Construction sector looks up to Government's planned infrastructure spend

Old Mutual Investment Group Macro Solutions Portfolio Manager, John Orford believes SA construction sector’s medium-term prospects will almost certainly face headwinds due to lingering electricity challenges.

Government's proposed R800-billion of public sector investment in South Africa’s infrastructure over the next three years could go some way to a long way to loosening the grip in the construction sector.

Stakeholders in the sector continue to anxiously await the materialisation of the proposed R800-billion of public sector investment in the country’s infrastructure over the next three years. However, while this will undoubtedly be a much-needed shot in the arm for the country’s ailing construction industry, it should by no means be considered a panacea as the planned investment spend represents little to no growth in infrastructure investment compared to the previous three year period.

SA construction sector’s medium-term prospects will almost certainly face headwinds due to lingering electricity challenges, according to John Orford, Portfolio Manager for Old Mutual Investment Group Macro Solutions.
 
“While government’s infrastructure development rollout will undoubtedly mean the construction industry will experience better days in the coming years, any uptick in activity shouldn’t automatically be seen as a cyclical turnaround by investors,” he emphasises, “as it’s very likely that any short-term increase in activity will eventually be tempered by still slow economic growth as a result of energy constraints and delays in the rollout of Eskom’s new capacity,” he says.

Orford does, however, point out that much of this is already priced into the sector, as evidenced by very subdued share prices compared to the broader market in recent years. And he is also quick to explain that the news coming out of the construction sector has not all been bad in recent years.

“While activity has slowed considerably from the highs preceding the 2010 FIFA World Cup, we have actually seen positive growth in three of the last four years,” he explains, “with real growth in construction investment recorded at 3%, 11.8% and 14% in 2011, 2013 and 2014 respectively, and the potential for low interest rates is likely to continue to underpin the sector during the rest of 2015.”

Orford expects the SA construction sector to continue to seek opportunities in international markets including Africa to offset weak domestic growth prospects  

“The larger companies in the sector have already made significant moves to establish international operations, including Africa,” he explains, “and we expect to see this trend gain traction as rising infrastructure investment on the continent also increases demand for skilled and experienced construction talent.”

However, he also warns that while opportunities in Africa may translate into sustainable growth for many SA construction companies, these opportunities also come with more than their fair share of project and political risk. Therefore caution - by companies and investors - is strongly advised.
 
But irrespective of potential for growth in the rest of Africa, for now Orford is convinced that the challenges facing the construction sector at home will continue to hamstring its efforts to deliver on its full potential as an important driver of economic growth.

“In the current economic environment, construction companies facing a weak demand environment are experiencing pressure on margins.”  And while the eventual rollout of public infrastructure investment may ease the pressure for some businesses, the sector as a whole is likely to continue feeling the pinch for quite some time to come,” concludes Orford.