STUART THEOBALD: Investment case remains intact despite the mayhem

This column was first published in Business Day.  

This column is endowed with the responsibility to look at current events from an investment perspective. It is a cold and calculating task amid the personal tragedy and loss of life we saw last week. But it was one that the financial markets were making as events unfolded.

The key question was: has the violence and mayhem of last week damaged the investment case for SA?

Looking at the markets, you would have to conclude “no”.

The currency showed some weakness on Tuesday and Wednesday when the looting and destruction of property seemed most widespread and out of control, but by the end of the week it was back at pre-crisis levels. Indeed, JSE-listed companies showed some strength on the worst days, particularly mining companies that benefit from a weak rand. Financial and retail stocks were down a few percent but, overall, the top 40 index ended up unmoved.

How can the destruction of billions of rand worth of stock and infrastructure not be reflecting in the values of SA companies? It is partly a function of the mathematics of valuations. Stock prices always reflect the future. A one-off event, even a large negative one, is quickly diluted in a long tail of cashflows that go into valuing an asset. One-off events can therefore be limited in their affect on share prices.

The real problem is change that leads to long-term underperformance. Has SA’s security situation fundamentally deteriorated to the point where investors must factor periodic riots and destruction of property into the outlook? There are other markets that work like this — investing in unstable regions, such as Nigeria’s Niger Delta or northern Mozambique, requires investors to factor in a large risk discount. It reflects that expected earnings are permanently affected by sporadic security events that must be “priced in”.

Caught napping

Foreign investors have been concerned about events last week. Billions of dollars of global savings are invested in SA shares and bonds. Was this a tipping of the country into widespread disorder and chaos that would permanently undermine companies’ ability to make money or the government’s solvency? The answer, by the end of the week, was “no”.

This is undoubtedly correct. The mayhem had more in common with the White House insurrection than a permanent or semipermanent security deterioration à la northern Mozambique (or, from a historic perspective, the security situation SA faced from 1976 to the early 1990s). It is an aberration that wider institutions of the country are able to absorb and deal with, even if they were caught napping by it.

As the drama unfolded, investors could take heart from the (belated) rollout of all security forces, the large-scale arrests and promises of swift prosecution of those involved, the reference to a deliberate political strategy linked to those close to former president Jacob Zuma.

Investors could also see the mostly peaceful rallying of SA citizens to work with security forces to protect property. Investors could interpret it therefore as the dramatic denouement of the state capture years, with the full might of Zuma reactionary elements expending themselves. It was an explosion, but one absorbed by the underlying strength of SA institutions and the will of citizens to stand up for law and order.

Priced in

Of course, the poverty and inequality that besets SA was a contributing factor. This has been worsened by the Covid-19 pandemic that had already lost many people their jobs. Poverty is a powder keg that those wanting to foment violence could light, with the tinder of ethnic and racial tensions.

From an investment perspective, poverty and inequality are already priced in. It costs more for companies to raise finance and government to borrow than it would if poverty were eliminated. Economic growth, and good policies that prioritise the least well off in distributing the spoils of growth, are important in themselves, but have the instrumental benefit of reducing the risk discounts investors apply to SA. That helps trigger a virtuous cycle as lower cost access to capital helps drive economic growth.

Considering the macro level does not obscure the devastating losses that people in KwaZulu-Natal and parts of Gauteng have experienced. Hundreds of small businesses may never open again. Large manufacturing plants and logistics nodes may never be rebuilt. This is a real loss.

The crisis may add momentum to the reforms that have been under way to change how the SA economy works; changes that investors can price positively into their view on the country.

The economic recovery programme already agreed by the cabinet can be accelerated — the crisis demonstrates the importance of delivering on it. Some of the political obstacles may now more easily be swept aside.

To those reforms we must add the repair of our intelligence and other security institutions to lock in the one-off nature of the crisis.

Ultimately, SA still has a path open for it to improve the lot of all South Africans, delivering a positive investment outcome in the process. Investors believe it can be done. We have work to do.

• Theobald is chair of research-led consulting company Intellidex.