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Friday, February 1, 2008
Pressure cooker

Keeping an eye on interest rates will be key to a successful year. High interest rates and slower economic growth globally will see consumers feeling the pinch and tightening their belts.

Comments  Kevin Lings, Stanlib’s chief economist, “It’s going to be a tough year ahead – with more difficult conditions than we have seen over the past few years.
“Both global and local interest rates could dictate market moves and any interest rate movements will be key to the market’s performance.”
He emphasises that we cannot separate our local outlook from the global views, trends and events, “What happens in the US and other markets affects the South African market. Globally the developed world is slowing and the question for emerging markets is will they hold up? We see higher risk being attached to some emerging markets like SA and lower returns than we have seen over the last four years.”
As for the US the concern remains that it may slip into recession. Economic growth is likely to be under 1,5% for 2008, and this is a marked slowdown from the long term average growth rate of just over 3% and the 2007 growth rate of over 2%.
“The reasons for this are the weak housing market, higher interest rates, inflation; and general lack of confidence.”
Mr Lings believes that a recession can be avoided if the US Fed cuts interest rates sufficiently in the months ahead, but still manages to keep inflation under control. “It’s a very difficult situation to manage, and difficult economic conditions could end up being a factor in the elections.”
It’s not just the US that has economic challenges to deal with in 2008. The UK, Euro region and Japan are all struggling and Mr Lings sees all but the Japan central bank cutting rates in coming months. “We are likely to see lower global interest rates this year.
“China and India have spent huge amounts on infrastructure and have generated significant internal demand so to a degree they are not as impacted by global trends as other economies.”
Of course, interest rates are high in South Africa and we believe they will remain high for most of the year. Consumers are starting to tighten their belts and retail sales and vehicle sales are lower. House sales are slowing and prices are under pressure.
“Higher interest rates mean higher cash returns and portfolios may increase their cash holdings to benefit from this. Inflation remains problematic – well over 8% in the short term moving closer to 6% by the end of the year. But it is unlikely to be convincingly in the target range this year.”
Pressure on food prices (a global trend), wages and the planned increases in electricity costs will obviously boost short term inflation. Add to the equation rising medical and education costs, and the inflation picture does not look so healthy.
“A 2008 trend could well be increasing bad debts and stress borrowing from consumers. What should hold up well in 2008 is fixed investment spending and we could see more infrastructural projects being undertaken, but it won’t temper all of the downside.”
SA is still running a large trade and current account deficit. With increased global risk aversion and a higher risk assessment of SA, reflecting high inflation, interest rates and the ongoing uncertainty around the position of Jacob Zuma, SA’s balance of payments position is extremely vulnerable.
“We are forecasting local growth of around 4% - which is still reasonable but not as high as the 5% of the last three years and there is a risk that this could even be revised lower.”
But he says while earnings of many companies will be under pressure with a stretched consumer, companies with quality earnings could be an opportunity in 2008. Investors need to look out for companies that can hold onto their prices, are offering products consumers have to buy like basic necessities and those who will benefit from the infrastructure spend.
“Information technology is also an area to look out for, both in SA and globally. Spending in this area has lagged and one can expect IT upgrades to underpin expenditure increases in this sector.
With the rand under pressure and global interest rate trends ahead of SA, local investors may also see opportunities in offshore markets.

Copyright © Insurance Times and Investments® Vol:21.1 1st February, 2008
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