This column was first published in Business Day
Remember when we cared about company strategy and the quality of management? Last week I stumbled across several decade-old notes I had written analysing JSE-listed shares. I was struck about how things have changed. Then I thought it was important to understand those things as part of forecasting future returns.
It seems like another era. Now the thing that most affects their prospects is politics.
Take the annual financial results that were out last week from Nedbank and Standard Bank. Both reported a big jump in bad debt provisions as clients’ ability to pay has diminished on growing unemployment and corporate distress.
It is also more difficult to find lending opportunities with asset growth constrained. Standard Bank reported headline earnings growth of just 1%, while Nedbank reported a 7.3% decline. In real terms, the profitability of both shrank. The market was expecting better and both share prices were down on the results. This week we will be getting figures from FirstRand and Absa, which are likely to confirm the tough environment.
It has been bleak to be a bank in an economy that is grinding down. But there was a moment of cheer for bank shares on the day of the budget speech two weeks ago. Then, bank and retail shares had a positive bounce of 3%-4% (before coronavirus fears quickly swamped that in a global market rout). That was because finance minister Tito Mboweni spoke a strong game of delivering better economic prospects through reforms and tackling the government’s unsustainable debt position.
A ratings downgrade, which would be sharply negative for banks as it would increase their cost of funding, seemed to be delayed and maybe even avoided. And if the reforms Mboweni spoke of are implemented, there might even be a positive effect on economic growth.
Now, as I think through the prospects of JSE-listed companies — whether banks, retailers, telcos and IT businesses, property companies, manufacturers and even miners — every one depends on the government to deliver an environment that might enable growth.
Apart from the macro environment, each also has specific exposures to policy decisions: will Icasa (the Independent Communications Authority of SA) actually deliver on spectrum auctions with anything like the urgency that is being asked? Will the deadlocked Mining Charter reach some conclusion that will bring some comfort and certainty back into the mining sector? Will the government actually deliver a restructured energy supply sector that can reliably and, perhaps, more cheaply, deliver electricity? And, can progress be made on sentiment drivers such as property rights and the criminal justice system?
These uncertainties can be managed. Companies can install generators and batteries or their own production to manage power disruption. Miners can flog their SA assets and deploy capital elsewhere. We can make do with expensive broadband, shifting business strategies to cope. This is what it means to be in defensive mode. But all of that means we end up with flat growth. There is no wind in anyone’s sails.
Banks will continue to focus on reducing costs, cutting branches and headcount while trying to manage distressed borrowers. Other companies will cut back on investment and try to maintain profitability. No-one is positioned to grow. That is reflected in the performance of the exchange: the Top-40 index is now at the same level it was in 2014.
Things would easily be worse if conditions in the rest of the world were different. The monetary stimulus pumped into economies from the US to Japan has been critical to emerging markets as global investors have directed flows towards them in search of yield. SA has been lucky this global wall of money has been available to us during this hour of need. But at some point, foreign markets will change course and the wall of money will leave.
Too few in the political sphere seem to realise how important these policy issues are for the health of the SA economy. It is almost as if listed companies are the problem, not the solution, at least judging by the comments of those who think one can pull investment out of them without consequence.
The Government Employees Pension Fund, a large portion of which is invested on the JSE where it earns a return commensurate to the risks, can be used, according to some, to bail out bankrupt state-owned companies, especially Eskom. Apparently, they believe, this would be better than the money “doing nothing” on the JSE.
But that is politics, not economics. Unfortunately, politics is what share prices now depend on.
• Theobald is chair of Intellidex