Strikes don't put South Africa off stride

South Africa's main stock index rose to a record this week even as the country's gold industry was idled by the biggest strike since the end of apartheid. Optimism about growth in Africa's biggest economy may sustain the rally.

"Strikes don't affect our investment rationale," said George Howard, chief investment officer at Sanlam Investment Management in Cape Town. Economic growth was important, "not one-off events".

Finance Minister Trevor Manuel has said South Africa's economy is likely to expand by 4.3 per cent this year, the fastest pace in nine years. Strikes in the mining industry, whose contribution to the economy has dwindled since 1980, will do little to derail growth.

The FTSE/JSE Africa all shares index has surged 24 per cent this year on expectations economic growth will accelerate, helped by interest rates at their lowest since 1981. South African companies will boost earnings 31 per cent this year, more than double the global average, an Institutional Investor survey has found.

The gold mining industry, South Africa's top foreign-currency earner, had five days of strikes this week as workers demanded higher wages. The unions representing gold miners ended the dispute by agreeing to a pay rise of as much as 7 per cent.

However, the unions said Anglo American and BHP Billiton were among coal mining companies that could also face strike action over pay. The gold mining industry was not alone in having business disrupted. Grocers, airlines and steel-makers were among companies affected by strikes in the past month.

South Africa's economy last grew at the 4.3 percent rate forecast for this year in 1996. It expanded 3.7 per cent last year and 2.8 per cent on average since Nelson Mandela's African National Congress came to power in 1994.

Mining accounted for 7.1 per cent of the economy in 2004, down from a peak of 20.6 per cent in 1980. The country's gold output fell 8.8 per cent last year to the lowest since 1931.

"The economy is much more diversified now," said Slim Feriani, at Progressive Developing Markets in London. "The expansion of the domestic economy has meant that it is less reliant on exports."

Statistics South Africa data show finance was the biggest contributor to the economy in the first quarter.

On April 14, South Africa's Reserve Bank unexpectedly cut its key interest rate by half a point to 7 per cent, the seventh reduction since June 2003. The rates were kept unchanged on Thursday for the fourth consecutive month.

The rand has slipped 11 per cent against the US dollar this year. The currency's decline has helped improve the profitability of mining companies that pay workers in rands and sell their metal in US dollars.

The index measure for shares in the industry has the biggest weighting in the benchmark, accounting for 31 per cent.

Anglo Platinum, the world's largest platinum producer, reported a 35 per cent increase in first-half profit, helped by the depreciating rand and rising platinum prices. The company's shares have surged 51 per cent this year.

Sasol, Africa's largest chemicals-maker, has also benefited. Its profit for the year to June 30 rose 60 per cent and its shares have climbed 78 per cent this year.

Still, the weaker rand is hurting returns for US dollar-based investors. The FTSE/JSE has added 11 per cent in US dollar terms this year, lagging the 15 per cent gain by the Morgan Stanley capital international emerging markets index, a global benchmark.

"A weaker currency won't be good for the market," said James Syme, head of emerging markets at SG Asset Management in London.

Richard Hassen, a fund manager at Old Mutual Asset Managers, is more optimistic. Economic growth "hasn't yet been fully priced into the sharemarket. We're still bullish on South Africa."

- BLOOMBERG