If there is a silver lining to SA’s economic malaise and the struggles of its private sector, it is that the country’s financial markets should mature as investors and regulators sift out those that are inefficient, and more importantly, those that are errant.
SA’s economic stagnation, and Steinhoff’s spectacular meltdown over an accounting scandal from late 2017, has made life more difficult for the private sector. And it shows.
Barring gains on the back of a global stock rally over the past three weeks, the JSE all-share index is flat compared with a high reached in April 2015. Over the same period, the S&P 500 index rose by a third.
Steinhoff’s dramatic collapse did not help, especially for those companies whose accounting practices had previously escaped scrutiny.
Tongaat Hulett is the most recent example. New management at the sugar producer, whose market capitalisation has crumpled to R1.8bn, say the company’s balance sheet may have been overstated by as much as R4.5bn. Had trading conditions remained buoyant, and had Steinhoff never happened, this may well have gone unnoticed.
“When things get tough, mismanagement and malpractice gets exposed,” Vestact portfolio manager Byron Lotter said in a recent note to the asset manager’s clients.
Political corruption rubbed off on to the private sector, which already had something of a “Wild West culture” that rightfully rewarded resilience and resourcefulness, Lotter noted.
“But the recent slump has exposed what is still an immature market. Poor management practices that succeeded in the past have failed and the regulatory environment has learnt many hard lessons.”
The bright side is that this is how markets grow more sophisticated. Regulators are learning some hard lessons and are moving to close the gaps they had not previously considered.
Many companies that have been playing by their own rules will not see out the current business cycle, assuming SA is headed for better days, says Lotter. “Those that have stuck it out, played fair and hard, will be stronger for it.”
In the meantime, the JSE is under pressure to take a more active oversight role, and rightly so. SA’s main bourse, which seems to be contemplating just how involved it should be in protecting investors, has published a number of proposed amendments to its listings requirements to keep its integrity intact. This could see CEOs and CFOs being held more directly accountable for the financial statements they sign off, and more stringent requirements for main-board listings.
The latter comes amid heightened scrutiny over the approval of listings, including the controversial listing of Ayo Technology Solutions, which received little scrutiny at the time as the Public Investment Corporation was the only investor. After taking flak for letting the listing go ahead, the JSE has asked the technology company to get its external auditors to check its interim financial statements.
Meanwhile, a number of companies on the fringes of SA’s biggest exchange have long escaped scrutiny as they are closely held and hardly followed by major institutions.
Take Trutco, for example, a small Namibian investment holding group. At first glance, the company grew its 2018 annual sales at a strong 85% to N$1.5bn (R1.5bn), while profit after tax surged 165% to N$725m. But buried deep in the statements, it becomes apparent that most of the revenue was boosted by Trusco’s decision to move from inventory property worth nearly N$1bn to the top-line because it had scrapped plans to develop and sell that piece of land, and was now holding it for capital appreciation — or an increase in the value of an asset over time. The group also recorded a gain of N$545.6m after removing from its balance sheet a related-party loan that had been waived.
Alongside long-only investors and regulators, hedge funds also have a role to play in helping SA’s financial markets reach maturity, as they scour the JSE in search of opportunities to profit from inefficient or offending companies.
SA’s regulators and exchanges have a long way to go to plug the gaps, but the ball is rolling.