EDITORIAL: Stock market’s dark night brightens into a sunny dawn
Predictions of permanently declining fortunes have missed the mark as both the all share index and the top 40 index have extended 2020 gains
If you had listened to prophecies of doom and gloom for SA equities a year ago, you must be annoyed with yourself right about now.
True, it seemed like the end of the road for SA stocks in March 2020 when it became clear that the pandemic was set to shatter all expectations of the 21st-century version of the “Roaring 20s” and trigger the steepest global recession in generations.
At that time, the JSE all share index, the broadest measure of the local stock market performance, and the benchmark top 40 index crashed to historic lows.
It was difficult to find anyone willing to stick their neck out that there was a chance that the market would recoup even half the losses suffered by the end of 2020, especially given that SA companies are exposed to an economy that was already on a downward spiral even before the pandemic struck.
There was no shortage of doomsayers, some of whom passionately offered advice to investors to move their money offshore.
But the stock market has thrived in the face of numerous and sometimes prominent detractors, almost doubling returns to roughly 80% since the March 2020 selling frenzy and slightly outpacing just more than 70% return in the MSCI world equity index, which tracks shares in almost 50 countries.
Predictions of permanently declining fortunes have missed the mark as both the all share index and the top 40 index have extended their 2020 gains, scaling record highs since the beginning of this year.
And the reassuring thing is that it’s not only companies that earn the bulk of the profits overseas that have been in demand, it is also those with exposure to the SA economy — which like others elsewhere in the world suffered its deepest downturns in generations.
Heavyweights such as MTN Group, Africa’s biggest mobile phone operator, drinks maker Distell and lender FNB have joined the likes of Naspers as the must-haves in fund managers’ portfolios in the past year. Of course we would not be here if it were not for the mining stocks, which have been riding the supersonic rally in commodity prices and keeping investors on their sides with bumper dividend payouts.
Even then, the valuations attached to SA companies such as Distell and Adapt IT tells a depressing story about the level of pessimism in our public markets. If recent events are anything to go by, it is clear that overseas long-term investors may well be trying to take advantage of an investment community with an inherent tendency to believe the worst will happen. Shareholders in Adapt IT have been offered R1bn by Canada’s Volaris, a bid that comes with what looks like a generous 56% premium.
But the offer is more than a third below Adapt IT’s recent peak of about R9.85 just three years ago and comes as Adapt IT prepares to participate in a hoped-for post Covid-19 economic recovery after slashing costs and debt in 2020.
Distell is also in the middle of merger talks with an overseas company. Though Heineken has not disclosed how much it would pay to buy control of its main global cider competitor, it’s not unreasonable to imagine a Distell share price collapse in 2020 has given the Dutch-based company an opportunity to pitch a price that might not reflect its true worth.
It’s true that Distell’s share price has doubled in value since the March 2020 stock market crash, but that surge has only taken it to what it was towards the end of 2019. As one analyst pointed out, Distell is trading at a discount to its global peer and so is Adapt IT.
We also learnt on Friday that Dimension Data’s Japanese parent, Nippon Telegraph and Telephone Corporation, or NTT, has decided to double down on its Johannesburg-based SA company, which has operations across the Middle East and the rest of the continent, as SA accounts for 70% of the business.
As much as corporate SA faces risks and challenges in an economy ravaged by the pandemic, there are opportunities that should not be overlooked. If the past year has taught us anything it is that the bears waiting for their prophecies to be borne out have missed some of these opportunities.
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