Too much sugar can be bad for banks
One of Business Leadership SA’s (BLSA’s) most prominent members this year got itself into an unnecessary pickle that inadvertently made it a lightning rod for scepticism about the credibility of research issued by bank analysts.
It’s almost a decade after the outbreak of the financial crisis brought the issue back to the fore, having been initially highlighted at the turn of the century when the technology bubble burst. The dot.com crash led to serious questions, not to mention criminal investigations, into brokers that had been punting companies they knew to be complete duds. They seemed to be motivated by the need to secure lucrative trading and other relationships for their banks, rather than to act in the interests of the investors they were supposed to advise.
About six weeks ago an Investec analyst wrote a critical report on KwaZulu-Natal-based sugar producer Tongaat Hulett, calling for the long-serving CEO Peter Staude to quit over what he called an “appalling” set of results and a decade of underperformance.
Instead of defending its highly rated analyst and affirming the integrity and independence of its research, Investec chose to disown its own work and apologise to Staude, with whom it had enjoyed a “long and fruitful relationship” up to that point, for any embarrassment caused.
The only way the statement could have been more damaging would have been if it had simply proclaimed that the bank’s research should from then on not be taken at face value because its analysts would in future be guided primarily by their employer’s commercial interests, rather than their stated commitment to unbiased and objective analysis.
An argument could be made that such a level of honesty would be preferable as consumers of the research — asset managers and pension funds overseeing ordinary workers’ savings — would at least apply the necessary degree of scepticism before using it as a basis for making investment decisions.
The episode was also surprising given that just a few weeks earlier Investec had stood up for one of its analysts, who had dared to write a report critical of Naspers, Africa’s most valuable company, rightly earning the bank kudos.
It is within this context that BLSA commissioned a report on the activities of Viceroy, the research company that became famous after it issued a report in 2017 detailing a litany of wrongdoing at Steinhoff. The firm, founded by a British social worker, burst out of nowhere and followed up the Steinhoff report with allegations of wrongdoing at Capitec, arguing that it should be placed under curatorship, pushing the share price on the day down by as much as 25%. That report was not as well received and Capitec duly recovered, though it is still down about a fifth in 2018, which may have to do with its valuation prior to it coming to Viceroy’s attention.
Both the South African Reserve Bank and the Treasury defended Capitec’s business model and practices, with the government going as far as to describe Viceroy as reckless and not acting in the public interest.
That’s not to say the regulators are infallible, as shown by their failure to pick up criminal activity at VBS Bank, which may turn out to have been subjected to one of the biggest heists ever, involving the theft of about three quarters of the bank’s assets.
The interesting thing about Viceroy is that up to this point, very little interrogation of its roots and methods seemed to have taken place, with reputable media organisations mostly taking its research — a source of great headlines — at face value. There’s no doubt that the media coverage that accompanied the reports did much to amplify their effect, more than anything we had seen from more conventional research houses. To its credit, Viceroy never denied having positions that would benefit from declines in the shares of the firms it was analysing.
The bigger question is whether the intent of that research was merely to drive down share prices in order for them to profit, at the expense of other shareholders, as opposed to ensuring market players had access to relevant information needed to make informed decisions.
Restoring trust in financial markets has been one of the great challenges of our age, which has been marked by massive scandals from Enron to our own Steinhoff, and the various crises that have rattled markets across the world, with significant losses.
Trust in analysts and their integrity are crucial and offer the best defence when their work is questioned. Therefore conflicts of interest must be managed decisively.
Highlighting this was perhaps BLSA’s most important contribution. It’s a much bigger issue than Viceroy’s motivations and (lack of) integrity.
RESTORING TRUST IN FINANCIAL MARKETS HAS BEEN ONE OF THE GREAT CHALLENGES OF OUR AGE, WHICH HAS BEEN MARKED BY … SCANDALS FROM ENRON TO STEINHOFF