Is SA Inc investable?

Is it time to back SA Inc? While the question alone might be the cynic’s ultimate contrarian "buy" signal, the answer might be as simple as "confidence" — whether there is any belief that the next 10 years will be a vast improvement on the past decade.

For months, the smart money has said "wait until after the election". But now that the ink is dry on the ANC’s 57% victory, what do the tea leaves tell us?

The FM surveyed a broad range of SA’s business leaders to find just how "investable" the country is after Cyril Ramaphosa’s victory. Even if they mostly said the right things, the picture was far from convincing.

Take Brian Joffe, one of SA’s most canny investors. He turned Bidvest into a sprawling, multibillion-rand global services business and is now building a new company, Long4Life, aimed at "lifestyle investments".

Last week, as Joffe began Long4Life’s annual results presentation, he prefaced it with a plea to his fellow South Africans.

"Each one of us needs to contribute to the future confidence of SA, otherwise it’s never going to work," he said. "And unless that happens, SA will never be investable. If you want people to invest in SA, South Africans need to do that first."

It was a noble sentiment but you can’t really fake confidence, can you? You either have it or you don’t.

However, Bernard Swanepoel, former CEO of Harmony Gold and now a director at the Small Business Institute, says you can create business confidence to spark a country. "Economic confidence is so cheap to achieve. Look at the Colin Coleman phenomenon," he says.

Coleman, head of Goldman Sachs SA, has been one of Ramaphosa’s higher-profile fans since he took the ANC presidency in December 2017. Last week, Coleman hosted the president at an investment conference in which Goldman pledged to expand the bank’s offering in SA.

Of course, Goldman’s proximity to power has historically been good business for the US banking giant, which Rolling Stone magazine described as the "great vampire squid … relentlessly jamming its blood funnel into anything that smells like money".

But, says Swanepoel: "I can tell you this is what economic confidence does. A single guy at the top must feel better and the company responds accordingly. If Cyril can harness that, then you will have other Colin Colemans. Obviously, in time you have to follow through, but it becomes self-perpetuating."

Swanepoel says "more Colemans" means "real investment, then jobs get created and we’ll like ourselves again".

Joffe, who’s been active on the fringes of government since backing the CEO Initiative that came about after former president Jacob Zuma sacked finance minister Nhlanhla Nene in December 2015, also had a warning for Ramaphosa.

"Governments never create wealth. I’m sorry, Mr President: all that governments can do is create the opportunities, the fertile soil in which private sector people can build wealth."

This is why Joffe said SA’s money managers must come to the party.

"Fund managers and investors are the food that makes it possible for SA companies to create. I think that [they] have the responsibility to make the capital available and for good ideas to be able to help corporations develop.

"Otherwise, corporations are just going to be stagnant," he said.

It is something of an impassioned plea. But you could argue that Joffe himself is struggling to find reasons to buy SA Inc.

Long4Life, which has amassed a war chest of R1.1bn, isn’t exactly gobbling up businesses. Its last acquisition, in October 2018, was a 36% stake in private clinic business, ClaytonCare.

For Sasfin Securities deputy chair David Shapiro, a veteran stockbroker who has experienced SA’s tumultuous investment cycles since the 1960s, this is telling.

"We haven’t got a proper business industrial plan, and that’s reflected in the stock market," he says. "There’s an absolute absence of deals. If there’s value why is nobody buying the value? Why is Brian Joffe not buying? Because the future value is not there," he says.

One of Ramaphosa’s most pressing tasks, that indeed may define his presidency, is whether he can slash SA’s unemployment rate, which sits at 37% if you include the people who’ve stopped looking for jobs. But to do that, you need foreign investment.

If you’re looking for the single reason why foreign investors are reluctant to invest, there’s only one graph you need to see. It’s the difference between $100 invested in the S&P 500 over a five-year period, against the same amount invested in the JSE.

If you’d bought in the US index, your $100 invested on May 28 2014 would now be worth $152.28. But if you’d put your money into the JSE, it would have shrunk to a meagre $82.14 today.

