Purse strings loosening?
Indicators in many sectors are positive, and, despite some misgivings, commentators are mostly optimistic about the SA economy, writes Stafford Thomas
Just six months ago South Africans were in despair, weary of widespread corruption, political intrigue and a no-growth economy. But that negativity has been replaced by optimism. Consumers are leading the charge, in which retailers stand to be big winners.
Cyril Ramaphosa’s election as ANC leader in December brought the first ray of hope. It was followed by the ousting of Jacob Zuma, who had held office as president for nine years. Other good news flooded the economy in the first quarter of this year: Moody’s decision not to downgrade SA’s sovereign debt, strong moves by Ramaphosa to put an end to corruption and upward revisions of SA’s GDP growth prospects.
National treasury’s forecast, disclosed by former finance minister Malusi Gigaba in his budget speech in February, is for the GDP to grow by 1.5% in 2018. This is more than double the 0.7% forecast in the medium-term budget policy statement in October.
US investment bank Goldman Sachs is even more upbeat, forecasting SA’s GDP growth in 2018 at 2.3%. The forecast was made just prior to Zuma’s ousting.
A recovery in consumer confidence was inevitable. It kicked in with a vengeance in the first quarter.
The Bureau of Economic Research’s (BER) consumer confidence index (CCI) rocketed from -8 in the fourth quarter of 2017 to +26 in the first quarter of 2018. The rebound followed 12 consecutive quarters of negative readings. The BER said: “The lift signifies that the majority of consumers are optimistic about the outlook for the SA economy and their household finances.
“This [rebound] was well above our expectations.”
The CCI reading set a new record and exceeded the +23 previously set in the first quar- ter of 2017, when SA’s GDP was growing at almost 6%.
Chris Freund, an Investec Asset Management fund manager, believes the rebound in consumer confidence is a positive wake-up call for the market. “People have forgotten what a normal economic upswing looks like. SA’s GDP could grow by 3% this year,” says Freund. “Consumer debt is at manageable levels, and with inflation likely to be at 4.5%4.7%, people are getting real wage increases.”
Per capita disposable income of the household sector increased by 5.9% in the fourth quarter of 2017. Also notable was that in the first quarter of 2018 the household financial position component of the BER’s CCI jumped from an index reading of +2 to +31.
Robust consumer confidence is already being seen in retail sales data published by Stats SA. “For some time know retail sales growth has been coming in stronger than had been expected,” says Alec Abraham of Sasfin Securities.
Reflecting this, March retail sales, the most recent available, were up 6.4% year on year (excluding price inflation), bettering the 6.2% rise in February. In constant price terms sales were up 4.8% in March.
Particularly encouraging was spending by consumers on bigger-ticket durable goods. This was seen in a 20.7% yearon-year rise in constant price terms in the sales of household furniture and appliances. It was the biggest rise across the seven retailer categories and built on a rise of 13.7% in February and 14.1% in January.
In the furniture sector investors have only one real choice — Lewis Group, which recently won a long-running legal battle with the National Credit Regulator. Unfortunately, a lot of the good news already appears discounted by Lewis’s share price, which has been ramped up 90% since the start of 2018. It has left the company
trading on a historic 12.9 p:e, by far its highest since the height of the 2007 retail boom, when its p:e briefly hit 14.8.
Stronger demand for durable goods is also being seen in the passenger car industry, where the National Association of Automobile Manufacturers of SA reports a year-on-year rise in sales of 3.7% in March and, despite the Vat increase, 6.4% in April.
“Vehicle sales are an important lead indicator of consumer spending,” says Claude van Cuyck of Denker Capital.
Companies in line to benefit include Barloworld, Super Group and Imperial, all of which have large vehicle sales divisions. For a pure play in the sector the standout is Combined Motor Holdings (CMH), which has an R11bn annual revenue and operates in KwaZulu-Natal and Gauteng.
