Dear Reader,

I’m fed up with the markets this week. And I’m tired of being smashed out of trading positions due to excess volatility.

I was watching the now usual “sea of red” on my trading screens yesterday when it occurred to me: What if the recession wasn’t really over? At first I slapped myself for asking such a stupid question. Everybody knows the country powered out of its technical recession early in 2009. And we had the World Cup in 2010, which brought in billions.

Well I have a news flash for you. The World Cup was a fantastic success – it brought in billions and even more in international goodwill. But it’s not a long-term recession buster.

Besides, the country’s trade unions and government’s crazy intervention with mining licenses has already poured cold water on the world’s enthusiasm for all things African.

You see, we’re only as good as our last report card. We got an A+ for the fantastic football tournament and something similar to Julius Malema’s woodwork grade for the recent public sector strikes.

Ignoring the positive impact of the World Cup you’ll find an economy in tatters. We’ve got one of the highest unemployment rates in the world; our education system sucks;  we’ve got 12 million social grant recipients and are trying to pay for everything from a dwindling tax base.

It’s showing in the numbers. Earlier this year economists trumpeted their estimates of 3%-plus for GDP growth through 2010. Today they’re revising their estimates downward. The second-quarter statistics plugged their brass instruments in record time as the growth rate slumped despite the billions brought in by the 2010 World Cup.

So what’s going on? Have we really put the recession behind us or are we at risk of testing the waters of economic turmoil for a second time?

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“Banks are the real bell weather for the economy”

Has the “fat lady” sung for South Africa’s recession? Ignoring what you’ve just read, let’s take a look at the bell weather of South Africa Inc – the banking sector.

Forget what the analysts say for a moment and take your own “snap shot” of the banking sector. Banks traditionally make their money by taking deposits from you and me (and companies of course) and then lending out this money at better interest rates.

Lending is under attack on two fronts. On the one hand, banks are struggling to qualify potential lenders because of the stringent conditions in the national credit act and the general indebtedness of consumers. As a result the value of new mortgage loans and hire purchase agreements which constitute a massive slice of bank lending activity has plunged dramatically.

You can see evidence of this slowdown in the passenger sales and housing statistics. Hold on! I can hear the rumblings of your objections: “The latest motor vehicle sales numbers are improving and house prices are trending higher!” Am I talking nonsense?

Assessing an economy is about more than blindly looking at the statistics. The truth is each of these improvements is off the extreme lows recorded through the 2008/9 recession. And there’s a secret the house price statistics don’t let us in on… Activity – meaning the actual numbers of houses changing hands is a trickle of what it used to be…

I’ve made no secret about being on the hunt for a property in recent months. And what I’ve found in suburb after suburb is quite shocking. Since 2007 the number of houses actually changing hands is in steep decline. In a “middle of the road” residential area in Centurion 63 sectional title properties were transferred in 2007, 20 in 2008, 10 in 2009 and only six, year to date… From the 2008 peak to today volumes are 80% down even after doubling the 2010 sales for a full-year estimate.

And transaction values which on some levels mirror the amount of bank lending fell from R41.112m to R4.324 million over the same period. Full title homes in this area went through a similar slide from 54 units in 2006 to 12 (year to date 2010) and from R67.296 million to just R14.657 million.

I can already see a way to spin positive news from this shrinking industry… All we have to do to guarantee a “feel good” outcome is look at the average price of concluded transactions.

Instead of the “doom and gloom” paragraphs above I could have simply said the average price of a sectional title home increased from R653 000 to R720 000 between 2007 and first-half 2010.

Feel better? House prices are on the rise and everything is coming up roses... I think not! It’s like planting flowers on a mass grave. Nothing you do will hide the truth.

The second attack on lending activity is from the borrower. Consumers are defaulting on their loans like never before. It’s this “bad debt” which is hitting the banks hard. Nobody expected the 2008/9 recession, nobody expected the number of job losses we’ve seen and nobody expected impairments to remain so high after all those Reserve Bank interest rate cuts. But they did!

Is the recession over? Has the “fat lady” had her final say? I think this opera riddle will only be answered when the “big four” banks rise from the proverbial post-recession ashes and report meaningful improvements in earnings and impairments.

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Hunting small animals is just as much fun

If you’re among the thousands of hunting enthusiasts in this country (I’m not for the record) then you’ll know the thrill of taking small game at 160 meters is right up there with bagging an Eland.

When HSBC came to South Africa they wanted one of the country’s “big four” banks and they wanted it bad! The experts reckon they’ll pay at least R40 billion for 70% of Nedbank. You can add up to 20% to the total, especially if Old Mutual (with a 50%-plus share of the bank) plays hard ball.

But I’m not so sure the international bank put its crosshairs on the right target. Nedbank might have the critical mass to get it where it wants to be; but something like Capitec has a far better understanding of what the average African banking client needs.

If I were on the hunt for a bank in Africa, I think I’d have bagged Capitec instead. It’s nimble – in the guts of the country’s emerging mass affluent – and certain to expand in leaps and bounds domestically. Imagine the innovative and low cost banking offering of Capitec tying up with the balance sheet and international clout of HSBC! Now that’s a mouth watering prospect!

If you’re keen on becoming a banking pioneer you might want to ignore Absa, Standard Bank, Nedbank and FirstRand for now, and build up a sizeable position in Capitec. When you check back with me in three years I’m sure the small bank will have outperformed its larger peers by some margin.

Let the profits roll,

Gareth Stokes

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