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Solid base seen for SA economic growth

The groundwork has been laid for the South African economic environment to match that of the boom of the sixties, says Old Mutual Asset Managers' Alwyn van der Merwe.

Van der Merwe said this was a good thing for the country's post democracy economy.

"South Africa is no longer marginalised," he said, comparing the situation with those in countries such as Zimbabwe which experienced stagflation and volatility.

"The conservative market friendly policies of government remain in place and government has a credible track record.

Van der Merwe said the painful part of the country's global re-integration and policy conservatism were also over.

Mindshift

The key outstanding issue was still whether the country and investors could make a big mindshift over the likelihood that low inflation was here to stay, that the currency was no longer a one-way bet and that historical balance of payments constraint was no longer serious.

Van der Merwe said the current economic environment showed remarkable similarities with that prevalent during the 1960s.

"We expect South Africa to experience more muted cyclical swings in growth, inflation and interest rates, very much the scenario of the 60s."

Solid foundation

He believed the economic and political conditions that were feeding the boom/bust scenarios of the past 35 years had been worked out, Ieaving a solid foundation for a more stable economic environment.

Van der Merwe said there were however implications for investors. He warned that while investments in property should benefit from the low inflation and better growth environment, investors should watch their entry price into this market carefully.

Cask investments would also yield low returns, while bonds were better.

He said equities would benefit from low inflation but that the strong rand would hurt some investors.

Risk of short term cycles

Van der Merwe said these positive aspects of the economy however did not eliminate the risk of short-term cycles pushing up inflation and interest rates, or weakening the rand.

"But these short-term cycles are not expected to be as severe as they have been since the 1970s.

"Investor behaviour still appears to be driven by the view that South Africa will see a repeat of the boom/bust cycle of the past 35 years," says Van der Merwe.

Case for offshore diversification

Speaking at the same conference Omam senior portfolio manager Denzil Burger said, despite low returns there was still a case to be made for offshore diversification.

"The dramatic recovery in the rand over the past two and a half years together with low global interest rates and volatile equity markets, has resulted in poor returns on offshore portfolios in rand terms.

"As a result many investors are questioning the need for offshore assets, much as investors were considering cutting their local equity exposure in the wake of poor returns up until the second quarter of last year."

Reduce emerging market risk

Burger said geographic diversification was one of the benefits of offshore investing. "It also reduced the emerging market risk and can reduce the currency risk."

Burger said offshore investing could still provide a smoother ride over-all in the long run and provided the investor with access to increased investment opportunities.

"The long term case for offshore assets remains powerful and investors should not react to recent poor returns by simply cutting global holdings," he said.

Investors should instead take stock of overall positioning and consider buying opportunities crated by the rand's current strength, he added.