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 MONDAY UPDATE: South Africa's all-share index scaled a record peak on Monday - climbing to 35,334,19 - as Asian shares rallied in the wake of stronger-than-expected US jobs data and emerging optimism for European action on the debt crisis.  

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Once again, South African stocks are on a tear.

Drawn by earnings growth, fat dividends and expectations of further Africa expansion, investors — particularly foreign ones — have ploughed into Johannesburg’s retailers, banks and industrials, sending the All-Share Index to another series of record highs.

While Johannesburg is home to at least a dozen companies that boast world-class management teams and an uncanny talent for squeezing out shareholder value, the latest surge in equity prices raises hard questions about Africa’s top economy.

The outlook is tempered by a raft of structural problems: woefully high unemployment, inadequate power supply, a volatile currency and a government that can’t quite seem to quell talk of nationalisation.

It is unclear whether investors have accurately priced big chunks of the equity market — especially recent favourites such as retailers — given the nagging macro risks.

"I think there’s a total mismatch between what’s happening in the country and the pricing," said John Biccard, who runs Investec Asset Management’s value fund.

"The story the foreigners buy is that South African consumer companies are in a structural up market; that there’s been a structural change, which is of course entirely fictional."

Instead, Biccard reckons that the growing spending power of many consumers comes from two places: higher government wages and grants, and the massive increase in unsecured lending to low-wage earners.

And with many reliant on South Africa’s sprawling mining industry for jobs, the outlook for consumers could worsen if commodity prices fall further.

FOREIGN SENTIMENT

Over the last 12 months nearly 50 shares on Johannesburg’s All-Share index have gained more than 30%, with retailers posting some of the most gravity-defying performances.

Woolworths, which sells clothing and high-end food and is eyeing further expansion in Africa, has clocked a stunning 70% increase, while discounter Shoprite has increased 60%.

Both are trading at heady price-to-earnings (PE) ratios: Woolworths at 26 and Shoprite at 33.

"These businesses are overarchingly being driven by international sentiment rather than domestic economic reality," said Adrian Saville, an economist and chief investment officer at Cannon Asset Managers, about retailers.

But Saville is quick to point out that while portions of the market are at inflated PE ratios, the index itself isn’t.

The All-Share is currently trading at around 13,3 times average earnings, according to Thomson Reuters data, well below its recent historic high of near 18 times in early 2010.

The South African Reserve Bank cut interest rates to a 40-year low last month and trimmed its 2012 growth forecast to 2,7%.

Finance Minister Pravin Gordhan has since told Reuters that growth could come in even lower.

That’s especially troubling when the government says it needs an annual GDP increase of about 7% to make a meaningful dent in unemployment, currently hovering at around 25%.

But even low growth is still growth, and gradual economic expansion usually translates into rising per capita income, more spending and therefore, higher corporate earnings and an increase in stock prices.

And for investors in much of the developed world, South Africa’s slow growth is a better prospect than what they can get at home.

"Whilst growing at 3% is nowhere near what South Africa requires, it’s in the right direction and it’s ahead of population growth," said Saville.

"South Africa hungers for 6, 7 or 8% growth, but global investors will take 3." - Reuters

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Sat May 25 00:29:50 SAST 2013 ::

Aug 6, 2012

Deepstick-C

All this calls for nationalisation of key industries in the rest of Africa...foreigners have cash and will dictate situations to profit without caring about citizens.

Its good to see growth within our economy but at the same time it sucks that local people are not beneficiaries of their own economy, black south africa own less that 1% of shares listed in the JSE (share incentive schemes not included). its a problem, a serious one.

So africa must nationalise, nationalise and nationalise
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Aug 6, 2012

jnrb

@ Deepstick-C

You make idiotic comments (maybe just to stir) because “Blacks own at least 28% of available shares on JSE and not less than 1% (see http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page71619?oid=259431&sn=Detail&pid=71619)
Secondly why Nationalisation is such a stupid idea: Take Tanzania as one example but there are many others . In 1961, Pres Julius Nyerere issued the Arusha Declaration, which outlined his socialist vision of ujamaa that came to dominate his policies. The policies led to a collapsing economy, systematic corruption, and unavailability of goods. In the early 1970s Nyerere ordered his security forces to forcibly transfer much of the population to collective farms and, because of opposition from villagers, often burned villages down. The campaign pushed the nation to the brink of starvation and made it dependent on foreign food aid. Nationalizations transformed the government into the largest employer in the country. This created an environment ripe for corruption. The private sector suffered from multiplying cumbersome bureaucratic procedures and excessive tax rates. Enormous amounts of public funds were misappropriated and put to unproductive use. Purchasing power declined at an unprecedented rate and even essential commodities became unavailable. A system of permits (vibali) allowed officials to collect huge bribes in exchange for the vibali. Nyerere's policies laid out a foundation for systemic corruption for years to come. In 1985, after more than two decades in power, he relinquished power to his hand-picked successor. “Nyerere left Tanzania as one of the poorest, least developed, and most foreign aid-dependent countries in the world.” See Skinner, Annabel (2005). Tanzania & Zanzibar. New Holland Publishers. pp. 19. ISBN 1-86011-216-1. The lesson you need to learn is that that GOVERNMENT BUREAUCRATS NEVER CREATE WEALTH, they only know how to spend money.

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Aug 6, 2012

ukuvusa

@ Deepstick

I get extremely annoyed at comments like yours. There is absolutely nothing stopping black people from opening a stockbroking account and investing in shares on the JSE.

How much of your monthly savings do you invest in JSE shares?

Also, do you know that your pensions and that of all people (including black) in SA is mostly invested in JSE stocks and you are therefore a holder? So if you nationalise and our exchange tanks you will lose your pension. So please educate yourself before making such comments.
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Aug 6, 2012

Deepstick-C

Jnrb you base your argument on a stupid article, blacksown less than 1% of the whole JSE listed stocks (thats excluding share schemes)

@Ukuvusa, how do you open a stockbroking account when you are underpaid by whites although educated than your white peers who earn more than you?
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