This is why it’s a hard sell. And local investors, after years of dwindling returns, finally threw in the towel late last year, convincingly wiping out the Ramaphoria that had accompanied Ramaphosa’s ascendance to the ANC throne.

"We don’t have the industrial giants," says Shapiro. "We’re not producing products the rest of the world wants. We are becoming an uninvestable nation."

For Shapiro, it’s about getting the country’s policies right. "The US will continue up while we go nowhere until we change our economic model."

This year, sentiment seemed to have improved marginally. The JSE, thanks to rampaging platinum stocks and a rebound in Naspers, chalked up its best quarterly performance since 2009 — gaining 12.9% between January and April 23 this year. Since then, we’ve given back about 6.5%.

So was this year’s early rise in the JSE the start of the hoped-for "recovery", anticipating Ramaphosa’s "mandate for change" from the electorate? Or is it just a dead-cat bounce, before SA is weighed down again by more political wrangling and dead-end policies?

One person who argues that it’s the former is Peter Armitage, CEO of Anchor Capital. In a note to clients last week, Armitage argues that the election result "is positive for SA investor confidence" and should lead to "strong inflows" into the JSE.

"We are likely to see more inflows of foreign direct investment [FDI] and local investment into SA as ANC policies are hopefully clarified, especially those related to expropriation without compensation [EWC] [and] the nationalisation of the SA Reserve Bank," he says.

Anchor says investors would do well to maintain meaningful exposure to SA Inc shares, but be prepared to react depending on how the political drama plays out. "SA has serious structural issues and the advances made in solving these are equally important," he says.

All things being equal, Anchor Capital expects the rand to strengthen to around R13.30 by year-end, from R14.36 now, while GDP growth could hit 2.5% by 2020. The JSE, Anchor predicts, is likely to gain 15% this year, with the banks, retailers, property and industrial stocks particularly well positioned.

But there’s a caveat. Armitage warns: "Jobs will be created by the private sector only within a favourable investment environment and not with policy uncertainty, corruption, doublespeak and EWC hanging over our collective heads. No-one will invest if they believe their money or investment isn’t safe."

Nor is Anchor the only investment house that sees the glass as slightly more than half-full right now.

Malungelo Zilimbola, founder of asset manager Mazi Capital, is wearing his Harvard tie the day the FM meets him in his Sandton offices. Zilimbola is unquestionably optimistic that SA is set for better things.

Investment cycles, he says, vary between eight and 10 years and SA is hardly immune from any downturn. The country’s detractors would argue, though, that the past decade’s woes have been largely self-inflicted under the Jacob Zuma-led corruption spree.

"One thing about South Africans is that we tend to be very hard on ourselves," he says. "When we’re going through a cycle, we think that it’s permanent, it’s the end of the world, and for me, what SA is going through is really normal. If you focus on fundamentals, you’ll see that SA is in a very good space."

Zilimbola says that the 15% fall in the market last year preceded this year’s rise. While many would have been tempted to sell stocks last year, it would have been the worst time to do so.

"If you look at one year you’re going to get frustrated. Remember that when the economy is not performing, it’s good for people who have assets ... who can get a bargain by buying property cheaply, and when the market turns, asset values go up."

But that’s presuming the market does recover. For those asset managers who’ve seen their money go nowhere the past five years, that message is a hard sell.

In an unusually sombre message recently, Sanlam Private Wealth’s Alwyn van der Merwe wrote: "It’s with regret that we acknow-ledge that SA investors have not been rewarded for the risks taken in investing in growth asset classes — equities and property. We’re now seeing disillusioned investors questioning the traditional risk-reward relationship associated with shares and listed property."

The problem, he says, is that when equities wobble, "jittery" investors "sell off at precisely the wrong time, which more often than not costs them dearly in the long run".

Van der Merwe, however, does see value. "While we can’t predict a decent return over the next 12 months, what we can say is that in this investment cycle — five years and longer — we believe local equities can generate returns that will justify the risk of investing in this volatile asset class. This may, however, mean taking contrarian views and picking unpopular stocks," he says.

Van der Merwe reminds gun-shy punters that good investment decisions are always based on price. "If we can buy decent-quality companies at a reasonable price, it would be fair to expect that the return on investment will beat cash over the current investment cycle," he says.

