Resources Can Fuel Lots of SA Growth
Victor Hugo
With few big surprises expected from the budget this afternoon, the biggest driver of financial markets is still the US$ and its effect on other markets.
As recently as December, enthusiastic CNBC commentators were doubtful that the US$ would continue its acceleration weaker in the first quarter of 2004. Most of them expected a few months of consolidation or even a stronger US$ as a breather. A British Pound in the 1.900's when at 1.720 was anticipated -- but only by the end of 2004 or in 2005. Already at 1.915.
Despite the Japanese throwing billions into buying the US$ to protect the Yen from strengthening and despite a G-7 meeting of "wealthy" countries where they mumbled about how awful the global imbalances are -- there has been little to convince the world that there will be any imminent change of macro dynamics to prevent the US$ from falling even further. The problem the US has is that although a weaker US$ helps the US's trade deficit -- global imbalances of trade and growth become even more serious. Sometime down the line the US is also likely to have huge inflationary pressures -- with all that implies.
The situation is very serious for the global economy. Even the Chinese are looking at the viability of unhooking the peg of the Yuan to the US$. Oil producers are morose - and the commodity boom accelerates. Meanwhile investors vote through stock markets that they anticipate earnings growth and that all will be reasonably okay in the US and other markets this year.
Those whose investments are being damaged by the declines in real value being US$- denominated -- are becoming increasingly concerned. At what point do they say -- to hell with this -- I'm getting out? Already the question being asked is -- well if I get out -- what do I invest in?
As mentioned before, significant shifts of global capital are happening. Since 2001, clever money has steadily been moving out of US investments to new long term global growth prospects -- even to the more responsible of the developing markets, particularly those with strong resource reserves -- such as South Africa.
US Treasury Bond holders include one of the biggest holders of US debt -- Japan. They have to be hanging in -- for now. In fact US Treasury Bond yields are still in bull trend. The US cannot afford higher interest rates and bond yields. Bond holders just don't know where else to put their money. Maybe as being whispered -- the US government itself is buying its own paper through middlemen. Talk about creating paper money.
The domino effect of the dump of US Treasury Bonds is a nightmare that the US Fed and the global financial system just cannot afford. Yet the risk hole is being dug deeper and deeper as the US trade deficit increases. And there is still little sign that the US itself can domestically reduce its high exposure to national, federal, corporate and private debt -- debt that has been holding the whole edifice up.
So what does all this mean for the average South African who has his life savings linked to property and the JSE in some way?
It means good news. After years of reducing the debt problems of the 1990s, the country is in a reducing interest rate environment. It is beginning to have a currency that earns the respect of the world. Property prices are rising ( while the warnings from property people are there that it is overdone and ready for a bubble burst - traders know that the bull in property prices is intact -- funny, the best of the economists agree this time!)
South Africa's reserves of gold, platinum, coal ... diversified mining resources -- and scope for new mining development are getting the attention of the world.
The region is a gateway to a resource- rich Africa -- much of which does not want to repeat previous mistakes. The region as growth area is being re-evaluated despite structural problems.
Property values are helping more of the lower and middle-classes to build wealth. Those people are becoming increasingly anxious to prove to the world that "Africa-risk" is Africa-opportunity.
Resource prices are booming, especially the $ price of Gold and Platinum -- as worried investors seek hedges against currency insecurity.
Interesting to see that some of the larger research institutions are beginning to suggest that South African gold shares are undervalued relative to their US counterparts. They are beginning to concede that although the Rand may strengthen some more in the next two years -- this should not deter earnings performance too much.
For some time I've been saying that the upside on the Rand is not enough of a handicap to discourage the resources sector, especially gold and platinum shares.
More important than the mining sector -- think of all the other JSE sectors which will benefit from a boom led by mining resources development. New mines and new mining development has almost not been thought of -- for at least two decades -- often a characteristic of the end of the bear. New investment in mining development has all sorts of spin-offs. Property, heavy engineering and infrastructure development, construction and building materials, transport, IT, retail -- and financials will all do well in this environment, fuelled further by decreasing interest rates.
In a recent Market Strategy we concluded that despite some worries, interest rates in South Africa are likely to be cut again this year -- even by half a basis point twice this year -- and still prospects for more cuts next year. As long as politicians don't do anything too silly.
Exporters who have been wailing about the drop in income as a result of the stronger Rand, have been working on cost savings and efficiency. A Rand heading to the ZAR$ 5.00's will still hurt for a while, but the benefits to our global credibility and South Africa's increasing ability to attract long-term investment are at stake. No more do we need to rely on being a Mickey Mouse among currencies.
Risks and volatility? Yes. This year of swings could see any of a number of external scenarios deeply denting JSE prices for a while. Panic on Wall Street, geopolitical issues -- we all know the risks. An exit door nearby is always a useful thing. Cash gives choices in dips.
Yet the primary feature of suggested JSE market strategy for 2004 -- is that shocks and dips may be excellent buying opportunities. While the technical, fundamental and cycle indicators show healthy trend development or maintenance, investors have to accumulate the dips to be aboard.
Share selection in a young bull and deciding when to buy -- is very important. In some cases the runners of last year can be runners again.
What about gold, platinum and silver shares? Well - investors who were disappointed last year are still going to be rewarded for their patience. Even if the $Gold price does more work $385 to $404 first - momentum and behavioural evidence while the Gold price is above $384 -- shows scope for $480 or higher this year. R2665 support on the RGold price has to hold and work above R2840 has to look likely -- to favour a JSE gold share run.
Global precious metals and diversified mines and the companies that earn from them -- are in a mighty big, still young bull market. You have to be aboard.
Victor Hugo
www.HugoCapital.com
www.SAgolds.com
www.GoldSignals.com
19 February 2004
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