Asian flu hits Johannesburg.

Author:Siddiqi, Moin

South African stocks were unable to escape the malign influence of the Asian flu', but as the global panic subsides investors may find the older, more sophisticated Johannesburg bourse a safer haven than the more exciting but volatile South-East Asian markets.

Last year was an exceptionally bearish period for the world's top emerging markets, as flights to traditional markets hit even those few markets, such as South Africa and Russia, where economic fundamentals justify significant annual capital gains.

The overall performance of the Johannesburg Stock Exchange (JSE), which ranks eighteenth in the world by capitalisation (having fallen from the top 12 due to the rand's devaluation), was lack-lustre in the second half of 1997.

In early August however, the industrials and all share indices had risen to highs of 9,314 and 7,614 representing annual gains of 18% and 14% respectively, but the influence of the 'Asian flu' did hit performance hard. South Africa, as part of the global community, was unable to prevent major sell-offs, as foreign funds fled to the safety of quality US and core European fixed-income assets.

The South African economy experienced a 'soft landing' in 1997, with real GDP growth estimated at between 2-2.3%. Painfully high real prime rate (averaging 11%) had depressed both private domestic demand and business spending. The key engine of growth remained the surge in manufactured exports, as the weaker rand enhanced South African global competitiveness.

The contrast between South Africa and SE Asia is, however, substantial. The latter region is over-borrowed, and banking systems in Thailand and South Korea remain extremely fragile. South Africa, on the other hand, possesses a first-world banking sector, and remains under-borrowed -- nor is its property market over-heating, as is the case in Hong Kong.

The country's economic fundamentals should be conducive to a rally in the JSE during 1998. Standard Bank projects growth at 3%, although the return of El Ni[tilde{n}]o in the 1998/99 season could cut 0.5% off these projections. Interest rates and corporate earnings are at the heart of equity prices.

Market indices, excluding JSE Gold, are expected to enjoy a bull-run on optimism over the gradual relaxation of monetary policy during 1998, and this will provide the impetus for a revival in consumer spending and improved corporate earnings. Analysts project earnings in growth of 6-8% in 1998. The market's valuation will now...

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