South Africa's headwinds are economic, not political
Nov 06, 2009
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South African stocks have lagged most other emerging markets this year, despite the JSE All-Share index rising by around 20%. But this isn't due to the political risk many feared would be a major problem after Jacob Zuma was elected president in April. He owed his rise to the ruling ANC's Communist and trade union allies.
The worry was that they would insist on the previous government's steady and prudent fiscal and monetary policy being replaced with an inflationary spending spree that would destabilise the economy.
Although Zuma's allies still insist on a lurch to the left, any changes so far have been largely cosmetic. Overall, the country looks set to continue on a "pragmatic course", says Richard Lapper in the FT. Last week's budget certainly didn't point to a radical break with the past, says Bank of America Merrill Lynch. It signalled "ongoing fiscal prudence" and the Treasury's commitment to inflation targeting, which the unions "continue to rail against".
But while the political backdrop looks positive, there are other headwinds for stocks, says a Morgan Stanley note. The economy is gradually following other emerging markets out of recession, but the momentum is likely to remain slow. One problem is the rand. It has gained 30% on a trade-weighted basis this year and is also up 18% against the dollar.
A revival in global risk appetite and relatively high interest rates has bolstered the appeal of commodity currencies. That's bad news for exports, worth 30% of GDP. Some firms are already concerned about "irreparable damage" to their competitiveness. But consumption, 60% of GDP, isn't going to rocket either, due to rising unemployment and sharp recent falls in disposable income growth.
Note too, says Morgan Stanley, that unlike other major emerging markets, South African downgrades of earnings estimates still outnumber upgrades. And profit growth next year is expected to be comparatively low. Yet the market is more expensive than many of its faster-growing peers. Investors should "wait for a better entry point".
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