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SWEET ‘16?

IMPLICATIONS FOR BUILDING, CONSTRUCTION, ENGINEERING & RELATED SECTORS

@AdrianSaville

Visiting Professor, Economics & Finance, GIBS

Chief Strategist, Citadel

50

500

199

5

199

6

199

7

199

8

19

99

200

0

200

1

200

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200

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201

0

201

1

201

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201

3

201

4

ALSI Index and Index Earnings (1995=100)

ALSI Index

Index Earnings

South Africa

0.93

Adrian Saville & Seleho Tsatsi, Cannon Asset Managers (2014, updated 2015 Citadel Investment Services)

NET WORTH FOLLOWS EARNINGS

World

0.81

LeadershipHumanCapital

BusinessProcesses &

Analytics

Dominant Market Share

Economies of Scale & Efficiency

Economiesof Scope

LogisticsLeading

BrandMonopoly

Customer Clusters & Networks

Barney, J. B. (1991) Firm resources and sustained competitive advantage. Journal of Management, 17: 99–120; available at www3.uma.pt/filipejmsousa/ge/Barney,%201991.pdf

IF BY MAGIC, YOU COULD ADD AN

INGREDIENT TO DRIVE EARNINGS …

CHOOSE THE ECONOMY

Economy World CHN DEU FRA IND ITA SGP USA ZAF

Correlation 0.66 0.62 0.61 0.81 0.52 0.43 0.90 0.65 0.71

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

20,0

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP Growth (% p.a.) & Growth In Real Corporate Earnings (% p.a.): 1998-2015

GDP Growth (%)

IF THE ECONOMY MATTERS …

SLUGGISH EVERYWHERE

Samantha Pauwels, Cannon Asset Managers (2016)

-8,0%

-4,0%

0,0%

4,0%

8,0%Vehicle Sales

Retail Trade

Electricity Output

GDP

Gross Fixed Spend

Disposable Income

Manufacturing Production

Business Cylce Indicator

10 Year Average

Latest 3 Figures

FALLING BEHIND

1,7

3,3

5,3

8,8

0,9

3,03,7

2,9

1,3

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

9,0

10,0

Growth in Income Per Person Per

Year: 1994-2014 (2011 $, PPP, %)

0,00

0,20

0,40

0,60

0,80

1,00

1,20

1,40

1,60

1,80

197

0

197

4

197

8

198

2

198

6

199

0

199

4

199

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20

14

South Africa's Share of World Export

Markets: 1970-2014 (%)

Adrian Saville (2015) Citadel Investment Services

A NEW DEAL

LES TRENTE GLORIEUSES & SIX PACKERS

Data via World Bank (2015), IMF (2015) and Angus Maddison via Maddison Project (2014); ggdc.net/maddison/maddison-project/home.htm; France:

1945-1975 France 5x 1965-1995 South Korea 8x 1975-2005 Chile 6x

Savings & Investment Demography Policy & Institutions

Education Health Openness

David Landes (1998) Wealth & Poverty of Nations; Daron Acemoglu and James Robinson (2012) Why Nations Fail; Abhijit Banerjee and Esther Duflo (2011) Poor Economics; RuchirSharma (2012) Breakout Nations

NEW DEALS & SIX PACKERS

Six Packers

Six Cylinders

Industrial Engines

Evolution from Imitators

to Innovators

GDP per Capita ($, 2010)

Relative US per Capita GDP (%)

Forecast Growth 2010-2050 (%)

Population (mn, 2010)

Bangladesh 1,735 4 6.3 151

China 7,430 16 5.0 1,339

Egypt 5,878 13 5.0 80

India 3,298 7 6.4 1,210

Indonesia 4,363 10 5.6 237

Iraq 3,538 8 6.1 32

Mongolia 3,764 8 6.3 3

Nigeria 2,335 5 6.9 158

Philippines 3,684 8 5.5 94

Sri Lanka 4,988 11 5.5 21

Vietnam 3,108 7 6.4 87

Brazil 10,980 24 3.5 190

Chile 14,956 33 3.4 17

Colombia 9,302 20 3.8 46

Kazakhstan 12,121 27 4.2 16

Korea 29,538 65 3.0 49

Mexico 13,689 30 3.0 112

Peru 9,470 21 4.0 29

Russia 15,701 34 3.7 143

South Africa 10,360 23 3.8 50

Thailand 8,638 19 4.4 67

Turkey 13,063 29 3.5 73

Adrian Saville, Cannon Asset Managers (2014) based on derivations of method via Citigroup Global Markets (2011) Global Growth Generators