Fatima Vawda, MD at investment house 27four, has had two decades in the financial markets. She is adamant that SA is simply going through a cycle.

"In the past 100 years we’ve been here many times," she says. Vawda strongly believes international investors "are going to pick up on the emerging markets opportunity and those foreign flows will come in. And when you’re not in the market that day when it happens, you’ve missed out."

That moment, obviously, is the holy grail for local investors, desperate for any sign of the much-touted turnaround.

Claire Rentzke, Vawda’s colleague and 27four’s chief investment officer, points to banking group FirstRand as an example.

Though the bank’s recent 6% increase in earnings is the weakest growth it has produced in years, Rentzke says: "In an economy that’s doing nothing, that’s pretty good earnings growth, and when you couple that with the dividends that you’re getting — that’s where your return comes. Your returns in equity come from earnings growth and dividend yield and we’re still seeing [that] holding up in the quality companies."

Vawda dismisses the notion that SA’s investment community is at a point of crisis after years of poor performance. But selling the stock-market dream, when hardly anyone has made any money, is no easy game.

She acknowledges that "there are way too many players in the SA market … competition is wide because everyone is chasing a smaller pool of assets."

The optics of local investment don’t look good either. Ten years ago, more than 700 companies were listed on the JSE — and that has now halved.

Vawda says the JSE isn’t where investors will find the best pickings in future.

"The opportunity for SA institutional investors is the private market. In private equity we’ve seen the emergence of at least 20 players in the past three or four years."

Because the JSE has performed so badly, some stocks — Clover is one of them — have also become very attractive for private equity buyouts.

Raising capital on the JSE, it seems, isn’t working. "It doesn’t make sense when you can raise capital from alternative sources to actually list and the JSE is a clear demonstration of the fact that people are not looking to list to attract capital," she says.

The SA Venture Capital & Private Equity Association (Savca), which represents the private equity industry in SA, says business took a "wait and see" attitude in the run-up to the elections. But its latest survey shows activity in the private equity sector grew last year.

"What is pleasing is the 67% increase in the funds raised from 2018 to 2019. This in itself indicates that investors still regard SA, and in particular the private equity industry, as a viable long-term investment," says Savca CEO Tanya van Lill.

Investment activity also picked up. Savca says this shows that, regardless of the current economic and political environment, the sector "is still managing to find deals and invest in privately owned companies".

But given how badly poor political decisions ravaged the economy over the past decade, the investment community has a wary eye on the Union Buildings.

Dawie Roodt, economist at the Efficient Group, is waiting to see who’s in charge — the "good guys" or the "bad guys".

"Will Ramaphosa consolidate his power? Once we have an answer to that, the next question is what are we going to see in terms of possible policy changes."

Roodt faces the same dilemma experienced by sceptical retail investors: "I’m pretty sure about SA being an uncertain place, yet at the same time you get these nice opportunities ... but there’s always a ‘what if’. I’m quite negative on SA, but at the same time, the stock market already reflects that."

Roodt believes bricks-and-mortar type investments will, initially at least, come in the form of politically connected deals, "like Saudi Arabia investing in a refinery".

But the concern is that private sector investments in factories and breweries, for example, may still be quite a long way off. This is especially until questions around expropriation without compensation, "prescribed assets" and nationalisation of the Reserve Bank are clarified.

Curiously, Roodt argues that the sophistication of SA’s financial markets actually works against it.

"What would have been foreign direct investment (FDI) actually comes in the form of portfolio flows.

"Compare SA to Mozambique, for example: quite often they have higher FDI in relative terms because you don’t have a choice," he says.

"If you want to invest in Mozambique you have to invest in FDI, because they don’t really have financial markets."

Two investors who’ve made a packet taking contrarian bets are former Brait directors Sam Sithole and Antony Ball. They invested in technology company Altron when it was trading at around R7, two years ago. Today the stock is about R23.30 — a 230% gain.

"Here’s the thing," says Sithole. "Some of your best investments actually come during those times when [nobody] is excited about the market and doubting whether they should invest."

But surely that presupposes that the future will be similar to the past? What if SA’s structural issues don’t improve, but actually worsen?

