Rudi van der Merwe has his doubts about how realistic Trevor Manuel's four percent growth target is.

Bruce Whitfield:
Rudi van der Merwe from Standard Financial Markets I’m trying to make light on a day which was a pretty tough day just on the macroeconomic front as well as in terms of what happened on equity markets and Trevor Manuel in the news talking about yes, inflation is high, yes petrol prices are high, but he sticks to his four percent growth target which is admirable considering where we are.

Rudi van der Merwe:
Bruce evening yes it is rather, how realistic it is I am afraid I have my doubts. I think we are going to find it extremely difficult to hit that four percent target this year. We can see with the company results coming out specifically the consumer related companies are under very severe pressure and the little growth that you do see is typically inflationary as opposed to real growth of any kind and typically you are also getting a lot of warnings that things have started slowing over the last six months which probably means the next six months are going to be significantly more difficult.

Bruce Whitfield:
We saw that in Foschini's results, they actually made a first half profit, the second half they saw earnings decline and they've got an overall growth rate of 2.5 percent which for Foschini which four years ago, three years ago, was producing profit growth of 40 percent per annum this is a disaster.

Rudi van der Merwe:
Absolutely Bruce that is quite right and consumers are very clearly under significant pressure and very clearly well over indebted and rates by the look of things have some way to rise yet and obviously there is a lagged impact of the rate hikes still to come 18 months further down the line so I think we are going to be very hard pressed even to get three percent GDP growth this year quite honestly.

Bruce Whitfield:
The rest of the globe at the same time is slowing quite sharply as well and we as an emerging market a big chunk of our economic growth comes from exporting things like commodities into these developed markets which are slowing sharply at the moment so I think it is going to be a very tough quarter to get anywhere near four percent.

Bruce Whitfield:
You just look at what happened in the banking sector today on the threat of higher interest rates, Investec down four percent, R52.10, we haven't seen it there for a very long time. FirstRand, Standard Bank, Nedbank, Absa all of those down to multi month lows getting beaten down very sharply.

Rudi van der Merwe:
Bruce yes I think also a combination of things impacting that this scare on interest rates certainly having some impact on margins there. We are seeing as we said a lot of the consumer related companies coming out that are exposed to credit are showing a severe deterioration in their debtors books and I think that is going to certainly impact the banks earnings very significantly going forward and that is not going to be a one set of results problem either it is probably going to be for the next at least two, possibly three, sets of results that that situation is going to probably worsen rather than have a brief dip. The other is that Standard Bank has warned that they probably won’t meet their targeted, I think it is inflation plus…

Bruce Whitfield:
Well they had two profit warnings effectively in March saying CPIX plus five is the new target and yesterday saying we are not going to make CPIX plus five but we expect to beat consumer price inflation. Now within three months to come up with two dramatic statements like that from a company with which we have associated consumer price inflation plus at least 10 percent is serious.

Rudi van der Merwe:
It is Bruce and the other thing is it is a company which is very flush with capital, it is not one of the banks that is at all stressed, they just had a very significant inflow of capital which actually should help their earnings to some extent in terms of the interest earned on that capital. We have seen some of the other banks warning that or there has been recent media speaking about FirstRand’s losses in the UK and that those potentially are still under pressure and there was quite negative press on Investec as well today so I think on top of that we are also seeing a lot of analysts finally coming forward and starting to reduce their price targets on banks and reduce those earnings expectations.

Bruce Whitfield:
You have been very concerned about Investec particularly for a long time and the piece in the FM today does go into some of the detail at Investec and it does raise lots of questions and Stephen Koseff is quoted as being quite defensive about the acquisition record of Investec in that piece. It is one certainly worth reading. We will have more with Rudi van der Merwe the later on.

Bruce Whitfield:
Doug Murray the Foschini chief executive is stuck in his presentation; we hope to speak to him in the next 15 minutes or so, so Rudi van der Merwe our market commentator this evening and Rudi the bad debt scenario really is an underlying theme as to what is going on in the South African economy. Standard Bank complained about it yesterday, Foschini is complaining about it, Mr Price has said it saw suddenly bad debts come through in its very small credit book; bad debts is the theme which is probably only just beginning to play out.