4.1bn

Savings & Investment Demography Policy & Institutions

Education Health Openness

David Landes (1998) Wealth & Poverty of Nations; Daron Acemoglu and James Robinson (2012) Why Nations Fail; Abhijit Banerjee and Esther Duflo (2011) Poor Economics; RuchirSharma (2012) Breakout Nations

SOUTH AFRICA'S DEAL

Six Packers

Six Cylinders

Industrial Engines

Evolution from Imitators

to Innovators

GDP per Capita ($, 2010)

Relative US per Capita GDP (%)

Forecast Growth 2010-2050 (%)

Population (mn, 2010)

Bangladesh 1,735 4 6.3 151

China 7,430 16 5.0 1,339

Egypt 5,878 13 5.0 80

India 3,298 7 6.4 1,210

Indonesia 4,363 10 5.6 237

Iraq 3,538 8 6.1 32

Mongolia 3,764 8 6.3 3

Nigeria 2,335 5 6.9 158

Philippines 3,684 8 5.5 94

Sri Lanka 4,988 11 5.5 21

Vietnam 3,108 7 6.4 87

Brazil 10,980 24 3.5 190

Chile 14,956 33 3.4 17

Colombia 9,302 20 3.8 46

Kazakhstan 12,121 27 4.2 16

Korea 29,538 65 3.0 49

Mexico 13,689 30 3.0 112

Peru 9,470 21 4.0 29

Russia 15,701 34 3.7 143

South Africa 10,360 23 3.8 50

Thailand 8,638 19 4.4 67

Turkey 13,063 29 3.5 73

Adrian Saville, Cannon Asset Managers (2014) based on derivations of method via Citigroup Global Markets (2011) Global Growth Generators

4.1bn

1992-2011

SOCIAL IMPACT

Nic Borain, Joan Tshivhinda & Jeffry Schultz(2014) BNP Paribas Cadiz Securities; data via RESEP, PSLSD, 1993, NIDS 2012 ; Dambisa Moyo (2013) TED

0

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20

25

30

LSM 1 LSM 2 LSM 3 LSM 4 LSM 5 LSM 6 LSM 7 LSM 8 LSM 9 LSM 10

Proportion of Black Population per LSM Group (%)

2001 2013

“... the black

middle class

has been

the fastest

growing

population

group ...

since the

early 2000s.”

Nic Borain, Joan

Tshivinda & Jeffry

Schultz (2014)

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-2

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85

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Real GDP Growth (%): 1980-2018

World

South Africa

“In From The Cold”

3.4%

3.2%

Cannon Asset Managers (2015); IMF: Selected Country Groups Data (2015)

“Boom Bust”

1.4%

2.9%

0.29 0.86

“Hard Yards”

1.5%

3.0%

CATCHUP & THREE NOT SIX

Growth globally

co-ordinated

Past 20 years 2x

previous 20 years

Per capita income growth:

3.2% > 1.5%

IMF(2016); analysis by Adrian Saville, Citadel (2016)

