Adapting is the name of the game in a topsy-turvy time
SA is in dire straits after the hard lockdown and while some firms are thriving others are struggling to survive
At the end of 2020 SA’s economy is likely to experience shrinkage five times greater than that experienced a decade ago during the global financial crisis.
Global trade is also expected to decline by a fifth, severely curtailing our exports, with inbound tourism being severely hamstrung.
During the second quarter a third of all economic activity came to an abrupt halt after the government imposed one of the most severe lockdowns globally as measured by Oxford University. To make matters worse, we have been among the laggards in relaxing these rules. Alarmingly, the SA economy lost a decade of growth this year alone — a huge setback.
But this picture is even more perplexing when one juxtaposes it alongside the 50% rally by the JSE all share index since March lows. SA equities were the second strongest performers in the emerging market universe in the past quarter, behind Argentina. The rally was led by a rebound in resources stocks, which more than doubled from March lows, driven by an improvement in demand, a weak currency and supply shortfalls.
The world’s largest commodity munching machine, China, revved back demand, being first in and first out of the current crisis. Of the miners, gold shares shone the brightest as the gold price hit a nine-year high. The rise of bullion is a mirror image of the greenback losing its lustre after the US Federal Reserve cut rates by 150 basis points to near zero.
Of all the horror stories the tale of Texas oil futures is the scariest — it plunged to an unprecedented minus $38 a barrel (no this is not a typo — demand froze during lockdown and there was insufficient container capacity to store oil, so buyers were in effect being paid to take crude.
This anomaly did not last, as oil staged its strongest rally since 1990 to trade at $41 a barrel as economies reopened. A more obscure commodity also benefited from the DIY explosion — US lumber futures spiked 85% since the beginning of April as those locked indoors used the opportunity to improve their homes.
Naspers and its European-listed next-of-kin Prosus also performed strongly on the back of a rebound in technology shares, with Chinese internet stocks also rocketing. Naspers continues to trade at an eye-popping 50% discount to the sum of its parts, with Tencent up 40% year to date and dominating its portfolio since its prescient acquisition in 2001. The group has newer growth vectors such as classifieds and food delivery, neither of which is profitable yet, but they are poised to gain traction in a post-Covid world.
The MultiChoice pay-TV asset has been unbundled, and global internet assets were listed as Prosus in Europe. It can now pursue a more acquisitive strategy, as demonstrated by bids for UK online food delivery group Just Eat and the classified business of eBay.
Even President Donald Trump is feeling threatened, vowing to ban Tencent’s WeChat. In his homeland, the AAA FM (Apple Alphabet Amazon Facebook and Microsoft) now account for a record 22% of the market cap of the S&P 500.
In SA, the eat at home trend has seen high-end food retailers benefiting, with Checkers reporting blockbuster sales up 16% and Woolworths following close behind with a 14% rise in food sales in the first half of this year. To benefit from changing habits, these businesses have had to offer attractive prepared meals and fresh foods and improve their online offering, as demonstrated by Checkers’ Sixty60 grocery delivery service within 60 minutes.
On the downside, the local property index is still down almost 42% year to date as the transition from the physical to digital world accelerates. It is ironic that pre-Covid internet businesses were often perceived as having fickle customer bases and unpredictable revenue streams. On the other hand, property companies were lauded as good cash-generating businesses, with established physical assets and long contractual leases, which made them predictable and defensive. However, we have seen businesses that were forced to stop trading challenging their contractual obligations and obtaining rental reductions or outright holidays. On the other hand, the lockdown fed a bulimic habit for digital consumption by a large swathe of our population.
Many companies are being forced to press reset. UK property giant Intu has gone into administration and will be delisting from the JSE this month. Debt-heavy balance sheets need to be pared down, often at the expense of dividends to shareholders. Shoprite will be shedding its former growth engine in Nigeria, while MTN is trying to extricate itself from politically unstable regions in the Middle East. This also presents opportunities for the strong to gobble up downtrodden businesses, with TFG buying Jet and Cashbuild absorbing the Pepkor building businesses.
The SA economy reminds me of the book The Diving Bell And The Butterfly, the autobiography of former Elle magazine editor Jean Dominique Bauby. He suffered a stroke and went into a coma (coincidentally known as lockdown syndrome). Bauby dictated the book by blinking only his left eye due to being completely paralysed.
The coronavirus has pushed our economy into a deep coma, with limited resources to revive the patient. SA’s attraction as a global investment destination is waning. The JSE’s weight in the global emerging market index has dropped to under 4% and our sovereign bonds are not part of the major global government bond index. Global allocators of capital are picking out businesses with business models that will not only survive but thrive in a post-Covid world.
As Charles Darwin famously said: “It is not the strongest that survives; but the species that is able to adapt to and adjust best to the changing environment in which it finds itself.”
• Rassou (@Patricerassou) is chief investment officer at Ashburton Investments.
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