JSE-listed companies lose their sparkle abroad
Financial scandals as those unravelled at Steinhoff continue to paint a negative picture of SA’s corporate governance and its general management standards
A series of corporate governance and managerial failures among major JSE-listed companies such as Steinhoff International has knocked investor perception of SA equities, with local counters now being increasingly viewed with trepidation.
Foreign investors continue to shy away from local equities after having their fingers burned in terms of major stock losses, and the lack of interest in local stocks could see smaller cap companies being delisted, according to experts who spoke at a Meet the Managers event in Sandton on Tuesday.
Previously,the management teams of SA’s companies were seen as world-class, but recent setbacks, examples of which include cost overruns of Sasol’s Lake Charles project, or Woolworths’s underperforming investment in David Jones, had seen SA stocks lose their premium ratings, said Iain Power, chief investment officer at Truffle Asset Management.
“We are being rated today, in the South African corporate perspective, more as an emerging market,” said Power.
The JSE continues to see foreigners selling off local equities — by Friday last week this amounted to R35bn for the year to date, JSE market statistics show. In the same period in 2018, foreigners had bought R16bn worth of JSE-listed equities.
The JSE fell 11.37% in 2018, its worst performance in a decade.
Small and medium cap stocks have been particularly hard hit by SA’s tepid economic performance during the period, as these companies are generally more dependent on domestic conditions than larger companies.
Over the past year, the JSE’s small-cap index has fallen 11.4%, while the all share has inched up 0.7%.
Investors had to be increasingly aware of value destruction when it came to picking local equities, although there were opportunities for undervalued stocks, Power said, citing Capitec’s ultimate share price recovery after a sharp sell-off prompted by a critical research report from short-seller Viceroy Capital in January 2018.
Although much of the market focus had been on major managerial failures, such as Steinhoff, there were numerous examples among JSE listed medium-sized companies as well, Power said. Steinhoff shocked the market in December 2017 and sent its shares into freefall after it announced it had uncovered “accounting irregularities”.
The last two years had seen between 50 to 60 examples of listed companies that had at some stage breached corporate ethics, said 36One CEO Cy Jacobs. “A lot have been found out, but there are a lot where there are major questions,” Jacobs said.
Global risk appetite continues to remain depressed, something evident in negative-yielding bonds in many developed markets, Jacobs said.
“It just shows you there is little to invest in,” he said.
In general, SA’s stocks were now severely undervalued, and small and medium cap stocks were often just being ignored by large investment houses, according to Piet Viljoen, executive chairman at independent asset manager RECM.
“Right now South Africa, if you take out Naspers, is one of the cheapest markets in the world, perhaps Russia is comparable” said Viljoen.
“This is the ultimate sign of a distressed market,” said Viljoen, adding, however, that cheap valuations did have some advantages for smaller investment managers. Larger wealth managers were generally under more pressure from clients to target returns from top 40 companies.
In focusing on smaller companies, diversification was even more important than technical analysis of stocks and forecasting, Viljoen said. Given the active disinterest by investors in smaller cap companies, this could lead to private equity buying out some of them.