0,0

1,0

2,0

3,0

4,0

5,0

6,0

Advanced

Economies

Rest of the World World South Africa

Structural Economic Growth Rates (% p.a.): 2016-2025

GROWTH STRUCTURE = 3 NOT 6


0,0

1,0

2,0

3,0

4,0

5,0

6,0

Advanced

Economies



GROWTH CYCLE

Drought &

Resources

Energy

2016 = 0.5%


0,0

1,0

2,0

3,0

4,0

5,0

6,0

Advanced

Economies



TRAPPED GROWTH = 1.7%

1.7% = zero

per capita

2016 = 0.5%


0,0

1,0

2,0

3,0

4,0

5,0

6,0

Advanced

Economies



REQUIRED GROWTH = 2.7% = STRUCTURAL

1.7% = zero

per capita

+1.0% per

capita = 2.7%

2016 = 0.5%


0,0

1,0

2,0

3,0

4,0

5,0

6,0

Advanced

Economies



ENOUGH TO STAY IN THE GAME …

BUT IT’S JUST MORE OF THE SAME

1.7% = zero

per capita

+1.0% per

capita = 2.7%

2016 = 0.5%

Three Great Throttles

1. Savings

2. Connectedness

3. Industrial Exclusion

1 & 2. FAST GROWTH NEEDS TWO THINGS

y = 0,2904x - 3,8707

R² = 0,5164

0

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4

6

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10

12

15 20 25 30 35 40 45

Re

al G

DP

Gro

wth

(A

ve

rag

e %

, 2

00

1-2

010)

Investment Share of GDP (Average %, 2001-2010)

R² = 0,4985

0

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20

30

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60

70

80

90

100

100 1 000 10 000 100 000

TCIP

(C

on

ne

cte

dn

ess

) Sc

ore

GDP per Person ($)

GDFI TCIP

Adrian Saville, Citadel Investment Services (2015)


0,0

1,0

2,0

3,0

4,0

5,0

6,0

Advanced

Economies



GD

FI

TCIP

3. GROWTH POTENTIAL IS GREAT BUT …

Statistics South Africa; Gallup; SAIRR; Youth Enterprise Development Strategy : 2013-2023; interpretation and analysis Adrian Saville (2016)

0

5

10

15

20

25

30

35

40

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

South African Unemployment Rate (%): 1994-

2015

Unemployment Rate: Expanded (%)

Unemployment Rate: Strict (%)

24,7

0 20 40 60 80

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-65

Total

Unemployment Rate (%) by Age

Group (2010)

3. STRUCTURAL CHOKE: INEQUALITY &

EXCLUSION

businessinsider.com/gini-index-income-inequality-world-map-2014-1; extreme poverty is defined by the food poverty line of R335 per month in 2015

Gini 0.65

Top 10% 53.8%

Bottom 10% 1.1%

Unemployment 25.0%

Extreme Poverty 21%


EXCLUSION

-

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

5 000

Chile Malaysia South Korea South Africa

Small Firms per One Million People

1987-2012

100 Biggest -30%

100 Smallest 15x

Adrian Saville & Andrew Dittberner (Cannon Asset Managers, 2013)


EXCLUSION

BEING A MIRACLE NATION IS INSIDE OF

OUR REACH

In 35 years, even with 5.4%

economic growth, he will

probably be poor

Growth is exclusive

He’s trapped

1918-1931

1931-1951

1951-1970

1971-1980

1981-1999

2000-2011

2012-2016

y = 0.1x + 1.4

R² = 0.72

-2

0

2

4

6

8

10

-20,0 -10,0 0,0 10,0 20,0 30,0 40,0 50,0 60,0

Ave

rag

e E

co

no

mic

Gro

wth

Ra

te (

%)

Average Real Commodity Price Change (%)

The Commodity Cycle & South African Economic Growth:

1918-2015 (Modified for Fixed Price)

Adapted from Mike Schussler (2016) via www.moneyweb.co.za/news/economy/what-long-term-slow-growth-means-for-sa/

THE REALITY … & SOME GOOD NEWS

1918-1931

1931-1951

1951-1970

1971-1980

1981-1999

2000-2011

2012-2016

y = 0.1x + 1.4

R² = 0.72

-2

0

2

4

6

8

10

-20,0 -10,0 0,0 10,0 20,0 30,0 40,0 50,0 60,0

Ave

rag

e E

co

no

mic

Gro

wth

Ra

te (

%)

Average Real Commodity Price Change (%)

The Commodity Cycle & South African Economic Growth:

1918-2015 (Modified for Fixed Price)

Adapted from Mike Schussler (2016) via www.moneyweb.co.za/news/economy/what-long-term-slow-growth-means-for-sa/

1. ‘17 BEATS ‘16

Points to 2017

beating 2016

2. GDFI IS KEY … AND WAY TOO LOW

YoY Growth (%) Gross Fixed Capital Formation: 1961-2015 Growth (%) Gross Fixed Capital Formation By Decade

