The curious duality of SA’s first business quarter

The first quarter is over, and one of the major reporting seasons has come and gone. After the dust has settled, at first glance it seems as though the news is generally good. The All Share is up 11.5% and the Alsi40 is up 10.8%. Yet, looks are sometimes deceiving.

Stocks rise. They fall. It goes on and on, round and round. Except that every movement does tell you something, on average over time, about the state of business and finance. But making sense of the JSE over this past quarter has been unusually difficult because it contains such a Jekyll-and-Hyde aspect.

The duality was captured by veteran stock market analyst and Sasfin deputy chairman of equities David Shapiro, who in a tweet said the first quarter was turning out to be a disaster for “SA Inc” stocks. The market was up thanks to foreign giants: Naspers, BHP, BAT and Anglo American.

“But: EOH -64%, Tongaat -62%, Omnia -39%, Blue Label -33%, Aspen -31%, Mr Price -26%, Massmart -24%, Truworths -24%, Woolies -19%, Discovery -16% etc”. When you look at it that way, it’s a depressing list.

In an interview, Shapiro expanded on his thesis. The JSE, he explained, really consists of three pillars of stocks: The monster companies that are listed outside the country, but have secondary listings in SA. These stocks include the big miners BHP and Anglo American, and tobacco company BAT, for example.

The second pillar is local stocks but which have such big foreign assets that the SA market is more a price taker than a price maker. The prime example here is Naspers, which is technically SA’s largest listed company, but which is really governed by its Chinese investment Tencent.

The third pillar is what might be called “SA inc”. These are the companies that do the majority of the business in SA, and this is where the big problems lie.

“All the bounce came from the international stocks.”

The US Fed turned dovish, and the US/China trade deal seemed more likely. That’s what provided the lift. The big resource companies have paid down their debt, and are in a much better place now.

But for the “SA inc” stocks, the quarter was really shattering. Many of the stocks have moved more in a quarter than they have in years.

So what’s behind that change? Shapiro said he suspects that up till now, these businesses were able to hold their own. They improved efficiencies and cut costs. But that could only go so far, and eventually, it caught up with them. These 15-30% declines are “massive destruction of value”, he said.

And now? Where do we go from here? Shapiro says valuations do look reasonable and although Europe remains weak, “I think we will bumble along. We are pencilling in a reasonable year.”

Shapiro said he reads lots of forecast statements in company reports and nothing in them has recently provided great encouragement.

But, “we might have even reached the bottom”. Let’s hope. DM