Although the economic outlook for South Africa is decisively more bullish in 2003 than developed economies, potential curveballs could manifest and adversely affect the economy.
That’s according to Martin Jankelowitz, head of economic and markets research at multi-manager Investment Solutions (SLU), who cautions that some indicators need to be monitored closely.
“Currently, we are seeing the development of a negative sloping yield curve which usually implies a slow down in economic growth a year down the line. The yield curve indicates that short-term rates need to come down or growth will slow,” explained Jankelowitz.
“South Africa’s leading indicators, which although are currently indicating positive growth, are also pointing to a deceleration in momentum.”
Jankelowitz believes that the most significant area that warrants close monitoring is a strong rand.
“Rand strength is a double-edged sword: it helps bring down inflation, boosts stability and confidence, but also negatively affects manufactured exports, resource company earnings as well as the offshore earnings of some of our FINDI shares. The South African market remains highly geared to a weaker rand exchange rate.”
He calculates that the rand hedge stocks make up 70% of the Alsi 40 index. “The longer the rand maintains its current strength, the more likely we are to see further earnings downgrades of our major corporates.” said Jankelowtiz.
He added that the respite provided by higher dollar prices for commodities such as gold and platinum, will be inadequate to grow earnings
“The implication of a Rand staying ‘stronger-for longer’ is that the financial & industrial counters are likely to outperform the resources counters. A strong rand will still imply at least relatively good returns for South African asset classes; the issue is simply the conduit of those returns.
There is also the possibility that perhaps certain sectors may continue to do well and those that are highly dependant on a weaker rand (and not compensated by improving dollar commodity prices) may battle a little.”
Jankelowitz adds that even with these potential curveballs, he thinks South African asset classes still remain a good bet for 2003. – I-Net Bridge