Increase in corporate credit seen as engine of 2013 growth

GROWTH in borrowing by households and private companies accelerated more than expected last month from December 2011, to the highest rate of expansion in almost four years, Reserve Bank figures showed on Wednesday.

This suggests spending spurred growth in the last quarter of last year.

The growth in credit extended to households and private companies — to 10.1% year on year last month from 9.6% year on year last November — could also indicate a strong dependence on credit to fund festive season spending.

"In December, there is usually a pick-up in credit demand because of the festive season. The strong growth could have been boosted by low interest rates and price discounting on certain items," Nedbank economist Johannes Khosa said on Wednesday.

Growth in credit extended to households slowed year on year last month, while that to corporates improved.

Growth in the category that indicates demand for credit by corporates — other loans and advances — improved year on year last month, the Reserve Bank reported.

"We expect this credit category (corporates) to drive growth in 2013 — in response to the cost of credit as well as the increased government projects, notably the renewable energy projects," Standard Bank economist Shireen Darmalingam said.

While corporate borrowing is expected to improve, the same is not forecast for consumers.

Households are expected to face steeper electricity, food, and fuel costs this year, according to analysts, which will cause a slowdown in the growth of household consumption expenditure.

There was continued growth in unsecured lending last month, the Reserve Bank said.

Investec’s chief economist in South Africa, Annabel Bishop, on Wednesday said that while unsecured credit would be problematic if it were extended to people who could not afford it, it played an important role in enabling small businesses to grow and students to fund their education.

Nedbank expected credit growth to stabilise this year, and growth in asset-backed credit — particularly to individuals — was likely to ease as consumer confidence remained weak due to the poor economic outlook and high debt levels.

Borrowing by households and private companies rose by R240bn last year — much higher than the R129bn recorded in 2011, but still below the levels of about R300bn recorded five years ago, before the recession.

While most of the credit extension components monitored by the Bank — such as instalment sales and other loans and advances — provided support to the strong growth in borrowing last year, mortgage advances were a drag. Mortgage advances are the largest component of credit extension.

"Mortgage advances have shown relatively low growth right through 2012, most probably related to the broader economic environment, which impacted on the consumer and eventually worked through to the property market in terms of subdued demand," Absa Home Loans property analyst Jacques du Toit said.

"I think the state of consumer finances definitely plays a role here, and all this despite the lowest interest rates in 40 years."

The low interest rates have not been enough to lift the property market, as most consumers still do not qualify for home loans due to overindebtedness coupled with tough National Credit Act requirements.

Mr du Toit forecast single-digit growth of 4%-5% for mortgage advances this year.

Ms Bishop said the marginal rise in mortgage advances last month reflected weak housing demand. "Indeed, real house prices continue to fall."

BdLive

The Top 17 Investing Quotes of All Time

1. "An investment in knowledge pays the best interest." - Benjamin Franklin
When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research, study and analysis before making any investment decisions.

2. "Bottoms in the investment world don't end with four-year lows; they end with 10- or 15-year lows." - Jim Rogers
While 10-15 year lows are not common, they do happen. During these down times, don't be shy about going against the trend and investing; you could make a fortune by making a bold move - or lose your shirt. Remember quote #1 and invest in an industry you've researched thoroughly. Then, be prepared to see your investment sink lower before it turns around and starts to pay off.

3. "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett
Be prepared to invest in a down market and to "get out" in a soaring market.

4. "The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Fisher
Another testament to the fact that investing without an education and research will ultimately lead to regrettable investment decisions. Research is much more than just listening to popular opinion.

5. "In investing, what is comfortable is rarely profitable." - Robert Arnott
At times, you will have to step out of your comfort zone to realize significant gains. Know the boundaries of your comfort zone and practice stepping out of it in small doses. As much as you need to know the market, you need to know yourself too. Can you handle staying in when everyone else is jumping ship? Or getting out during the biggest rally of the century? There's no room for pride in this kind of self-analysis. The best investment strategy can turn into the worst if you don't have the stomach to see it through.

6. "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Robert G. Allen
Though investing in a savings account is a sure bet, your gains will be minimal given the extremely low interest rates. But don't forgo one completely. A savings account is a reliable place for an emergency fund, whereas a market investment is not.

7. "Invest in yourself. Your career is the engine of your wealth." - Paul Clitheroe
We all want wealth, but how do we achieve it? It starts with a successful career which relies on your skills and talents. Invest in yourself through school, books, or a quality job where you can acquire a quality skill set. Identify your talents and find a way to turn them into an income-generating vehicle. In doing so, you can truly leverage your career into an "engine of your wealth."

8. "Every once in a while, the market does something so stupid it takes your breath away." - Jim Cramer
There are no sure bets in the world of investing; there is risk in everything. Be prepared for the ups and downs.

9. "The individual investor should act consistently as an investor and not as a speculator." - Ben Graham
You are an investor, not someone who can predict the future. Base your decisions on real facts and analysis rather than risky, speculative forecasts.