"The way we look at it is that people always overreact to both negative and positive news, so when things are going well the valuations are just too much. And when they are not going that well, people overreact on the downside," he says.

For Sithole, the key question is, at what point has the market gone overboard? "This is where, even if the company were to be broken up or fail, you would still get more than what the liquidation value of the company is worth," he says.

You could argue that taking a dim view of the future actually pays better.

Says Sithole: "if you only invest assuming things will go well, the moment they don’t you find the share price falls by 80% and you can’t recover from that."

What has been of some comfort to big business is the people that Ramaphosa surrounded himself with in the lead-up to the May 8 elections: economic advisers like former finance minister Trevor Manuel, former deputy finance minister Mcebisi Jonas and former Standard Bank CEO Jacko Maree.

Asking whether SA has become uninvestable, says Maree is "an unfair question".

He points to the p:e ratios of SA’s listed banks as an example. "If SA were uninvestable the p:e ratios would be sitting at three or four," he says. At the moment, the banking sector trades on a p:e of almost 12."

Maree is of the view that businesses which did not spend in the Zuma years are now going to start investing in their companies again. "I really think a lot of SA companies held back on routine capex and that money probably has to be spent, so that will start coming through nationally."

As for foreign investors, he says they have "a reasonably good idea of what’s going on and what the issues are. So, much of what we’ve been doing is to help unblock things where there’s been particular problems ... we haven’t been going out cold-calling."

Ramaphosa’s other economic advisers are as gung-ho too.

Economic adviser in the presidency Trudi Makhaya says: "We’re determined to see our rankings in the Ease of Doing Business survey improve to the top 50 internationally within three years."

At the moment, SA is 82nd out of 190 countries.

"It won’t be easy," Makhaya says, "but … we’re committed to making it happen. We will soon workshop a detailed roadmap to reach this goal with business."

Says Maree: "I think the president understands very well the type of things that need to be done, so it’s going to be fascinating to see, once the new administration is in place, how quickly they do so."

Asked if Ramaphosa’s team of crack envoys has any thoughts on the government’s ideology, where the state apparently sees itself at the centre of SA’s economic development, Maree hesitates.

"It’s not as philosophical as that," he says. "When we talk to investors, they say they can’t get visas, or port tariffs are too high ... those are the sort of conversations we’re having… [it’s] more practical things that we deal with. When there’s any issue, we write down the key points and try to feed those back into the presidency — we can’t facilitate laws being changed."

ETM Analytics economist Russell Lamberti says it would be too simplistic to brand SA right now as "uninvestable", since the concept of "investability" has many layers.

"You could say there’s no country on earth that’s uninvestable, in the sense that you could go to the most war-torn place you could think of and there’s probably some opportunity there to make money by, say, pulling uranium out of the ground."

But conventional investability, on the other hand, is where you have an established pension system and a means of exchange — like the JSE. "You can think of investment grade and junk grade in terms of: can you access a proper systemic savings system or not? And in SA we know that we still can, whereas in Gabon or possibly Iran, you can’t," says Lamberti.

He says a savings system "doesn’t just die overnight — it takes a lot of bludgeoning by politicians. Having said that, it’s not like that is not a risk in SA."

The problem is that a vibrant savings system, as much as it’s supported by flourishing business, needs "honest, market-led price discovery that requires good property rights protections and a proper institutional structure". It is these sorts of protections, on the margin, that are becoming "frayed".

Then, of course, there’s Steinhoff — the retailer that imploded in December 2017. It has since emerged that over a decade, the company booked "fictional transactions" of R106bn into its revenues. It’s nothing less than SA’s equivalent of Enron.

"It actually matters when a huge stock blows up: it smacks people’s pensions, it diminishes trust in the system," he says.

Lamberti fears that SA’s inherent potential will be throttled by "ruling party ideology around overregulation and neo-socialism".

"It’s not that SA is doomed, but if it’s not going to be doomed, you need to see hard evidence of reform."

Like Shapiro, Lamberti argues that locally listed stocks "deserve to be cheap" given their earnings prospects.

Still, our relative decline, compared to the US, may work in our favour.

