Investors briefly became excited about a revival in the fortunes of the economy, the rand, South African bonds and JSE-listed domestic-focused companies after Cyril Ramaphosa was elected as the head of the ANC in December 2017.
The rally that followed lasted about 10 weeks resulting in net inflows from foreign investors for the first time in years. Since then, domestic companies have massively underperformed the broadest index measurement, on the FTSE/JSE All Share Index as well as the major dual-listed companies.
Research shows that valuations of certain domestic sectors are at the same levels that they were in December 2017 after then president Jacob Zuma fired then finance minister Nhlanhla Nene.
Listed domestic industrials, which are particularly exposed to a weaker economy and the ills of Eskom, have de-rated heavily and are close to the ratings to which they fell after the 2008/09 financial crisis, with price-earnings (P/E) ratios of 9 and dividend yields of above 4 percent.
These valuations are well below the 10-year average and are the cheapest they have been in 10 years. The banking sector is on a forward P/E ratio of 9 and dividend yield of 6 percent, also cheap relative to December 2017 and 2008/09.
Some industrials, such as Imperial, Motus and Bidvest, have recently reported results that surprised on the upside, given the low expectations from the market. And that could be the crux of the matter: investors’ expectations and sentiment are so poor and reflected in much of the mutual fund positioning, private client positioning, and even evidenced at the level of foreign selling of South African equities at record highs.
Anecdotally, the conversation with savvy investors revolves around taking all investable monies offshore or buying South African-listed rand-hedge stocks. The rand and the premium demanded by investors to be invested in South African bonds are also back to “Nenegate” levels. Foreigners have become dramatic net sellers of government bonds despite the $17 trillion (R247trln) of debt in negative yield globally and the US 10-year yield at 1.5 percent.
The recent commentary from FirstRand’s chief executive accompanying the September 5 results sums it up: it is the price that you pay for an investment that is of utmost importance as it increases or decreases your chances of success.
“Given the structural nature of South Africa’s challenges, the (FirstRand) group believes that domestic economic activity will remain under pressure for the foreseeable future. Weak domestic demand and low income growth will continue to weigh on real GDP growth and core inflation, and the real economy remains constrained by high government indebtedness, inefficiency of large state-owned enterprises (SOEs) and low private sector investment. The country needs urgent economic reform, which should include energy supply, price stability and policy certainty in key areas such as fiscal consolidation, SOE reform, land reform and mining rights. Without action on these, the risk of further sovereign rating downgrades remains high.
FirstRand remains optimistic that despite the difficult backdrop, it is executing appropriate strategies to deliver ongoing growth in earnings.
Armin Diem is a South African equity portfolio manager at MitonOptimal South Africa.
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