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Press Offices > Investment Companies

Citadel Investment Services
Press Office Feature : The year that was – business highs and lows in 2015

Company: Citadel Investment Services
Author:George Herman
Email:[email protected]
Posted:25 Jan 2016

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The damage has been done and it will take years to restore confidence in the South African markets

Last year was a mediocre one for South Africa: the JSE ALSI ended 2015 only 5.13% up over the 12 months and GDP growth was well south of 2% for the full year.

In fact, we seem to have just dodged a recession rather than seen the growth we so urgently need.

Much of the impact on the South African business environment in 2015 came from changes in the international one.

China, specifically the crystallisation of lower growth and expectations for further slow growth, had a major knock-on effect on global markets, South Africa included.

Prices across the commodity complex tumbled during 2015, in part due to the stronger US dollar, but in large measure as a result of slower global demand.

As a major commodity exporter, the negative effects were sharply felt by South Africa, notably in our Balance of Payments, specifically the trade balance which saw net outflows in all but two months last year.

In addition, South Africa has been shifting trading partners from the US and Europe more towards China and Africa. Unfortunately for this country, those two regions are seeing slower growth resulting in less demand for our exports and slower growth expectations.

The one commodity with a low price which has helped South Africa has been oil. Although much of the decline took place in the latter part of 2014, the price remained low for the whole of 2015 and ended the year well below the starting price. From over $100/barrel, oil is now below $30/barrel and set to stay low for some time.

While a weak oil price can be interpreted as reflecting weak demand and therefore poor economic performance, in this instance it has resulted from a supply glut.

For oil consumers this represents a bonanza – a bit like getting a tax cut – and is underpinning economic growth. It has had an important positive impact amid a sea of gloom.

Happily, the Greek tragedy which played out in Europe last year is now behind us. Bogged down by enormous public debt, uncertainty regarding a potential default and speculation on a Grexit (Greece exiting the euro zone) impacted negatively on Europe in 2015.

However, after several months of negotiations, Greece received its third bailout in five years and fears of financial instability have receded.

Less clear-cut is the European refugee crisis which has seen an estimated one million plus migrants and refugees crossing into Europe illegally last year, four times the number in 2014. This inflow added to the political pressure in Europe and the European Union risks collapse.

Already there is talk of a Brexit – Britain leaving the EU. However, in dealing with the refugee crisis, there has been less attempt to deal with the cause than with the symptoms.

People are fleeing war and persecution in countries such as Syria, Afghanistan and Eritrea. A more permanent solution would be found in restoring peace to those countries, rather than absorbing increasing numbers of migrants into Europe.

Brazil’s economy has disappointed in recent years and is expected to have contracted by 3% last year, putting the country in a recession. Poor policies, gross government debt of 66% of GDP, high interest rates (around 14%), above-target inflation and rising unemployment have left an economy in tatters.

Consumer confidence has fallen to its lowest level in the 10 years that it has been monitored. As The Economist puts it: “It is hard to see where growth will come from. Worst of all, Ms Rousseff’s policy levers are jammed.”

The management of Brazil’s economy by the left-wing Workers’ Party (PT) of Dilma Rousseff should sound loud warning bells for South Africa. Household consumption is dropping, hampered by low confidence and high debt levels.

At the same time, public spending has surged. If this sounds like déjà vu, it is. South Africa has been plagued by similar trends and we can but hope that we do not also slip into a recession.

Of course, this list would not be complete without a reference to the musical chairs that played out in the Treasury last month.

After summarily dismissing Finance Minister Nhlanhla Nene and replacing him with the relatively unknown David van Rooyen, President Jacob Zuma was forced to back down four days later and opt for the safe hands of Pravin Gordhan to guide South Africa’s Treasury.

This served to stabilise markets, but not before R169 billion was wiped off the JSE while the rand plummeted 9%. The damage has been done and it will take years to restore confidence in the South African markets.

Investors are likely to be wary of investing in this country for some time to come. We already saw R7 billion in portfolio outflow in the two weeks after the announcement.

This after the massive R24 billion outflow in Q3 2015, when investments held by South Africans globally were worth more than foreigners’ investments in SA for the first time since record keeping began almost 60 years ago.

We ended 2015 on far shakier ground than we started it.

George Herman is Head of South African Portfolios, Citadel

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