"There are certainly prospects for a kind of SA Inc comeback — not because we’ve hugely improved things here, but because we’re muddling along in one straight line and the US deflates, and the relative game just starts to potentially favour SA," he says.

If Ramaphosa can implement meaningful institutional reforms, and SA can surmount its ideological and corruption hurdles, some of its assets will begin to fly.

Especially since you’d think the meltdown in Venezuela should be enough to deter anyone, even in the ANC, from seeking to jettison market-based policies.

Lamberti says investors will be looking for markers in the sand that indicate which direction SA is likely to go. So what would those markers be?

The first one is what happens to the integrity and independence of the Reserve Bank. You should get worried, says Lamberti, if "you see the vultures circling the Reserve Bank, wanting to get rid of [governor] Lesetja Kganyago, wanting to overhaul the personnel and the make-up of the bank and use it, in extreme, to print money and monetise government debt", he says.

SA’s fiscal stress is less of a headache for him. "If the government defaults on its debt, so what? A bunch of bureaucrats don’t get paid, a bunch of bond investors lose their money, interest rates spike — we can live through that. Everyone has to consume less or hunker down to pay their mortgages. But full SA Reserve Bank capture and money printing — you go Venezuela and Zimbabwe. The Bank is a big deal."

Ultimately, predicting SA’s long-term growth may be as simple as reading the Bank’s quarterly bulletin, which details how much fixed capital investment is taking place. While companies pledged $20bn in investment at last year’s high-profile investment summit, much of that was money already destined to be spent by corporate SA.

In fact, real fixed capital formation still shows as a negative. It shrank 2.5% in the last three months of 2018, marking the fourth decline in succession. And it’s not just the private sector that isn’t putting money into SA.

Snarl-ups in state spending are as much of an issue. According to the bulletin, "the contraction in gross fixed capital formation for 2018 as a whole resulted from a marked decline in fixed investment by public corporations and, to a lesser extent, by general government. This reflected funding and governance challenges … By contrast, fixed investment by private business enterprises increased further in 2018, albeit at a slower pace than in 2017."

The bottom line is, SA’s business cycle is stuck firmly in reverse. According to the Bank, our present downward phase is now 65 months long. That’s by far the longest period in which the country has ever experienced such pessimism.

The longest previous downward business cycle was 51 months, between March 1989 and May 1993, as SA began its tortuous transition from apartheid to democracy.

Zilimbola admits that if you take SA’s economic horror show of dwindling growth and surging unemployment, "you want to jump off a 10-storey building. But what we’re not seeing is that we are so well positioned to take advantage of the continent."

SA’s biggest advantage, he says, is having Africa, with its more than 1.1-billion inhabitants, on its doorstep. "Any management team worth their salt should be investing across the border and taking advantage of this huge market. The market where there’s no manufacturing to talk about, and we’ve got manufacturing capacity.

"If you’re a food producer, you should be selling your stuff across the continent."

The status of the Reserve Bank is seen as a key marker of SA’s future

—  What it means

MTN and Tiger Brands, two local JSE-listed behemoths, might beg to differ. Both have racked up spectacular losses taking big bets on Africa’s two biggest economies outside SA — Nigeria and Kenya.

But Zilimbola correctly points out: "You could say the same of companies that go to the UK or Australia; look at Brait with New Look and Woolworths with David Jones."

He points out that the benefits of the Brics alliance — between Brazil, Russia, India, China and SA — are still to filter through.

"The big benefit to corporate SA is you can have your base here, you can sell your goods across the continent and you’re not limited to 55-million people," he says.

If it sounds like Zilimbola is a blind optimist, it would be entirely incorrect. He is aware of the risks. And like Lamberti, he’s keeping an eye on the Reserve Bank.

"What is sacrosanct is the independence of the Reserve Bank, which I think we’ve got, irrespective of who the shareholder is.

"If we start to tinker with the mandate and change legislation, then I’d be worried."

You’d like to think that investing shouldn’t be the toss of a coin or a lucky bet. Nor should it be subject to the caprices of a fickle state. But maybe it’s always been this way.

In SA, as in life, that’s the deal.