sectors are still shedding jobs, and the planned infrastructure spend - aimed to alleviate bottlenecks in the economy - is hardly off the ground,” said Crosoer.

He added that, given the weak mining, manufacturing and burgeoning public sectors, the current account deficit has worsened again to more than 6% of the Gross Domestic Product (GDP).

Can the Reserve Bank cope with growing pressure?

A challenging economic outlook has resulted in the South African Reserve Bank (SARB) cutting its economic growth forecast five times this year. SARB now expects the South African economy to only grow to 1.5% by the end of 2014.

“The Monetary Policy Committee (MPC) of the Bank increased interest rates by 0.25% at its July meeting, but left rates unchanged in August. SARB has raised interest rates by a cumulative 0.75% between January and November this year,” said Crosoer. This indicates that the bank is aware of the pressures consumers are under and is trying its best to protect them against slow economic growth.

Crosoer added that the slightly better-than-expected inflation outlook has given the bank some legroom not to raise rates as aggressively as initially expected, and the market is pricing in another 1% in interest rate increases over the next 12 months.

Our troubles are not isolated

“South Africa’s weak economic recovery should be seen in the context of a global economic recovery that is also weaker than initially forecast. The International Monetary Fund (IMF) in October this year once again revised its expectation downwards for global growth in 2014 and 2015,” said Crosoer.

He added that the IMF now expects the global economy to grow by 3.3% this year (and emerging markets in aggregate by 4.4%), considerably less than its October 2013 World Economic Outlook forecast of 5.1% for the global economy (and 5.7% for emerging markets). South Africa’s 5% growth targets look very ambitious in this context unless profound structural reforms are initiated.

Editor’s Thoughts:
The growth of the South African economy in 2015 will be underpinned by the country’s infrastructure. This will depend a lot on Eskom overcoming its current problems, because the current interruptions in electrical supply are not doing the country’s economy any favours. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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