South Africa Inc is still picking up the pieces

Gareth Stokes, FAnews Online Editor

A recession is supposed to be over in a flash… If you consider long periods of economic growth data then the red blips are few and far between, and usually of short duration. A look at US GDP data spanning almost 150 years (courtesy wikipedia.org) suggest

The sub-prime mortgage crisis landed at the tail end of one of the strongest periods of local economic growth ever experienced. Statistics SA reports annual GDP growth of 2.7% in 2001… And Over the next seven years (ending 2008) our economy grew at 3.7%, 3.1%, 4.9%, 5%, 5.4%, 5.1% and 3.1%! Sub-prime was only felt domestically from Q3 2008 when South Africa officially entered recession… We suffered significant GDP contraction in Q1 2009 (-6.4%) and Q2 2009 (-3%)! A US-based hiccup quickly impacted on economies around the globe and effectively put paid to our run of 62 quarters of uninterrupted economic growth. Stock market investors were the first to feel the impact of this recession as the JSE All Share plummeted from its 22 May 2008 high of 33233 points to just 21509 by 31 December 2008.

Everything hinges on economic growth

Economists say our recession ended in Q3 2009, a year during which annual GDP contracted by some 1.8%. South Africa Inc has since grown at 2.8% (2010) with 3% pencilled in for the current year. Stock markets have certainly spruced up since the dismal lows of March 2009 too, with the All Share providing positive – albeit disappointing – returns in 2009, 2010 and year to date 2011. Unfortunately 2012 promises more of the same. Jeremy Gardiner, a director at Investec Asset Management, paints an extremely bleak picture in his searching article titled Credit Crunch II – coming soon to a bank near you? What a difference a year makes, he begins…

Toward the end of 2010 we were basking in the glory of a successful World Cup… We shrugged off concerns over government debt in the so-called PIGS (Portugal, Italy, Greece and Spain) and focused instead on the positive prospects for emerging markets. South Africa – we reckoned – would skip through the difficult post-recession global economy on the back of its new found emerging market peers Brazil, Russia, India and China (BRIC). “A year on, and the world has changed substantially. The outlook has moved from uncertain to unpleasant. Talk of an imminent Lehman-style collapse is everywhere and solutions seem remarkably thin,” writes Gardiner… As a result markets have become incredibly volatile… Investors are slaves to their emotions – selling on fear – and buying back into the market whenever this fear abates slightly.

An interconnected world

What can stock market investors expect through 2012? The local market – and our economy – hinge almost entirely on the West resolving their debt woes. Gardiner identifies two possible scenarios based on how the Euro-zone sovereign debt crisis plays out. In the first scenario the lack of political will and poor decision making by European politicians and central bankers results in “one of the affected countries defaulting” on its debt. The result would be catastrophic. “In this world, everybody would become risk averse. Big investment funds would pull their money home, primarily to Europe and the US, but particularly out of emerging markets,” he says. We would find ourselves slap bang in the middle of an emerging market crisis with our currency in freefall... Under this cloud the JSE All Share index could even repeat the 46% ‘peak to trough’ slump between the high of May 2008 and subsequent low in March 2009!

A kinder scenario “is one in which Europe muddles along, putting out one fire at a time, possibly ejecting a few countries from the Euro-zone and implementing a common fiscal system with a defined set of rules for both borrowing and spending,” says Gardiner. “In this world, American and European investors, who in the nineties saw no need to invest anywhere but home, will be starved of growth and yield and venture forth into countries and markets that look more exciting.” He reckons the rest of Europe should benchmark against the German economy, arguably the strongest in the Euro-zone bloc at present. Although the common monetary area brought many benefits to the member countries it also prevented economies from developing country-specific monetary and economic policy. South Africa, thanks to our strong trade ties with both emerging and developed markets, would experience slow but steady growth under this scenario.

Gardiner’s conclusions are anything but rosy. He points out that the Greek debt to GDP will hover around 120% for the next decade… European taxpayers will have to service additional debts created by the massive bailouts, delaying any consumer-led recovery indefinitely. This will place a damper on world GDP prospects too.

What should investors do?

It looks like 2012 will be another tough year for financial advisers and their clients. Insurance sales typically grow in line with the overall economy – and with South Africa forecast to grow at between 3% and 4% over the next two years sales are likely to remain sluggish. To add to the rather sombre mood investment returns will be muted too. We are deep in so-called “new normal” territory with every asset class struggling to provide decent inflation-plus yields. The temptation is to sit on the fence in bonds and cash… But it’s a dangerous strategy because of the poor yields in these financial instruments coupled with the risk of missing out on any recovery rally. “For this reason individuals are better off in balanced funds, where the professionals can make the decision as to when, where and how to phase back into the market,” concludes Gardiner.

Editor’s thoughts: South Africa is one of many economies built around consumption expenditure. Trouble is, in recent years, the state is responsible for more of this spending. Although our government debt as a percentage of GDP is still manageable we are setting off in similar directions to many of the European countries that are in debt difficulties today. Should we be lobbying government to reconsider our social welfare spending before it is too late? Please add your comment below, or send it to gareth@fanews.co.za