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What's the situation with the South African economy right now?

by , 10 June 2021
What's the situation with the South African economy right now?
On 20 May 2021 the SA Reserve Bank had its bimonthly monetary policy meeting.

The bank kept interest rates flat - at what is basically an all-time low for South Africans…

In its announcement the bank governor, Lestja Kganyago said “Economic and financial conditions are expected to remain volatile for the foreseeable future. In this uncertain environment, policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook.”.

So what exactly does this mean, and where is our economy headed for the remainder of 2021, and 2022?

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The fastest part of the recovery is now behind us – from here it will require hard work
In 2020 the South African economy contracted by 7%, slightly better than the 7.2% contraction predicted by government.
That said – the second quarter of 2020 saw one of the biggest economic contractions in South Africa’s history. It however was followed by a 13.5% recovery in the third quarter of 2020 and a 5.8% recovery in the last quarter of 2020.
Simply put – the second half of 2020 saw a huge economic recovery – but from rock bottom levels.
That was the ‘easy recovery’ bit…
The first quarter of 2021 only saw a 4.6% annualised recovery.
Even with this recovery – our GDP now stands at roughly the level it was at in 2016.
The first quarter of 2020 saw GDP of R782 billion, 2021’s first quarter was R761 billion.
That means there’s a massive R21 billion quarterly economic activity gap which still needs to be filled.
That’s equal to adding a company like Redefine to our economy each quarter.
And this won’t happen easily…
What are the other economic indicators saying?
The most recent figure for retail sales showed a 2.5% year on year drop in retail sales in March 2021, compared to a 2.2% increase in February 2021.
Simply put – retail sales are struggling.
The reason for this is simple. Inflation picked up from lows of 2.1% in 2020 to its current 4.4% in April.
This is putting pressure on consumers, who are already pressured due to higher unemployment levels, or lower income levels.
Vehicle sales are expected to grow 3% in 2021, but that will likely still not bring us back above pre-covid levels in 2021, only in 2022.
Most other sectors are looking healthy, with agriculture and mining being the star performers right now.
Restaurants and hotels are the clear losers – but they are obviously still hampered by Covid regulations.
Eskom on the other hand still remains the biggest hamper on our economy.
As I’m sure you’ve experienced – load shedding is again a daily occurrence and will likely remain so for much of the winter months.
At the same time Eskom was granted a massive 15% tariff increase by the National Energy Regulator of SA (Nersa).
While management thinks it will assist Eskom in achieving “sustainability” I don’t think these kind of tariffs are sustainable for the SA economy, and their outsized effects are seriously negative for inflation.
The only positive news out of Eskom is that the company managed to lower debt by R87 in the past year. That takes its debt down from R488 billion to R401 billion.
At least this means the company is paying less interest and can more rapidly repay debt going forward.
The restructuring of Eskom is also on track with the first stand alone entity, transmission, likely to be separated by end 2021.
Simply put – the economy is volatile, like the reserve bank said. There’s positives and negatives and we’re going to see it see-saw between these for the next year until covid vaccinations and herd immunity see us return back to a semblance of normal.
In the meantime, you need to make sure you invest to hedge yourself with the remaining uncertainty.
I personally believe the best way to do this is through dividend paying shares…
You see, before the pandemic started in 2020 interest rates were high, and the return from shares were low. So dividends weren’t so important to many investors.
But right now, the interest I earn on the cash in my brokerage account is a paltry 2.24%.
A bank savings account offers you nearly nothing.
Now if you consider that – a company paying a 7% dividend gives me THREE TIMES more reward than the interest I’m getting on my cash.
If you received a 7% dividend on a share today, and the company grows profits (and dividends by 20% in the coming 12 months) you could easily get another 8.4% dividend a year later – meaning a 15% return on dividends alone in 12 months. Then add in some capital gains – and you are coining it.
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Why I’m really interested in dividends right now
There are many companies that managed to preserve profits during the 2020 pandemic and hard lockdown. Some even managed to continue paying dividends.
But often these shares are still down 20%, 30% and even 60% from their pre-pandemic highs.
And they are still this low, despite often paying big dividends. The reason being many investors simply aren’t focusing on smaller shares.
But as the larger companies become fully valued, and smaller company profits (and dividends) rise, it will attract more attention to them, with rapidly rising share prices.
In the meantime, you get to collect big dividends.
Think about some of these shares and you’ll understand what I’m saying:
Bowler Metcalf – paid 48.9cps in dividends in past 12 months on a 985c share price (4.96% dividend yield)
Hosken Passenger Logistics – Paid 49cps in dividends in 2020, share price 352c (13.9% dividend yield)
Mahube Infrastructure – Paid 33cps in dividends in 2020, share price 529c (6.23% dividend yield)
The likes of Redefine and Caxton skipped dividends in 2020 to preserve cash, but based on cashflows and profits the companies are likely to pay great dividends in the coming 12 months.
Check out my June 2021 Red Hot Penny Shares newsletter for my five favourite dividend opportunities right now!
Here’s to unleashing real value
Francois Joubert
Editor, Red Hot Penny Shares

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