How to sell

Finweek English Edition - - INVESTMENT -

The lo­cal Gen­eral Re­tail In­dex has re­turned about 770%, or 24% per an­num over the last decade. To be clear, this in­cludes the likes of Woolies, Mass­mart and Mr Price, but ex­cludes the more de­fen­sive food re­tail­ers like Sho­prite and Spar. Since the great re­ces­sion of 2009, lo­cal GDP growth has been re­liant on quar­ter-af­ter-quar­ter of con­sumer ex­pen­di­ture growth while growth in other sec­tors of the econ­omy has been er­ratic. Yes, a de­cent dose of wage in­fla­tion has helped, as did a lower base for em­ploy­ment af­ter the lo­cal econ­omy shed about a mil­lion jobs in that re­ces­sion. But is that really sus­tain­able in an econ­omy where pro­duc­tiv­ity growth, em­ploy­ment growth and cap­i­tal for­ma­tion are at a 25-year low?

The prob­lem is that our re­tail sec­tor is to a large de­gree be­ing priced as if it the mu­sic is set to con­tinue. To put things into per­spec­tive, since the lows of 2009, the re­tail in­dex has in­creased by 265% of which 115% of that was as a re­sult of [earn­ings] mul­ti­ple ex­pan­sion. The p/e for the sec­tor now sits at 19.4, a full two stan­dard de­vi­a­tions from its mean. To hu­mour the statis­ti­cians, go­ing by data over the full decade, there is less than a 2.28% chance of a fur­ther mul­ti­ple ex­pan­sion. Or in lay­man’s terms, the­ses shares are as ex­pen­sive as we have ever known them to be.

Of course one could ar­gue that higher mul­ti­ples are jus­ti­fied due to a record low in­ter­est rate en­vi­ron­ment. I would be happy to agree, but only if you can guar­an­tee a re­peat of a few events that have shaped the earn­ings per­for­mance of this sec­tor over the last decade. We have had in­ter­est rates de­cline from above 20% a decade ago to 8.5% to­day boost­ing dis­cre­tionary spend­ing along with the rat­ings of th­ese shares. This is ob­vi­ously not re­peat­able, as is the credit surge of the in­di­vid­ual. In 2002 per­sonal debt-to-GDP was 35%, in 2012 that f ig­ure stands at 76%. Will we con­tinue to 160% debt-to-GDP over the next decade?

The big­gest re­source boom in over a cen­tury has also ben­e­fited dis­cre­tionary spend­ing sig­nif­i­cantly, per­haps blind­ing us to our own struc­tural prob­lems. The re­source boom may have lost its sparkle and as a coun­try we are now left to look in­wardly as our wind­falls dis­si­pate. Per­haps the big­gest wind­fall is still play­ing it­self out via the bond mar­ket. R80bn has f lown in this year as the rest of the world is fail­ing a ma­jor due dili­gence test in the blind search for yield. This has for the moment cov­ered the R70bn gap­ing trade deficit hand­somely. Don’t for­get West­ern cap­i­tal’s love af­fair with the very re­tail­ers. The prover­bial trade winds won’t blow for­ever. Per­haps it’s time to sell the good news and look across the ocean, or only north of the bor­der, for new trade or rather in­vest­ment des­ti­na­tions.

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