Miners boost the South African stock market

SOUTH Africa will be in the world’s spotlight like never before as the World Cup approaches. Television pictures of gazelles and wilderbeest roaming across the veldt will no doubt be great for the country’s tourist industry, but other parts of its economy also look sure to benefit.

According to a report released last month by Deloitte Touche Tohmatsu (DTT), hosting major sporting events such as the World Cup or the Olympics can accelerate the host country’s economic development by encouraging investment, boosting tourism and elevating the country’s status on the world stage. It is estimated that hosting the Olympic games boosted tourist revenues in China by nearly $5bn. Greece spent almost €1.3bn on improving Athens’ transport network. But the economic impact of the Olympic Games in Barcelona in 1992 was unusually large; estimates by the University Autonoma de Barcelona value the economic and social impact of the Games at $16bn.

The DTT report adds that the intensive building of stadiums and other infrastructure before these sorts of events begin can bring a large injection of investment that can have a long-lasting economic impact. South Africa’s tourism minister Marthinus van Schalkwyk estimates that the World Cup will contribute more than £4.3bn to South Africa’s economy through construction. More than 1m tourists are expected to travel to the games, generating £1.3bn.

But the World Cup is not the whole story for South Africa’s economy this year. The country is the world’s third largest gold producer and a leading producer of platinum, which it exports to fast growing emerging market nations. These vast reserves of raw materials mean that it is also benefiting from the growth story in China and other emerging nations.

Already the global commodity boom has helped boost South Africa’s fiscal position. Preliminary results for total revenues collected during the 2009-10 fiscal year, released earlier this month, increased to nearly £52bn, £700m higher than estimated. This has helped to reduce the budget deficit burden by 0.5 per cent of GDP; it now stands at 6.8 per cent of GDP, which looks fairly good compared to deficits in some countries in the West.

Together these have improved the outlook for South Africa’s economy, and yesterday the International Monetary Fund (IMF) raised its growth forecast to 2.6 per cent this year, compared to its previous estimate of 1.7 per cent. It said that the continued recovery in world trade should boost growth.

However, it is not all good news. The IMF also warned that consumer spending, which accounts for two-thirds of total expenditure, could be slow to recover. Murat Toprak, emerging market strategist for Societe Generale, also says that there are some worrying holes in the country’s growth story: “Booming trade for exporters helped South Africa to exit recession, however we are now at the point where we need other sectors of the economy, to pick up to continue the positive spiral in the future.”

Those looking to invest in South Africa should focus on its commodity boom. The best way to do this is through the stock exchange, the FTSE/Johannesburg Stock Exchange (JSE), which includes the top 40 companies in South Africa and is heavily weighted toward the mining sector, which makes up nearly 51 per cent of the entire index (see chart on left).

Foreign money is expected to flow into theFTSE/ JSE index this year, as investors look to take advantage of rhe commodity boom. The World Bank estimates that foreign portfolio flows into South Africa’s stock exchange topped $8.6bn in 2007, although they dipped in 2008 as in-flows were hit by the financial crisis.

Investors who are bullish on commodity prices should consider a long position in the FTSE/JSE index and there is now a range of listed products that give you exposure to the index. RBS recently launched FTSE/JSE covered warrants, which are good for risk adverse investors since these products limit your downside. It also recently launched an accelerated tracker, which provides leveraged exposure to the FTSE/JSE. Lyxor Asset Management also offers a FTSE/JSE exchange-traded fund.

Even if your team doesn’t perform at the World Cup, there are plenty of ways to pick a winner.