Genuine growth stories are few and far between on the local market. Where they do exist, it’s usually because a company figured out how to disrupt the status quo, rather than because there’s a red-hot sector in which all the companies are doing well (just think about the tech sector in the US in recent years).
This is a function of South Africa’s disappointing economic growth. A rising tide lifts all boats, but in these parts the tide seems to be perpetually going out and only a few particularly talented individuals buck that trend with disruptive corporate strategies.
Nevertheless, the shareholder registers of large local companies will reveal that institutional investors remain invested in equities that have had disappointing returns for years on end. There are a bunch of factors at play here. Concentration in the active asset management sector is certainly one of them, with far too much capital being managed by far too few asset managers. This affects liquidity for large stakes, making it difficult for the largest funds to exit positions without crashing the price.
Another factor is the statutory limitation on offshore assets for regulated pension funds. Though perhaps not a walled garden, this certainly creates a large row of thorny bushes all the way around the JSE. There’s a lot of South African capital that needs to find a home on the local market in line with model portfolio allocations. In other words, it can’t all be put into local debt, so equities that aren’t on anyone’s stock-picking list tend to find their way into pension fund portfolios. This means investors find themselves taking equity risk but achieving only fixed income returns as the reward, which is clearly unacceptable.
This is even worse when you consider that in South Africa, our structurally high interest rate environment means that real returns (returns in excess of inflation) are on offer without any heroics at all. By investing in fixed income funds, it’s likely that you’ll enjoy real returns. This means that the bar is set high for equity risk to be worth taking, as it would be foolish to add that risk to your portfolio unless you’re being rewarded for it. This is a great example of the “diversification vs diworsification” joke in action.
In the portfolios of retail investors, the attractiveness (or lack thereof) of many local equities tends to play out in the allocations made to money market funds and offshore equities. The foreign investment allowance puts a damper only on wealthy South Africans who are moving serious numbers offshore, which means that most South Africans can buy US (and other offshore) stocks to their heart’s content with their monthly investment quota.
You won’t find too many retail investors sitting with extensive exposure to the local equity market index, as they simply have access to too many other options
To supplement this and to ensure they have an emergency fund, money market accounts are a firm favourite. Some even venture into more interesting fixed income opportunities, such as bond exchange traded funds. Either way, you won’t find too many retail investors sitting with extensive exposure to the local equity market index, as they simply have access to too many other options.
This won’t change unless the JSE has more names offering the excitement that is usually associated with equities. When you can get a high single-digit return in the debt market without having to take much risk at all, then it becomes harder to justify a stock with a similar dividend yield and very little in the way of growth prospects.
Not every company can be a growth company, but it’s a little depressing when such a high proportion of local company announcements are focused on cost containment and trying to protect margins in a time of low growth. To add insult to injury, when a company does actually have an inspiring story to tell around growth, it inevitably trades at such a high multiple that the likely returns to shareholders are squashed anyway. If there were a deeper pool of quality assets to choose from, perhaps investors wouldn’t bid up every half-decent company on the JSE to an earnings multiple in excess of 20.
The resilience of local corporates and the high yields on offer have created a vibrant debt market on the JSE. The pools of capital are clearly there and are ready for appealing opportunities. We don’t just need more listings on the JSE; we need more listings that create genuine excitement. We need more growth stocks, not more dividend aristocrats.
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