Boom expected to slow down
March 17, 2006
By Rebecca Harrison
Johannesburg - Booming consumer confidence, the lowest interest rates in more than two decades, a steady rand and soaring prices for gold: South Africa's companies have never had it so good.
But as a stellar earnings season draws to a close, many firms are predicting a more muted mood for the year ahead, which could temper a record-breaking rally on the JSE.
"I don't think earnings momentum is going to fall off a cliff, but we can't expect to continue at the same rate we saw in 2005," said Bruce Anderson, the head of research at Trilinear Investment Managers.
Two of South Africa's top insurers, its biggest casino operator, its largest car dealership firm and several major retailers have predicted slower earnings growth in either the first six months or the full year in 2006.
Of 26 blue-chip firms that have reported annual, interim or quarterly earnings so far this year, 24 chalked up double-digit percentage rates of growth. Only one posted a loss.
Last year foreign investors snapped up South African equities, which many said were undervalued until recently, powering the Top40 index 44 percent higher in the year to a string of historic highs.
But while investors still expect an impressive performance from South African companies in 2006, growth will be much slower. Anderson expects the top 40 companies to post average earnings growth of between 18 percent and 22 percent in 2006, compared with about 30 percent in 2005.
That will affect the stock exchange. The Top40 index has climbed only 7 percent so far this year amid increased volatility, with daily rises or falls of more than 3 percent not uncommon. Investors expect the Top40 to rise about 15 percent in 2006.
Dividend yields, which are now at 2.4 percent, are expected to shrink. On a price:earnings basis, local stocks are not looking as cheap as they once did.
Abri du Plessis, the chief investment officer at Gryphon Asset Management, said: "Our market is not seriously expensive yet compared with emerging market peers, but it certainly isn't a cheap option any more."
The Johannesburg Top40 index trades at 14 times 2006 earnings, according to Reuters data. This puts it on a par with Russia's RTS index, makes it marginally cheaper than India's BSE index at 15 times and pricier than Brazil's Bovepsa, which trades at 9 times earnings.
Investors say their more modest forecasts depended on a best-case scenario. A catalyst to the downside could stymie growth, or even push the index lower.
"The fundamentals are okay, but the market is not as resilient as before and sentiment could quickly change if something major happens, like a downturn in the commodities cycle, or in global markets," said Du Plessis.
Johan van Zyl, the chief executive of Sanlam, said last week that financial services companies should be on guard for a turning point that could make business conditions less favourable.
Most experts agree that mining companies are unlikely to be blessed again with galloping gold prices. And most expect a slowdown in consumer spending, although some dissenters expect a boost from tax cuts unveiled in last month's budget.
But some local investors, who compare stocks with other local asset classes rather than foreign markets, said that even accounting for a slowdown in earnings growth, South African equities were still good value compared with government bonds. - Reuters
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