Purse strings loos­en­ing?

In­di­ca­tors in many sec­tors are pos­i­tive, and, de­spite some mis­giv­ings, com­men­ta­tors are mostly op­ti­mistic about the SA econ­omy, writes Stafford Thomas

Financial Mail - Investors Monthly - - Front Page -

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

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