-25

-20

-15

-10

-5

0

5

10

15

20

25

196

1

196

4

196

7

197

0

197

3

197

6

197

9

198

2

198

5

198

8

199

1

199

4

199

7

200

0

200

3

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201

5

7,9

4,7

0,71,5

7,6

2,3

0

1

2

3

4

5

6

7

8

9

1960-1969

1970-1979

1980-1989

1990-1999

2000-2009

2010-2015

South African Reserve Bank (2016); interpretation and analysis Adrian Saville and Kelly Firth (2016)

2. BUT THE DRIVERS ARE KNOWN AND

AVAILABLE

Real Interest Rate & Gross Fixed Capital Formation: (% GDP)

R² = 0,1898

-15

-10

-5

0

5

10

15

10 15 20 25 30 35

Kelly Firth (2016)

2. BUT THE DRIVERS ARE KNOWN AND

AVAILABLE

Real Interest Rate & Gross Fixed Capital Formation: (% GDP)

R² = 0,1898

-15

-10

-5

0

5

10

15

10 15 20 25 30 35

Public & Private Sector Investment (% GDP)

R² = 0,7396

0

5

10

15

20

25

0 1 2 3 4 5 6

Priva

te In

ve

stm

en

t

Public Investment

Kelly Firth (2016) adapted from Robert Matsila (2013)

Public & private infrastructure projects:

• multiplier & supply-side effects • impacts on growth, jobs & sustainability vary across sectors and by technology used• labour-intensive projects boost short-term growth & low-skilled jobs• biggest impact via telecommunications, roads and electricity

• lower transaction costs, more efficient use of inputs (especially transport costs)

• enhanced TFP promotes competitiveness• network externalities and improved market access• one standard deviation in infrastructure reduces Gini coefficient by 0.06

UNCTAD (2008); Kumo (2012); Bhattacharya, Oppenheim, & Stern (2015); African Competitiveness Report (2013); additional 1% GDP invested in transportation and communications sustains 0.6% increase GDP per capita growth rate

3. PUBLIC SECTOR AS A TRUE MULTIPLIER

Public & private infrastructure projects:

• multiplier & supply-side effects • impacts on growth, jobs & sustainability vary across sectors and by technology used• labour-intensive projects boost short-term growth & low-skilled jobs• biggest impact via telecommunications, roads and electricity

• lower transaction costs, more efficient use of inputs (especially transport costs)

• enhanced TFP promotes competitiveness• network externalities and improved market access• one standard deviation in infrastructure reduces Gini coefficient by 0.06

UNCTAD (2008); Kumo (2012); Bhattacharya, Oppenheim, & Stern (2015); African Competitiveness Report (2013); additional 1% GDP invested in transportation and communications sustains 0.6% increase GDP per capita growth rate

3. PUBLIC SECTOR AS A TRUE MULTIPLIER

Required infrastructure investment rate 7%-9%

South Africa has invested 5.2% from 2010-2015

4. ALREADY PRICED IN

Source: MRB Partners (August 30, 2016); *average of long-term credit ratings of Moody’s, Standard & Poor’s and Fitch; 0 is equivalent to investment grade; (+) higher than investment grade; (-) lower than investment grade; according to the relationship between credit ratings and nominal bond yields in the commodity-exporting EM universe, the highest rated non-investment grade sovereign bonds ought to yield 9.3-10%, only 30-90 bps higher than the current yield on local bonds respectively

5. WORLD CLASS CAPABILITY IN 43.03’

Wayde Van Niekerk, Olympic 400m champion and world record holder (2016)

5. OTHER WORLD CLASS CAPABILITY

http://www.dailymaverick.co.za/article/2016-08-31-africas-only-solar-panel-manufacturer-shines-brightly/#.V8ae2qKAW75

6. A WORLD BEATING TRUMP CARD

Dr Nthabiseng Legoete, Founder QualiHealth, Diepsloot (2016)

In 35 years, she’ll be 47

5.4% pa produces 6x South Africa

$2.1tn economy (India)

$23,000 per person (South Korea)

Citadel Investment Services Proprietary Limited is licensed as a financial services provider in terms

of the Financial Advisory and Intermediary Services Act, 2002.

THANK YOU

@AdrianSaville @CitadelSA

sweet ‘16? - masterbuilders.org.za · india 3,298 7 6.4 1,210 indonesia 4,363 10 5.6 237 iraq...

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