Comair collapse a chilling sign

Since the March selling frenzy that sent the JSE all share index to levels last seen nearly seven years ago, it has been on a gravity-defying run that seems to brush aside all kinds of bad economic news stemming from the Covid-19 outbreak.

The broadest measure of the SA stock market performance has dropped about 24% from this year’s peak and only 14% since March 5, when the National Institute of Communicable Diseases confirmed the first Covid-19 case.

Here’s another curious part: the index is about 80% higher than levels reached at the height of the global financial crisis, whose scale of economic destruction will pale compared with the Covid-19 pandemic, and it has notched up about 18% from the lows suffered in late March.

The respiratory disease forced governments worldwide to roll out unprecedented restrictions on people’s movement, bringing whole industries to a grinding halt and prompting economists to throw out their growth forecasts.

Official forecasts from private sector economists and the Reserve Bank signal that the economy, which was already on its worst downward spiral since the 1940s, could contract by anything from 4% to double digits. And each new forecast is worse than the previous, and the existing ones might even be shown to be on the optimistic side. Companies are scrambling for cash, drawing down on their credit facilities and punishing employees with deep salary cuts, retrenchments or unpaid leave.

Comair, a well-run company that was profitable for more than 70 years while its state-owned competitor sucked billions out of the fiscus, has become the latest to file for business rescue. Under such economic conditions, it would not be unreasonable to imagine that the main stock market should be much deeper in the red. Those who live by the adage that if it looks too good to be true it probably is, are wondering if they should exit their battered stocks before the next beating comes.

Equity traders will give all sorts of reasons for the bounce, including cash that was pulled out in panic a few weeks ago now hunting for bargains. True, many quality companies on the JSE have enough cash buffers to withstand the shock. Take banks, for example. One would have thought the pandemic would give them an excuse to review or even possibly cut their dividend policy, but they are not groaning.

Naspers and its subsidiary Prosus are sitting on about $4bn (R73bn) in cash and $2.5bn more in undrawn credit facilities to not only sail through the economic contagion but also to scan the globe for acquisitions.

In live-streamed remarks in Omaha, famous investor Warren Buffett, told shareholders of his company, Berkshire Hathaway, that it seemed unlikely the world would face the worst possible economic and health scenarios due to Covid-19 compared with some of the predictions made earlier this year.

If the broader stock market performance at home is anything to go by, Buffett might not be among the minority of investors who think some equity counters on the JSE have been unjustifiably sold off, or indeed the selling frenzy of the past few weeks was based on irrational fear of the worst for the global economy.

However, if one introduces the government as an indirect investor in struggling companies, things can get distorted. President Cyril Ramaphosa unveiled a R200bn loan guarantee scheme, which essentially means a cash-strapped company can use the state as collateral to take out loans that keep it going during the crisis, while the Bank has freed up R300bn in lending.

To some private investors, it is no longer a bet on a company but on governments and central banks. But some firms might not survive the post-Covid-19 world, making propping them up hazardous. And when we see a perfectly good company such as Comair go down, it’s enough to send chills down the spine of anyone who has to work out the future prospects of SA Inc.

COMAIR, PROFITABLE FOR 70 YEARS, HAS BECOME THE LATEST TO FILE FOR BUSINESS RESCUE