SA lags in global growth cycle

2013-10-20 14:00

A softer world economy and weak domestic business confidence are insufficient to create desired levels of employment locally

In a world riddled with challenging economic circumstances and with some of the biggest economies in the world under siege, investors are struggling to find a good place to put their money.

The global economic outlook remains dim. According to data from Barclays Capital, GDP globally is expected to grow by only 3.5% next year, while developing markets are expected to grow at 5%.

But South Africa’s growth will not match that of its developing-market peers. Absa Investments this week said South Africa’s GDP would grow by only 2.5%.

Craig Pheiffer, the head of private client asset management at Absa Investments, said: “A softer global economy and weak domestic business and household confidence are expected to keep GDP growth at low levels, below potential, and are insufficient to create the desired levels of employment.”

Pheiffer also said GDP expectations for developing markets had been reduced as a whole, even in China, which for a long time had been the beacon of extraordinary economic growth.

“Slower growth in China is an intended result of efforts to rebalance and upgrade the economy, but they have challenges from overcapacity, local government debt, shadow banking and external shocks,” he said.

Pheiffer said he expected China to grow at 7.1% next year, from 7.6% this year.

With the global economic outlook still looking weak, where are investors looking to grow their money?

Chris Gilmour, an analyst at Absa Investments, said fund managers still believed there was a lot of value in foreign markets. But while the corporate-earnings growth outlook for companies in the US was positive, it wouldn’t be spectacular.

“A lot of the growth we have seen out of US corporate earnings has been cost-cutting, but growing the top line has been a problem. Although many US companies have operations in emerging markets, earnings forecasts in these markets have been scaled down, especially in China,” said Gilmour.

He said shares on the JSE had been reaching record highs, but for the past two months dividend growth overtook earnings growth in South African companies and this signalled “a vote of no confidence” in South African companies.

“Companies are showing very little growth and are essentially saying to shareholders that the shareholders can do more with the cash in their hands than the company can,” said Gilmour.

He said deep value in quality stocks was becoming increasingly hard to find.

Gilmour did suggest investment in retail companies, including Mr Price, Shoprite and Woolworths.

While Pheiffer said the weak rand might not be helping our manufacturing sector, Gilmour said it might help rand hedge stocks such as British American Tobacco, SABMiller and Richemont, and should also benefit stocks such as Sasol and tourist-related stocks such as City Lodge and Tsogo Sun.

But Absa Investments was not optimistic about construction companies and conglomerates.

Gold mining stocks were also not attractive at the moment, according to Gilmour, who said that even the gold exchange-traded fund had lost its lustre.

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