South African stocks set for a long boom

By Markets Editor Andrew Van Sickle Jun 09, 2006

Andrew Van Sickle

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South Africa may be heading for winter, but spring is in the air in the stock market. The JSE All-Shares Index, up 20% last year, has climbed another 10% in 2005 to a record peak. The latest gains were fuelled by Barclays’s takeover of Absa – deemed a vote of confidence in the economy as it is the largest investment in South Africa since the demise of apartheid – and the sliding rand. It has declined by 17% against the dollar, giving South Africa’s export-reliant natural resources companies, which comprise a third of the index, a boost.

But there’s more to the South Africa story than the rand and the commodities boom. According to Dave Foord of Foord Asset Management, growth is set to move up a gear, underpinning a market boom likely to last another three years. Previous growth cycles were export-led, says Foord, but now South Africa has embarked on its first consumer-led growth cycle.

The government has contained inflation, which has lowered interest rates, thus boosting consumption and property prices amid an expansion of the black middle class; retail sales have been rising at an annual rate of 10%. And now the government, having kept spending under control – the budget deficit is under 2% of GDP – is in a position to begin a long-term investment programme in housing, education and infrastructure. This should extend the current growth cycle; having averaged 3% over the past few years, GDP growth should rise to 5% over the next five. Valuations, meanwhile, still look modest, with the industrial, financial and consumer-orientated stocks on forward PEs of just nine. Throw in further gradual rand depreciation from its current historically high level, and the bull run is far from over.

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