10. "It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for." - Robert Kiyosaki
If you're a millionaire by the time you're 30, but blow it all by age 40, you've gained nothing. Grow and protect your investment portfolio by carefully diversifying it, and you may find yourself funding many generations to come.

11. "Know what you own, and know why you own it." - Peter Lynch
Do your homework before making a decision. And once you've made a decision, make sure to re-evaluate your portfolio on a timely basis. A wise holding today may not be a wise holding in the future.

12. "Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this." - Dave Ramsey
By being modest in your spending, you can ensure you will have enough for retirement and can give back to the community as well.

13. "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." - Paul Samuelson
If you think investing is gambling, you're doing it wrong. The work involved requires planning and patience. However, the gains you see over time are indeed exciting!

14. "I would not pre-pay. I would invest instead and let the investments cover it." - Dave Ramsey
A perfect answer to the question: "Should I pay off my _____(fill in the blank) or invest for retirement?" That said, a credit card balance ringing up 30% can turn into a black hole if not paid off quickly. Basically, pay off debt at high interest rates and keep debt at low ones.

15. "The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton
Follow market trends and history. Don't speculate that this particular time will be any different. For example, a major key to investing in a particular stock or bond fund is its performance over five years. Nothing shorter.

16. "Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett
In the beginning, diversification is relevant. Once you've gotten your feet wet and have confidence in your investments, you can adjust your portfolio accordingly and make bigger bets.

17. "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch
When hit with recessions or declines, you must stay the course. Economies are cyclical, and the markets have shown that they will recover. Make sure you are a part of those recoveries!

Warren Buffett Stock Portfolio - A review of last year’s investment forecasts

A look back at the forecasts made for the expected performance of investment markets in 2012 this time last year shows up the folly, once again, of using ‘forecasts’ to determine and shape investment strategies.

At the beginning of 2012 the headlines were full of gloom and doom.

Global economic activity was tepid at best while the heat and noise surrounding the expected collapse of the European monetary union following on the near-certainty of a Greece withdrawal was reaching boiling point almost on a daily basis. This continued for most of the year dragging down markets to cyclical lows in June.

And as the year sped towards its ending, headline grabbing Greece and Spain was quietly replaced by equally doom-laden forecast surrounding the so-called ‘fiscal cliff’ in the USA.

The cumulative effect of this was that a great number of potential investors were kept on the side lines in cash while an even greater number of investors fled equity markets into cash at precisely the wrong time. They missed out on one of the best rallies in markets for a long time.

Banking giant Citigroup, for instance, put the certainty of a Greece withdrawal from the EU at 90% at one stage around the middle of last year. Greece, Spain and later on in the year Italy dominated financial media headlines, creating a sense of impending doom for risk-taking investors in equity, currency and commodity markets.

A January 5, 2013 analysis of 2012 forecasts on the Bloomberg website (Almost all of Wall Street got 2012 Market Calls Wrong) illustrates the dangers of relying too much on banner-headline forecasting.

For instance, hedge fund manager John Paulson (he manages $19bn in assets) lost a fortune for his clients banking on the collapse of Europe 2012.

Banking giant Citigroup put the odds of Greece pulling out of the EU at 75% and Morgan Stanley forecast a down year for global equity markets. Goldman Sachs chief executive Lloyd C. Blankfein, however, early on the year warned that the biggest risk for investors was being too pessimistic on markets, advising an increased exposure to equities in an era of negative global interest rates.

And then there are the perennial bears such as economist Nouriel Roubini—who have been forecasting a collapse of the global financial system for many years now.

In hindsight the ill-timed advice shows that even the largest banks and most successful investors failed to anticipate how government actions would influence markets.

Unprecedented central bank stimulus in the US and Europe sparked a 16% gain in the S&P 500 which included dividends for calendar 2012, investors who bought Greek bonds in May reported a windfall of 78% while investors in US government bonds, which was described as “dangerous” by legendary investor Warren Buffett, provided a 2.2% return.

The market value of global equities increased by $6.5trn last year as the MSCI-All Country World Index returned 17% including dividends.

Some of the best returns were earned in European countries at the centre of the crisis swirling around Greece, Spain and the future of the European Monetary Union. The German stock market was up 29% last year, for example.

It would appear as if fund managers, bankers and economists alike underestimated the political will of European leaders to keep the EU intact along with the determination of the US Federal Reserve to spend almost unlimited monetary firepower in an effort to keep interest rates low, increase employment rate and get economic activity to pick up speed.

South African equity markets too had a very good year with the average rate up 22% for the year on average, while certain sectors such as property was up a staggering 37%.

The resource sector, mainly as a result of declining global commodity prices and the events surrounding Marikana, was the only sector to record a negative return year last year.

Author: Magnus Heystek (This article was first published in Brenthurst’s Investment Report. / Then in Moneyweb)