South Africa's ailing, booming economy - what's going on?

***

The JSE – A Small Cap Investor’s paradise right now!

Just another consequence of the strange times we find ourselves in…. Certain JSE stocks are delivering blistering growth but are just not getting the attention they deserve.  

It’s one of the reasons I Iove penny stocks.  They’re the stocks that fly beneath the radar of large institutional investors but its where private investors like us can pocket double and triple digit growth in sometimes a matter of
months. 

I’ve filtered out my top five favourites here.
 

***

What’s behind the rise of the South African economy – post pandemic?

Simply put – South Africa is exporting a lot more than it is importing.

South African exports have soared in the past year

As you can see, while exports have steadily risen since 2012 (inflation related growth) they have suddenly and sharply spiked in the past year.

This is off the back of high commodity prices.

Metals like gold, platinum, palladium, copper are at all time highs. The coal price itself, one of South Africa’s biggest exports is sky-high.

Similarly agricultural commodities like citrus, red meat, maize and sunflower have done really well, assisting our economy significantly.

South Africa’s trade balance is the best it’s been since the dawn of democracy

The trade balance is the difference between imports and exports. The higher it is, the more we are exporting compared to imports.

From this chart you can see South Africa’s trade balance looks amazing. The best it has done since the dawn of democracy in 1995.

Clearly high export prices for our commodities are really helping.

Under other conditions – our economy would be booming with these metrics in place….

But we are just limping along…

Why the SA economy is bleeding

While private business is doing its best to keep SA growing, government has been doing its worst.

Eskom is still loadshedding at record high levels.

Despite our economy growing slightly, you’ll see that electricity production in South Africa has been steadily heading downwards since 2008. Despite the fact that we’ve added lots of solar and wind power to the grid, as well as Medupi and Kusile (for the most part) – electricity production isn’t picking up.

Businesses simply can’t increase production and make investment in growth without access to reliable, affordable electricity.

Add in some severe crises and our economy’s performance becomes all the more admirable

Consider the fact that in the past year we’ve seen rioting in KZN and Gauteng basically bring the country to a standstill for nearly a month.

Then there’s two rounds of flooding that basically levelled KZN as well. The Durban harbour came to a standstill. Factories were damaged, roads decimated.

And despite all of this our economy is still growing…

Imagine what growth could’ve been had South Africa not had to contend with all these negatives…

Could the SA credit rating come out of Junk status?

Standard and Poor’s revised South Africa’s credit rating from ‘stable’ to ‘positive’ recently.

This comes following a previous move from ‘negative’ to ‘stable’.

According to the ratings agency the change comes on the back of favourable terms of trade, and an improvement in government’s fiscal trajectory.

S&P also noted government has made some progress in government reforms.

We’re not out of Junk status territory yet. And still far from it, but things are at least turning around.

What’s the risks?

Well, much of SA’s turnaround is thanks to high commodity prices.

Commodities won’t stay sky-high forever. And then the party will end.

Then we’ll have to grow off of hard work. Hopefully our problems with electricity can be fixed in the meantime.

I don’t expect this’ll happen on the back of Eskom. Rather that private business will put up enough of its own generation capacity to counter Eskom’s failings.

So, what does all of this mean for investors?

I expect the recent rand strength we’ve seen will continue for as long as commodity prices hold.

But as commodity prices begin to normalise, the rand will become increasingly volatile. And it’ll return to its downward trend against other major currencies.

I’m sticking to rand hedge stocks for the long term, just make sure it is companies with low debt levels, and high cash generation.

Just last week I shared a number of smaller companies on the JSE paying dividends of more than 10% of their share prices, you can read that article here…

PS. If you want to know which small caps I’m buying right now, go here.