More investment pain ahead

Johannesburg - Investors need to brace themselves for more downside in equity markets despite the recent global rally.

"There is a lot of room for disappointment and investors are going to be surprised how far South African corporate profits are likely to fall," said Citadel's chief investment officer Jan van Niekerk this week.

A recent rally in global equity markets combined with a bounce in oil and base metal prices have prompted some forecasts of a "V-shaped" recovery.

However Citadel sees a "W-shaped" recovery as a more likely scenario given the current economic climate. They expect markets to rally and then give up some of these gains as the economic reality settles in.

Dave Mohr, chief investment strategist of the investment firm, believes there are three main reasons for this scenario: unemployment, an increase in household savings levels as well as the consequences of the "radical" policies implemented by various governments.

Mohr is closely watching local and international household savings rates as a sign that the global economy is getting back on its feet.

US household savings ratios have risen from below 1% to 4% over the last six months.

"This new found conservatism will cap the strength of any recovery in household spending for some time." Mohr concluded.

In South Africa, the figure remains negative and the cultural approach to saving needs to change, says Mohr.

Another major factor that Mohr believes will slow any recovery will be the many government bailouts of struggling firms and the various "stimulus" economic packages.

"To mitigate the risks associated with these radical measures, they will have to be reversed as soon as the economic situation starts improving."

Expected responses including the raising of taxes - something that has already begun in the UK - as well as hiking interest rates. Both of these will put pressure on consumer and corporate disposable income.

Infrastructure won't cut it

Both Mohr and Van Niekerk rubbished the notion that infrastructural spend by governments will be sufficient to keep South Africa ticking over.

It is widely assumed that spending on large projects including the Gautrain and World Cup football stadiums will play a key role in stimulating employment and economic activity.

"Much of the infrastructure spend is already captured in the latest GDP data," said Mohr.

He pointed out that Reserve Bank statistics show that infrastructure spending has already doubled in the last three years in real terms, with the government and construction sectors together only comprising 16.7% of growth domestic product (GDP).

Pointing to the recent GDP figure - and the anticipated rate cut to be announced by the Reserve Bank on Thursday - Mohr said: "One can't just wave a wand to make a recession go away."

According to Van Niekerk, corporate profits in many markets have dropped by as much as 50% already - while many JSE-listed companies have reported profit declines of about 10% off their peaks.

- Fin24.com