Investors not on strike

POLICY UNCERTAINTY, RISK-RETURN FEARS BEHIND IT “Instead of companies refusing to invest and just holding on to cash, they are actually refusing to give that cash over to shareholders as a cautionary move” – Stuart Theobald, Intellidex.

Growth in nominal cash levels of the largest nonfinancial JSE-listed firms over the past decade doesn’t point to a corporate investment strike. The findings come following reports that corporate SA’s hoarding cash – a concept often tied to the idea of an investment strike – after a period of meaningful political and economic turbulence.

Intellidex’s study for Business Leadership South Africa (BLSA) shows that although the total cash held by 85 JSE-listed mining and industrial companies increased 17.4% a year to R765 billion over the past decade, the fluctuation in cash as a percentage of total assets has been fairly narrow (6.410.2%). It reached 7.8% in 2016.

The research argues the increase in nominal cash levels can largely be explained by the growth in companies’ market capitalisation over the period, the rand’s depreciation against the dollar and inflation’s impact.

There’s been a correlation between cash levels and real GDP growth. After the 2008 recession, cash levels started rising.

Intellidex’s Stuart Theobald says companies respond to poor economic conditions by increasing their cash holdings. But this doesn’t mean they’re on an investment strike or hoarding cash.

Moreover, dividends paid as a percentage of cash on balance sheets have come down over the past two years, supporting the view that caution’s applied.

In difficult economic conditions, one expects companies to increase their cash holdings.

Of particular concern is return on equity in a mining company, which is about 4% on average, lower than the return on bank deposits. “That is a serious problem because there is no rational reason to invest in a mining company when your return is below what you get from a bank deposit and that is the state that we are in at the moment and have been for the last three, four years.”

Although the rate of capex growth’s been declining, expansion and investment spending have remained fairly strong.

Theobald says there’s no reason to connect the level of cash holdings to the investments companies are making. “The things that do affect investment decisions are companies’ expectations over the returns that they can earn from those investments.” Particularly in mining, “the returns that both shareholders and companies themselves receive from investments are lower than the returns from simply holding cash”.

He says to improve investment, one must change the expectation of return on those investments. There’s currently a significant problem around expectations, particularly in mining, tied directly to the policy environment.

“In the current environment any rational assessment of investment decisions is going to say: ‘don’t invest’. This is not hoarding, this is not some attempt to punish any government or anything.”

Theobald says the issue must be addressed rationally. Appropriate policy can change the outlook for return on investment in mining. This will have a positive impact on business confidence, and in turn, investment decisionmaking.

Mark Lamberti of BLSA and Imperial, adds that risk-adjusted returns are important.