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Johannesburg - South African companies are betting against an improvement in their home market.
Corporates in Africa’s most industrialised economy are so negative about future growth prospects that they’re sitting with record amounts of cash in the bank, according to Stanlib Asset Management, South Africa’s third-largest manager of domestic mutual funds.
Investment by businesses has stagnated as confidence languishes near its lowest in almost four years and President Jacob Zuma’s administration struggles to reignite an economy expanding at the slowest pace since the 2009 recession.
“It’s a very significant concern,” Kevin Lings, the chief economist at Stanlib, which has been cutting back on South African equities and sitting on cash-like investments among the $46bn it oversees, said by phone from Johannesburg. “The reason is fundamentally that corporates lack confidence.”
There aren’t many compelling reasons to be retooling plants or spending money on machinery or buildings.
A 50% depreciation in the currency against the dollar since 2011 has made imports more expensive, while an electricity shortage, persistent strikes and the risk of slowing demand from China and sluggish economies in Europe have depressed some of the benefits to exports from the weakening rand, contributing to a contraction in the $366bn economy in the second quarter.
Companies had R689.4bn on deposit in South African banks at the end of June, compared with R671.5b in November, according to data compiled by Stanlib from South African Reserve Bank (Sarb) data.
The rate of growth in fixed capital formation by businesses after inflation increased by 0.1% in the second-quarter from the previous three months, when it increased 1.6%, and following a decline of 3.4% for all of 2014, the data shows.
Looking abroad
Adding to the reticence by companies to spend money in South Africa is a lack of certainty regarding the government’s economic policy, including land ownership, mining rights, the availability of skills and Zuma’s commitment to implementing the National Development Plan, Lings said.
The blueprint, created by former Finance Minister Trevor Manuel, sets out how the country can boost growth to 5% by 2019 and create 6 million jobs.
Companies are instead looking abroad. Truworths [JSE:TRU] this week announced it started talks to buy Office Retail Group, a UK fashion footwear chain.
That would add to a list of overseas takeovers by South African companies, including this year’s $1.2bn acquisition of British fashion retailer New Look by Brait SE and The Foschini Group's [JSE:TFG] purchase of UK clothing chain Phase Eight.
Woolworths [JSE:WHL] bought Australian chain David Jones for about $2bn last year.
“We’re worried about valuations; we’re worried about corporate earnings,” Lings said.
“We would still hold equities where companies have a broad range of earnings; companies earning money in South Africa but also globally, because there’s more support for that earnings base.”
South Africa hasn’t been alone among emerging markets to suffer a slump in sentiment. The FTSE/JSE All Share Index, the South African benchmark, has dropped 1.5% since June 30 to trade at 15.5 times estimated earnings. That compares with a 15% decline for the MSCI Emerging Markets Index, which trades at a forward price-to-earnings ratio of 10.8.
“When you talk about corporates not spending their money, there aren’t many opportunities on a fundamental basis, both here and abroad,” Gavin Cawse who helps oversee and advise on the equivalent of $8.2bn as a Cape Town-based money manager at Nedbank Private Wealth, said by phone on September 11. “It’s not unique to South Africa.”
Undermining prospects
The economy has been hit by a worsening of labour relations in mining, which billionaire Patrice Motsepe said on September 4 is undermining prospects for an industry that employs 440 000 workers.
The government has received notice that as many as 12 000 mining jobs will be cut in the country, while labour unions say the figure could be as high as 19 000.
Christo Wiese, South Africa’s richest man, accused the government of implementing ill-considered policies that are curbing growth and undermining efforts to reduce poverty.
His comments echo that of Johann Rupert, the billionaire chairperson of Richemont [JSE:CFR] and Remgro [JSE:REM], and Simon Susman, the chairperson of Woolworths.
“You can, through policy, influence how corporates deploy their money, but unfortunately that’s not happening,” Lings said. “This is purely business concerned about current economic conditions in the country and making actual choices not to spend more money.”