Rudi van der Merwe:
Bruce that is quite right and it is not a purely South African thing either. There has been overextension of credit on a global basis which is exactly why we are seeing the problems we are just at the moment. Part of what exacerbated that is loose monetary policy, we have seen asset prices grow very strongly over the last couple of years and a lot of debt formed against that and then last year apart from the banks just lending aggressively we did see just before the National Credit Act a bit of a panic really I think people were scared that credit extension was going to slow very sharply and everybody who was a lender of money just decided to really roll it out exceptionally aggressively and I think that last push has really hurt consumers now that rates have gone up as significantly as they have and you know people get squeezed by inflation like they are at the moment and clothing related debt is really low on your priority list if you are really in trouble, obviously food is at the top of it.

Bruce Whitfield:
What are they going to do - repossess my T-shirt? I don't think so. So you buy food and you buy fuel so that you can get to work to service your debt and if there is anything left after that maybe you will consider paying off your store card.

Rudi van der Merwe:
That’s right and I think people are so stressed that you are finding that debt kind of gets rolled around from one card to the other and yes as you say the store cards are the last ones that get paid.

Bruce Whitfield:
And also what is happening as well increasingly financial institutions are prepared to extend the period over which you pay your debts. So if you have got a 20 year mortgage I am hearing that some of the banks will give you 25 years or 30 years so lower your monthly repayment but keep you indebted for considerably longer which is great in the short-term but it does shackle you over the long term.

Rudi van der Merwe:
Yes Bruce that is part of the problem quite honestly and that is one of the big things that leads to stagnation in an economy if you allow people to continue trying to pay off debts that they really can't service. It prohibits them from forming new capital, for example if somebody had to effectively be declared bankrupt and start with a clean slate they can start building capital immediately again but if they are forced to just service those debts they can't start anything new and it takes forever to…

Bruce Whitfield:
A considerable amount of time.

Rudi van der Merwe:
The other danger is specifically for banks and for people who have big debtors books is this rolling of debt because you say well they can't pay it in six months we will extend it to 12 months and before you know it so much more of your book has gone rotten and when you start finally having to close those books down you are way behind the curve again so I think it is a extremely dangerous scenario for guys to start extending loans too quickly or too easily.

Bruce Whitfield:
At some point there has got to be some value offered in the market in terms of retail shares, in terms of banking shares; you have said for a long time that banking shares which had stabilised, a lot of them, Standard Bank around R90, Absa around that level, Nedbank was between 110 and 120, all of those are down about 10-15 percent from those levels. Is this a time to be looking into these sectors and saying there may be value now in Standard Bank at R85, there may be value in Absa at 85 and there may be value in Investec at 52?

Rudi van der Merwe:
Bruce not yet. A lot of people are saying their stocks are cheap on a PE basis but those forward earnings I'm afraid just aren't going to materialise.

Bruce Whitfield:
What you're saying there is on a historical basis they look cheap but when you look at what the money is that they are going to earn into the future is they are going to earn probably considerably less than they have in the past.

Rudi van der Merwe:
Yes they certainly are going to be under significant pressure to grow, they are going to find it exceptionally difficult and they are coming off an extremely high base and the next set of results will be poor but that is not going to be the end of it I am afraid. This is the beginning of the downturn as opposed to the end of it from an earnings perspective so I think we are still quite a way off, probably at least 12 months, before these stocks start becoming attractive.

Bruce Whitfield:
What do investors then do Rudi? Where do they go? Do they churn what little bit they have into cash or maybe just sit on their losses and hope for a turnaround at some point?

Rudi van der Merwe:
It is extremely difficult Bruce. I read someone's commentary on it a while back and you know the banks are looking a relatively cheap on historic terms and the commodities are looking relatively expensive and there is a lot of talk about bubbles and the like and you sort of have to pick your poison. You know the one looks cheap but has an exceptional amount of risk around it and the other looks very expensive but there is potential for it to run further and effectively it looks at this stage like the area where you are least likely to get a big hiding is in the industrial sector where the companies are still cash flush and are paying decent dividend yields and it looks like there is still going to be reasonable growth.

Bruce Whitfield:
Rudi van der Merwe, thank you very much indeed.