GDP shaky? Stocks don’t always mind

The connection between growth and JSE performance is fluid

SOUTH Africa’s latest quarterly GDP figures depict a country facing a recession while much of the world is beginning to pull upwards.

However, the JSE’s All Share index recently hit another record high. Just how connected is the country’s growth to its stock market?

During the first quarter of the year, mining’s contribution to GDP fell 24.7%, manufacturing’s dropped 4.4% and the primary sector as a whole slumped 17.2%. The secondary sector fared better, falling only 2.7%, whereas the tertiary sector upped its contribution by 1.8%.

The industries propping up South Africa’s growth so far this year are finance, real estate, business services, the motor trade, transport, storage and communications, with a healthy dose of catering and accommodation thrown in.

The top 20 JSE-listed companies by market cap make up nearly threequarters of the main board. Most are dual-listed or can be considered multinationals.

Greg Hopkins, chief investment officer at PSG Asset Management, said his investment team did not bother to discuss quarterly GDP figures in relation to the investments in their portfolios.

“History and empirical studies suggest in big-picture terms that there are lots of examples of a lack of correlation between GDP growth and stock market performance,” he said.

For example, over the past decade, China had significantly outgrown the US in terms of GDP, but its stock market had underperformed against S&P 500, he said.

Consumer-facing businesses, especially those catering for the lower living standards measure categories, were struggling, but the services sector and logistics were doing better, reflected in earnings.

Among domestic midcap stocks, IT services company EOH’s first-half numbers showed its headline earnings per share were up 34%. For logistics company Super Group, which has some offshore operations, adjusted earnings per share were up 30% through December.

Capitec’s headline earnings per share rose 15% through February despite what had been a very tough local market. “Looking through GDP figures, you might miss a lot you’d find when you scratch down to individual companies,” said Hopkins.

Peter Brooke, head of Old Mutual’s MacroSolutions boutique, said the 0.6% drop was worse than people had been expecting for the GDP figure. “I think it is important for the markets because it highlights the damage done by the platinum strike,” he said.

“For some time now, South African economic growth has been steadily downgraded while global growth is being steadily upgraded. We believe the developed world is going to grow faster than South Africa.

“Equities are doing well while the economy is weak. Very often, markets are leading indicators, but you can get a disconnect. This will start to flag up concerns about corporate South Africa’s ability to produce profits.”

He said the numbers showed that consumer spending was slowing down.

“Last time we had a big slowdown, the government came to the table, but it’s much harder for it to act now because we’ve used up our windfall benefit — the good fiscal policy we had that brought debt-to-GDP down and the last stimulus package. The fact that we’ve been running a fiscal and budget deficit for the last few years is starting to compound.”

This creates the potential for a credit downgrade from the ratings agencies. “I’d be surprised if it happens in the June period, but by the end of the year it’s going to be quite tough for the ratings agencies to not act,” said Brooke.

“On a relative basis, our current account deficit, our fiscal deficit, our level of growth are not looking that attractive in an environment where we’ve actually had capital inflows and our market has outperformed. That creates a fair amount of risk for our market.”

As a result, MacroSolutions is overweight in offshore equities and un- derweight in South African equities. “This is based on relative valuations and relative earnings growth expectations, not on a currency view.”

Brooke said the economy was not closely reflected in the equities market — local manufacturing, for example, had a small presence on the JSE relative to its 17.2% contribution to GDP. Mining’s contribution to GDP, by comparison, was 5.5%.

“Half the market has nothing to do with local demand and growth. Even in our banks there’s a growing component of Africa. There are Africa expansion plans across the board — look at PPC, Nampak, Tiger Brands, Bidvest and Imperial. The component of profits that occur out of South Africa is very high . . . The high international component is actually positive.”