At the end of this year, South Africa’s economy will likely experience shrinkage fivefold 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 government imposed one of the most severe lockdowns globally as measured by the Oxford University. To make matters worse, we have been among the laggards in relaxing these rules. Alarmingly, the South Africa 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 Johannesburg Stock Exchange (JSE) All Share Index since March lows. South African equities were the second strongest performer 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 nine year high. The rise of the yellow metal is a mirror image of the greenback losing its luster due after the Federal Reserve (Fed) cutting rates by 150 basis points to near zero.
Of all the horror stories, the tale of the walking dead must be that of the West Texas Oil futures which plunged to an unprecedented -$38 a barrel (no this is not a typo – demand just froze during lockdown and there was insufficient container capacity to store oil, so the buyers were effectively being paid to take crude oil). This anomaly did not last as oil staged its strongest rally since 1990, to trade at $41 a barrel as economies re-opened. A more obscure commodity also benefitted from the DIY explosion, United States lumber futures spiked some 85% since the beginning of April as those locked indoors use 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 eyepopping 50% discount to its sum of the parts with Tencent, up 40% year to date, dominating its portfolio since its prescient acquisition in 2001. The group has newer growth vectors such as classifieds and food delivery – both areas are not yet profitable but are poised to gain traction in a post-Covid world. It has unbundled its Multi Choice pay tv asset and listed its global internet assets, Prosus, in Europe and now can pursue a more acquisitive strategy as demonstrated by bids for United Kingdom’s (UK) online food delivery group, Just Eat and the classified business of Ebay. Even President Donald Trump is feeling threatened, vowing ban US residents from using Tencent’s We Chat. 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 South Africa, the eat at home trend has seen high end food retailers benefitting with Checkers reporting blockbuster sales of 16% and Woolies following close behind with 14% in food sales in the first half of this year. In order 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 by almost 42% year-to-date as the transition from the physical to the 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, which were forced to stop trading, challenging their contractual obligations and obtaining rental reductions or outright holidays. On the other hand, the lockdown had fed a bulimic habit for digital consumption by a large swathe of our population.
Many companies are being forced to press reset. United Kingdom 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 South African economy reminds me of the book “the diving bell and the butterfly” which is the autobiography of the former editor of Elle magazine Jean Dominique Bauby. Bauby suffered a stroke and went into a coma (coincidentally known as lockdown syndrome). He dictated the book by blinking only his left eye due to him being completely paralysed. The Coronavirus has pushed our economy into a deep coma with limited resources to revive the patient. South Africa’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…”