JOHANNESBURG – While it is still early days, South Africans can look at the bright side again.
The trust and respect President Cyril Ramaphosa and his “A” team has, mean they have to walk the talk of his state of the nation address.
Fighting populism and implementing his reform agenda from the broad South African public manifested in the last week’s elections.
It will unequivocally be reflected in the business and consumer confidence surveys in the months ahead. The impact of confidence in the economy is pronounced in the build-up of inventories – one of the cornerstones of economic growth.
Confidence in the economy and specifically business confidence as measured by the Business Confidence Index (BCI) of the South African Chamber of Commerce and Industry (Sacci) tends to lead the economy and the change in inventories by around four quarters as a change in business confidence filters through the economy further down the line.
Ramaphosa’s election as president of the ANC saw business confidence hit a 27-month high in February last year while, according to SA Reserve Bank (Sarb) data, the industrial and commercial inventories to the gross domestic product (GDP) ratio hit a four-quarter high of 10.5 in the first quarter of 2018.
Uncertainties created by the land expropriation issues landed sentiment in the doldrums in August last year and Eskom’s woes hit business hard as the ratio dipped below 10 percent in the 4th quarter. Business confidence again tumbled before the elections while purchasing managers indexes based on a monthly survey of supply chain managers suggest that inventories dropped further since the end of 2018.
A surge in business confidence similar to after Ramaphosa’s election in 2017 is in the offing sooner than later. As 2018 has shown, the lead time to work its way through the economy by the rebuilding of inventories this time around may be shorter than the historic four quarters.
The upside potential for the South African economy is immense, if not unprecedented. Eskom’s blackouts from the end of 2014 going into 2015 led to a collapse of business confidence and was exacerbated by former president Jacob Zuma’s controversial firing of Nhlanhla Nene as finance minister.
According to Sarb, the ratio of industrial and commercial inventories to the GDP averaged around 12.4, from post the global financial crisis in 2008/09 to the 3rd quarter of 2015.
The ratio crashed to 10 in the fourth quarter of 2017, indicating that inventories effectively fell by nearly 20 percent relative to the size of the economy.
There is, therefore, scope that the inventory-to-GDP ratio may increase steadily towards the 12.5 level If business confidence recovers to and is sustained at the 2012 to 2014 range. It amounts to an increase in inventories of more than 30 percent relative to the size of the economy.
Pent up Animal spirits will be awakened when investors get a whiff of the underlying positive trend.
Business confidence, inventories and company profits are interrelated and so are government revenues through tax receipts. Business confidence leads the aggregate pre-interest profit margin of industrial companies as calculated by iress by around four quarters – similar to the inventory-to-GDP ratio. If business confidence as measured by Sacci recovers to 102+ and is sustained, we may see the aggregate profit margin from 10 percent to 12percent in a year’s time.
It is no secret that our stock market had underperformed global developed market equities as measured by the MSCI World Index.
It is no coincidence that there is a close relationship between the ratio of South Africa business confidence to G7 business confidence and the discount or premium that South African stocks trade to developed markets based on valuation measures such as Robert Shiller’s cyclically adjusted price-to-earnings ratio, which uses average earnings over the past 10 years and smooth out the impact of business cycles.
The All Share Index is trading at a discount of around 20percent to developed markets and is a fair reflection of the relative weak business confidence in South Africa compared to the G7 countries.
A 5percent improvement in business confidence in South Africa relative to the G7 countries could lead to our market kicking dust in the eyes of other markets by outperforming by more than 10percent in the next cyclical upturn.
The restoration of public and investor confidence would undoubtedly rub off on our credit markets.
Sustained higher levels in business confidence, improving economic and business conditions will result in the credit agencies smiling on us again, lower lending rates and a positive real estate market.
Just imagine how many jobs can be created.
Soft numbers will see an upturn with hard numbers to follow as confidence could be spoiled by the all-out trade war between the US and China, but the longer-term picture is exciting because positive sentiment is about to release pent up demand in South Africa if Ramaphosa and his “A” team gets their way.
It is in stark contrast to the erosion and eventual implosion of business and consumer confidence during the Zuma administration, which left the country on the verge of collapse.
Thank you that realism prevailed when you made your cross.
Ryk de Klerk is an independent analyst-at-large. Contact firstname.lastname@example.org. His views expressed above are his own. You should consult your broker and/or investment adviser for advice.