November 8, 2004

By Clinton Sprong

As consumers flock to the tills, South African companies that generate the bulk of their earnings locally are well placed to benefit from the buoyant conditions created by the low inflationary environment, strong informal sector and good government spending.

Investors should ensure their portfolios have a healthy weighting towards South Africa Inc as it is enjoying a golden period not seen since the 1960s.

With attractive equity valuations and high dividend yields, investors should take full advantage. The obvious industries to benefit are retail banks, retailers and companies linked to the domestic fixed-investment cycle, namely electronic and electrical companies, construction companies and building material suppliers.

Retailers are benefiting from cheaper imports and exceptionally strong consumer demand.

Recent positive trading updates by most of the country's leading retailers and encouraging comments made by the companies that have reported bodes well for a continuation of this consumer demand.

Banks are benefiting from increased demand for credit as consumers buy more vehicles and houses. The proposed Barclays purchase of Absa has helped boost valuations, too.

Although many of these shares have enjoyed strong runs, there is plenty of juice left in these counters.

Banks are on a current price:earnings ratio of 10.2 times, general retailers on 10.6 times and construction and building material stocks on 10.9.

Looking ahead, these sectors are on forward price:earnings ratios of only 8.4 times, 8.6 times and 9 times, respectively, which is not demanding and underlines the value in these sectors.

These companies, which are linked to domestic fixed expenditure, will benefit from increased infrastructure and capital investment by the government.

This includes the recently announced R165 billion in spending over the next five years by Eskom and Transnet, the Gautrain and Coega to name a few.

This can be added to private sector capital investment and continued investment in property by consumers, coupled with spinoffs of the 2010 soccer World Cup.

Personal consumption expenditure is expected to be 4 percent in 2004 and 3.3 percent in 2005. Gross domestic fixed investment is expected to be 8.5 percent in 2004 and 6 percent in 2005.

With no major surprises in the rand expected (an average rand-to-dollar exchange rate of R7.09 for 2005) or drastic changes in interest rate policy (prime at 11.5 percent at the end of 2006) these numbers may appear to be on the conservative side.

The emerging black middle class, coupled with the unlocking of value as traditional "white businesses" sell equity to meet empowerment charter requirements, is also likely to fuel a sustained boom.


Clinton Sprong is a portfolio manager at BoE Private Clients in Gauteng