Wake up South Africa! You don’t have it that bad…
The recession has left its mark on consumers and businesses alike. South Africa Inc shed more than a million jobs through 2009 as companies went into survival mode. Motor manufacturers and home builders have traded through an unprecedented slowdown and ar
Gardiner’s first observation was that 2009 was characterised by strong equity markets. South Africa’s JSE All Share index hit lows in March 2009 before powering ahead with a 58% US-dollar return. The speed of the recovery caught many investors off guard. Those who stuck with equity portfolios were over the moon as their asset values recovered, while those who chose to sit out the turbulence rued missed opportunities. Notes Gardiner. It started as a dead cat bounce – turned into a bear market rally – and no there’s talk of a full-blown bull market... “The first quarter of 2010 has seen a welcome dose of reality return to global markets,” said Gardiner. As we listened to talk of looming debt crises among European Union member countries and the abysmal ten-year economic performance in the US we had not choice but to conclude: South Africa doesn’t have it that bad!
World Cup fever mounts
One of the kickers for the domestic economy is the 2010 FIFA World Cup ™. South Africa has confounded the sceptics by completing massive infrastructure projects and work on the required stadiums in good time. In completing most projects ahead of deadline we’ve shown a middle finger to the doomsayers. Wembley Stadium in the UK was completed 18-months late, the Germans were putting finishing touches on their stadiums just three weeks before kick-off – and the Greeks were still working on the eve of the Olympic opening ceremony. “We need a nationwide effort to get South Africa to buy into the World Cup,” said Gardiner.
This buy-in is important for two reasons. The first is for South Africa to address the ‘third world’ label given it by many countries around the world. Gardiner says visitors will be quite surprised by the first world level of infrastructure they see in this country. And the second is to address issues of fear. Hosting the event gives South Africa an ideal opportunity to reach new tourist markets. The tournament is like a month-long advertisement beaming out to more than a billion soccer fans worldwide. “2010 will be like Christmas in June,” said Gardiner, adding that Port Elizabeth airport would handle as many as 30 000 arrivals a day, up from 3 000. He expects 2011 will be the real tourism boom as the world responds to the marketing and comes to see what South Africa is all about.
The Hong Kong of Africa
Infrastructure projects in the run up to the world cup have already had positive spin offs. Local construction companies have gained invaluable experience in stadium construction and will undoubtedly be able to ‘export’ this knowledge to future host nations. International partners have realised South Africa is the perfect stepping stone to the rest of Africa. Gardiner observed that the country should position as the Hong Kong of Africa. Hong Kong was for many years to the gateway to China’s massive manufacturing potential.
South Africa’s potential reflected in the economic variables through 2009. The local currency was a star performer, beginning the year at R9.47/$ and ending at R7.40/$. What helped the rand to second place – the Brazilian Real took gold – in 2009? There are a number of factors including the return of risk appetite, strong foreign capital inflows, rising commodity rates and strong carry trade. Whether chasing investment return or yield, foreign investors have backed South Africa with their hard-earned cash.
Long periods of rand strength present local investors with plenty of opportunities. “It is not a bad time to diversify some funds offshore,” said Gardiner, adding that the rand wouldn’t always be this strong! South Africa’s economic recovery is going to be sluggish due to the business and consumer confidence issues raised in the opening paragraphs. Unemployment is a major concern and its unlikely consumer spending patterns will revert to ‘normal’ with the threat of further job cuts looming.
Uncle Sam’s big zero!
Where should investors go if they expect the rand to fall? One approach is to stay invested in local equities with rand hedge potential. Companies with large offshore earnings typically outperform their domestic peers when the rand slides. A second option is to move some of your assets into US equities. It’s a brave move, but one you won’t regret ten years hence. The reason is US equities look set for a boom period as the country recovers. The US has never experienced a decade like the last. As a country it showed zero job creation, zero gains on homes and zero gains on stocks. To make matters worse 45% of all homeowners owe more on their primary asset than what its worth. This decade was “not what Americans or the world were expecting from the US at the end of the roaring 90s,” noted Gardiner.
The US Federal reserve took centuries to create its first $1trn in debt – Bernanke did it in less than four! But government is stuck between the proverbial rock and a hard place. They will have to continue spending to keep the economy afloat. If they direct this expenditure in the right areas US equities should be in for an improved decade.
Editor’s thoughts: A number of analysts share Gardiner’s view on the rand. The currency cannot stay strong forever. At levels in the mid-700c/$ it makes sense to bolster your offshore investment portfolio. Have you invested money in US equities recently? If yes, then what was your preferred financial instrument – direct, unit trust or exchange traded fund? Add your comments below, or send them to [email protected]
