Resilient SA Inc is not the worst place to hide

04 November 2022

As things stand, uncertainty reigns and investors are scrambling for safety as inflation, rising rates and ill-conceived government policy (as witnessed in the United Kingdom in September) erode asset values. Balance sheets on average across the JSE universe are strong. What is clear though is that corporate South Africa remains resilient and has demonstrated an uncanny ability to navigate through volatility.

These wild variations in sentiment are not without cause. During this period the world has gone through the throes of a pandemic, which saw markets sell off amidst unprecedented global lockdowns.

This was followed by a big market rebound as central banks and governments acted in unison, using the fiscal and monetary policy tools at their disposal to offset the effect of lockdowns and shore up the global economy. The S&P 500 rallied around 38%, an unprecedented move, over the 50 days into June 2020 with similar moves across global markets, including South Africa. The JSE SWIX was up around 65% from its March 2020 low through to March 2021.

However, as the pandemic began to wane, the cocktail of unwinding fiscal and monetary stimulus across developed and emerging markets, together with disrupted global supply chains and a war in Europe, prompted a harsh market reversal in 2022. As things stand, uncertainty reigns and investors are scrambling for safety as inflation, rising rates and ill-conceived government policy (as witnessed in the United Kingdom in September) erode asset values. This has left few places to hide.

 

AN UNLIKELY BOLT HOLE

Through this period, the South African market has painted a picture of relative resilience.

Early in the pandemic we saw companies on the JSE move to protect their balance sheets, mostly by pulling back on working capital and capex, and a few through rights issues. Banks, corporates and institutional investors alike pulled together, and the depth of the local capital markets was on full display as liquidity was preserved and companies were able to trade through peak lockdown. Debt levels and gearing ratios have trended lower across the JSE universe and, on average, sit below pre-pandemic levels. Across most sectors we have seen earnings recover to - or in some cases beyond - pre-pandemic levels.

Year to date, the JSE SWIX has outperformed the major United States, European and Asian indices. Dividend and cash-flow yields are higher than these other international markets with the average dividend yield at almost 6% for the JSE. At the same time, we have seen positive earnings momentum across most JSE sectors this year. Balance sheets on average across the JSE universe are strong. At a priceto-earnings ratio of about eight times, SA Inc still screens cheaper than the S&P, DAX, FTSE 100 and MSCI world indices relative to history. In particular we see the mid- to small-cap space of the JSE as offering attractive opportunities. However, in the short to medium term there is downside risk to earnings across both emerging and developed markets with the International Monetary Fund already suggesting that the world economy is edging towards recession.

This begs the question: What are the risks for South Africa?

State power producer Eskom's implosion means the country is stuck with debilitating power cuts until more self-generated capacity comes on to the grid. However, we have seen government putting in place legislation to support public-private partnerships to help address the capacity constraints.

In addition to many of South Africa's other, well-documented structural challenges - from high unemployment to crime and corruption - the country is also faced with continued political uncertainty as the 2024 election cycle kicks into gear. What is clear though is that corporate South Africa remains resilient and has demonstrated an uncanny ability to navigate through volatility. Given this experience, coupled with the unprecedented political and economic instability that exists in all global markets currently, right now South Africa is not the worst place to hide.

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