CMH comes with an outstanding record. It includes lifting its new-vehicle sales 11.8% in its year to February against the background of a SA market that grew by a mere 0.4%. Headline EPS in CMH’s past year lifted 17%, bringing the total rise to 81% over five years.
Improved consumer confidence also appears to be spilling over into home renovations. “High-income earners who last year held back on spending have returned to the market,” says Italtile chief financial officer Brandon Wood.
Demand for semi-durable goods is also on the rise, as reflected by clothing and footwear sales that, in constant-price terms, lifted 10.6% in March. It was the secondhighest segmental increase.
Fashion retailers’ share prices have already responded positively to the improved sales growth outlook, with Mr Price, TFG (The Foschini Group) and Truworths trading on forward p:es of about 26, 18 and 14, respectively. While these are not bargain ratings, there is reason for optimism.
It is also likely that credit retailers will increase their pace of credit extension, believes Van Cuyck. A high court ruling against the National Credit Regulator in March has removed an onerous regulation that has been in force since March 2015, requiring applicants for credit to produce their three most recent payslips. “The regulation precluded about 15% of consumers from accessing credit,” says Anthony Thunstrom, TFG chief financial officer and CEO designate. “It cost TFG hundreds of millions of rand in lost sales every year.”
Conditions are looking up for food retailers too. In the six months to February 2018 they enjoyed average real monthly sales growth of 2.9%, a big improvement on the average of only 0.1% during the six months to February 2017.
Improved trading conditions came through strongly for Pick n Pay in the fourth quarter of its year to February. Sales in the retailer’s SA operations lifted 7.3%, with little help from internal inflation at a minimal 0.2%. The stronger trend continued into the first quarter of Pick n Pay’s new year.
While the big jump in the retailer’s fortunes can in part be linked to success achieved in restoring it to good health, its fourth-quarter showing also suggests a much-improved state of play in the market.
The big question for investors is: how sustainable is the high level of consumer confidence?
Econometrix chief economist Azar Jamine has doubts that consumer confidence will retain its first-quarter level. “It looks too good to be true,” says Jamine. “Though there was a lot of positive news in the first quarter, SA still faces a lot of problems.”
Among problems Jamine points to are the leadership crisis in KwaZulu-Natal and recent civil unrest in many parts of the country.
Independent economist Mike Schussler shares the uncertainty. “Consumer confidence in the second quarter is unlikely to be as strong as it was in the first quarter,” he says. “Consumers have been hit by a number of negatives, such as the Vat increase and the big jump in the petrol price to a record high.”
Pressured by a rising US dollar oil price and a weakening rand, the petrol price in coastal areas has risen by R1.11/ l (8.4%) since March.
But despite the negatives, Freund remains upbeat on prospects, including an increase in banks’ pace of credit extension to consumers, which is slow at present.
“Banks’ books are in good shape,” says Freund. He believes strong consumer demand will be further underpinned by improving conditions in the manufacturing sector. “Manufacturers are in for two or three good years and will start increasing their capex levels,” he predicts.
Supporting Freund’s view, Investec Bank economist Lara Hodes notes that while the BER’s index-measuring expectations on future business conditions dropped to 69.9 in March from February’s 17-year high of 79.1, it remained well above the average level recorded in the previous 12 months.
Freund concedes, however, that there are potential risks that could derail the positive outlook. One is an end to what the IMF describes as the “broadest synchronised global growth upsurge since 2010”.
But there appears little risk of global growth faltering. In its April review the IMF notes: “The global economic upswing has become broader and stronger. [We] project that advanced economies will continue to expand above their potential growth rates this year and next, while growth in emerging market and developing economies will rise.”
Overall, it appears that the odds favour those investors who are backing SA consumer confidence to remain robust.
March retail sales were up 6.4% year on year (excluding price inflation), bettering the 6.2% rise in February. In constant price terms sales were up 4.8% in March
Picture: 123RF — DAN BARBALATA