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Friday, February 1, 2008
Bumpy ride

Investors may face a bumpy ride in the short term, but market prospects later in 2008 are relatively positive, at least according to Stanlib. It forecasts a rise of 18% in the JSE All Share Index over the next 12 months; but this is assuming a lot, that:

• corporate earnings growth stays solid at 17%;
• interest rates are close to the top;
• the commodity boom continues; and,
• global growth predictions hold up.

The major concern is that the credit debacle could take the US into recession and South Africa will feel the fall-out.
Paul Hansen, Stanlib’s retail investing director, says, “We don’t think this will happen. We believe we’ve entered a correction and the bull-run will re-assert itself.
“The correction should be quite short, but for the immediate future, investors should be aware that risks are significantly higher than a year ago.”
Negatives include oil and food prices at record international levels, more frequent strikes locally and average pay rises at 8% (a drain on company earnings).
Higher interest rates and inflation, perhaps reaching 7.5% early in 2008, are also causing increasing consumer distress, with bad debt on the rise.
Retail sales were only up 3% on 2006 and manufacturing (15% of the economy) is negative year-on-year. We continue to import more than we export and now have to attract R10 billion a month to cover the difference.
Despite these challenges, Stanlib believes the underlying fundamentals remain strong. “The US housing market may be in its worst state since the 1930s, but the American economy continues to create a net gain of over 100 000 new jobs a month. The IMF cut its US growth forecast for 2008 from 2.8% to 1.9%, which we see as an expectation of low growth, not recession,” he asserts.
Meanwhile, the IMF has stepped up its 2008 forecasts for sub-Saharan Africa and the Middle East. Furthermore, capital flows to emerging markets remain robust.
Locally, high fixed investment spending underpins the forecast for a relatively positive year.
“Our national infrastructure boom is immune to some degree from the rate hikes and looks set to accelerate,” Mr Hansen believes. “Public spending is expected to reach R490 billion in the next few years, with private sector expansion adding further impetus.
“Despite these commitments, the national Budget is in surplus while the 2010 Soccer World Cup should boost foreign tourism and create spin-off benefits across the service economy.”
Local investors have had four and a half good years. The JSE All Share Index return has averaged 40% a year since the low in April 2003. This is double the 20% average return for the past 47 years.
“We anticipate that future returns will move closer to the longer-term average – but that’s no reason for doom and gloom in 2008.”

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