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Cash-flush companies negative over future growth

Corporates in Africa’s most industrialised economy are so negative about future growth prospects that they’re sitting with record amounts of cash in the bank, according to Stanlib Asset Management, South Africa’s third-largest manager of domestic mutual funds.

Investment by businesses has stagnated as confidence languishes near its lowest in almost four years and President Jacob Zuma’s administration struggles to reignite an economy expanding at the slowest pace since the 2009 recession.

“It’s a very significant concern,” said Kevin Lings, the chief economist at Stanlib, which has been cutting back on South African equities and sitting on cash-like investments among the $46-billion it oversees. “The reason is fundamentally that corporates lack confidence.”

There aren’t many compelling reasons to be retooling plants or spending money on machinery or buildings. A 50% depreciation in the rand against the dollar since 2011 has made imports more expensive, and an electricity shortage, persistent strikes and the risk of slowing demand from China and sluggish economies in Europe have depressed some of the benefits to exports from the weakening rand, contributing to a contraction in the $366-billion economy in the second quarter.

Companies had R689.4-billion on deposit in South African banks at the end of June, compared with R671.5-billion in November 2014, according to data compiled by Stanlib from South African Reserve Bank data.

The rate of growth in fixed capital formation by businesses after inflation increased by 0.1% in the ­second quarter from the previous three months, when it increased 1.6%, and following a decline of 3.4% for all of 2014, the data show.

Adding to the reticence of companies to spend money in South Africa is a lack of certainty regarding government’s economic policy, including land ownership, mining rights, the availability of skills and Zuma’s commitment to implementing the National Development Plan, Lings said. The blueprint, created by former finance minister Trevor Manuel, sets out how the country can boost growth to 5% by 2019 and create six million jobs.

Companies are instead looking abroad. Truworths International this week announced it has started talks to buy Office Retail Group, a United Kingdom fashion footwear chain. That would add to a list of overseas takeovers by South African companies, including this year’s $1.2-billion acquisition of British fashion retailer New Look by Brait SE and the Foschini Group’s purchase of UK clothing chain Phase Eight. Woolworths Holdings bought Australian chain David Jones for about $2-billion last year.

“We’re worried about valuations; we’re worried about corporate earnings,” Lings said. “We would still hold equities where companies have a broad range of earnings; companies earning money in South Africa but also globally, because there’s more support for that earning base.”

South Africa hasn’t been alone among emerging markets to suffer a slump in sentiment. The FTSE/JSE All Share Index, the South African benchmark, has dropped 1.5% since June 30 to trade at 15.5 times estimated earnings. That compares with a 15% decline for the MSCI Emerging Markets Index, which trades at a forward price-to-earnings ratio of 10.8.

“When you talk about corporates not spending their money, there aren’t many opportunities on a fundamental basis, both here and abroad,” said Gavin Cawse, who helps oversee and advise on the equivalent of $8.2-billion as a Cape Town-based money manager at Nedbank Private Wealth. “It’s not unique to South Africa.”

South Africa’s economy has been hit by a worsening of labour relations in mining, which billionaire Patrice Motsepe said earlier this month is undermining prospects for an industry that employs 440 000 workers. The government has received notice that as many as 12 000 mining jobs will be cut, but labour unions say the figure could be as high as 19 000.

“You can, through policy, influence how corporates deploy their money, but unfortunately that’s not happening,” Lings said.

“This is purely business concerned about current economic conditions in the country and making actual choices not to spend more money.” – © Bloomberg News, with assistance from Simbarashe Gumbo in Johannesburg

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