Smart investors should target the huge, diversified South African conglomerates which are providing enormous scope for medium-term capital gains.
In January, African Business predicted an upswing on the Johannesburg Stock Exchange (JSE) after bearish performances in 1997; and that the US dollar would break the psychologically critical R5:$1 barrier at the end of March 1998. We were right in both instances.
The JSE has recorded steady and robust growth during the first quarter, and recouped losses suffered during the second half of 1997. In the aftermath of the SE Asian turmoil, the JSE, capitalised at $261bn, is now the third largest emerging market bourse after Hong Kong and Taiwan. Since the fourth quarter of 1997, exit money from East Asia is finding a stable home in South Africa, which is now perceived by institutional investors as a low-risk emerging market.
Net foreign purchases of South African equities rose to a new high of R26bn (compared to R5.2bn in 1996), and net purchases of rand bonds were estimated at almost R15bn (compared to R3 in 1996). Inward portfolio investment between January and early March 1998 is estimated at R7.7bn. Falling trends in inflation and interest rates have been supportive of inward capital to South African markets.
The financial sector is tipped as a strong future performer, spurred on by a merger frenzy. Banking stocks will offer higher returns over two to three years, partly due to ongoing cost-cutting measures. A number of significant mergers are planned this year and next. Anglo American Investment Trust and Rand Merchant Bank are combining banking and insurance interests. Liberty Life, the third largest equity investor, and Standard Bank Investment Corp., are also combining their banking, life assurance and portfolio management activities. Amalgamated Banks of South Africa and Nedcor may follow the trend. In the present low-growth environment, mergers and acquisitions are the only way to improve long-term profitability.
The markets will also be underpinned by demutualisation and the listing on the JSE of the two huge life assurance companies, Sanlam and Old Mutual. Both companies are expected to be listed with a capitalisation of R20bn ($4bn) for Sanlam by end-1998 and R60bn ($12bn) for Old Mutual in the first half of 1999. This total capitalisation of $l6bn is equivalent to the entire Peru stock market.
The restructuring of South African conglomerates, which is gathering momentum, will increase...