JSE doldrums not siesta time
SA HAS NEVER BEFORE SEEN SUCH A LONG PERIOD WHEN THE MARKET WAS SO RANGE-BOUND
The value of companies on the JSE has been on a broadly downward trajectory since February and seems to be heading back to the range in which it has been stuck for the past four years.
Looking at the longer term, it seems possible to now distinguish three major periods.
The first is the recovery period after the recession between 2009 and 2014, when the JSE’s all share index (Alsi) moved from around 20,000 points to about 50,000 points, surpassing its prerecession levels of around 30,000 points.
A static period followed when stocks were range-bound between 50,000 and 55,000 for four years.
That was followed by a fairly big run-up just prior to and after the ANC’s elective conference, during which the market hit another record, briefly breaching the 60,000 level in the wake of “Ramaphoria”. That rise has subsided and the current level of around 58,000 seems disturbingly reminiscent of the doldrums of the 2014 to 2017 period.
Is the market telling us something beyond the obvious? The obvious is that economic growth in SA from 2014 to 2017 was lacklustre, and that there was a spurt of hope following President Cyril Ramaphosa’s takeover as president. It’s obvious too that these hopes were overstated and there is now somewhat less confidence, particularly as the country comes to grips with the ANC’s decision to expropriate land without compensation.
It should be noted how unusual this long period of comparative stasis in the JSE is in SA’s history. SA has never before seen such a long period when the market was so range-bound. That has all kinds of implications; none good. For asset management companies, the returns recorded for clients have been disappointing. That has had one silver lining; the focus on fund management costs is becoming intense.
When investors get doubledigit returns for years, costs tend to take a back seat. Now, the industry is frantically trying to re-engineer itself for a different market scenario.
The second problem is with black economic empowerment. Many of the most successful BEE deals were based on buying stock for BEE partners against debt. But doing deals this way is premised on the stock price rising fast enough to balance the cost of the debt. In a static market, this kind of deal becomes impossible.
The failure of several recent and prominent BEE deals, notably Sasol’s Inzalo scheme, highlights the problem. There are of course alternative BEE structures, but they are inevitably much more expensive than allowing the market to do the heavy lifting for you.
The third problem is a gloomy mergers and acquisitions market. SA’s mergers and acquisitions scene is notoriously vacillating because the smallish SA market means a single big deal can skew the numbers. But speaking generally, corporate restructuring is theoretically a positive, even if many buyouts don’t really work. It is a benefit to shareholders for companies to be actively looking at new partners and new ways and places of doing business, and that is often expressed through mergers and acquisitions .
The latest year-to-date figures from Thomson Reuters, show global mergers and acquisitions up a staggering 47%, and yet African mergers and acquisitions, of which SA is the major proportion, is down 33%. Debt raising is also down enormously so far in 2018 almost everywhere but Africa.
The investment consequences are also worth considering. Stocks on the JSE collectively normally hugely outperform the S&P 500, as you would expect for a country with a developing profile. But remarkably, the S&P 500 outgrew the Alsi over the past decade. Even the FTSE 100, which normally represents some of the world’s largest and most mature companies, has come close to outperforming the Alsi over a decade-long span.
The consequences are serious. Ramaphosa is seeking to attract $100bn in new investment, but if investors can get the same return they get on the JSE from rich, stable, liquid markets, the job of attracting investment becomes a lot harder.
Typically, politicians and policymakers don’t concern themselves with the fickle markets. But their propensity is wrong. The JSE is a great bellwether for the state of business and industry within a country. They should sit up and take notice.