Two charts tell the story of South Africa Inc. One shows that SA companies cannot invest outside the country fast enough, and the other shows that the JSE All Share index, measured in US dollars, is unchanged since 2007.
Old Mutual economist Rian le Roux put together the following chart which shows SA companies invested abroad to the tune of R80bn in 2014, and more than R60bn on a rolling, cumulative basis up to the second quarter of 2015. Back in 2012 the figure was zero.
Old Mutual chief investment strategist David Mohr says the rate at which SA companies are investing abroad suggests they are nervous about the current operating environment in SA, and see better returns elsewhere.
“Power outages, an unfriendly business environment, rigid labour laws, all the usual suspects account for this migration of capital outside the country,” he says. “If there are any positives to be highlighted as far as SA is concerned, we still have a relatively disciplined fiscal regime and low foreign debt, which should shield us from some of the harsher consequences of delinquent behaviour being experienced by other emerging market countries such as Brazil and Turkey.”
The second graph suggests that virtually all gains on the JSE since 2009 have come by way of rand weakness. If there is a positive to this it is that as the rand weakens it protects investors against a possible bear market. The reverse, of course, would apply: any strength in the currency from here would hurt equities.
The exodus of capital from SA is in large part a vote against the government, which shows no appetite for essential reforms in the areas that investors consider most pressing, such as labour and energy. SA companies have realised that international diversification is a vital hedge against further maladministration. That SAB Miller is now the subject of an attempted buy-out by Anheuser-Busch is a logical outcome of a process which has been two decades in the making.
Larger companies, starting with the mining houses, started the process of international diversification around 1994. Sanctions had kept them out of the race for the juiciest mining assets outside our borders, so when the international embargo was lifted in the early 1990s, there was a sense of urgency in their move abroad. Other companies were quick to follow. The wisdom of this exodus is now plain to see.
The current weak state of the rand will not halt the capital drift. Companies plan for five, 10 or even 20 years into the future.
The common factor in both charts is the rand, which has already breached R14 to the US dollar in recent weeks. There is some consensus that the rand will likely end this year around current levels of R13.50 – R14, but what if there is a blow-out to R16 or even R18 in the next two years, as some have suggested? This is not beyond the bounds of possibility, as the rand has already skidded from R7 to R14 to the US dollar since 2011. The emerging market rout is by no means over, which means further pressure on the rand. That, in turn, is going to make it harder to reduce the current account deficit. Inflationary pressures – mercifully subdued for the moment – could resurface if the rand takes further strain.
If it’s more bad news you want, the South African Chamber of Commerce and Industry (Sacci) has just delivered a corker. This week it announced that its business confidence index sank to a 22-year low, requiring policymakers to do something extraordinary to right the tilting ship. We have to go back to before the 1994 elections to match anything like the current mood of despondency.
Most of the large cap companies on the JSE now earn more than half of their revenues offshore, a prescription which smaller cap companies, such as Truworths, are determined to emulate. It doesn’t always go according to plan, as Tiger Brands discovered when it purchased Nigeria’s Dangote Flour Mills for R1.59 billion in 2012 only to see the value of this investment slip to zero and even negative territory.
Sappi is a good example of how international diversification has cushioned its mattress. Roughly half its assets are in southern Africa and half in Europe, though two-thirds of its sales come from Europe. It’s a similar story at Steinhoff, which derives about two-thirds of its sales from Europe where it houses 59% of its assets. Africa now accounts for just 31% of SAB Miller’s revenue, and 27% of MTN’s, and a quarter of Aspen Pharmaceuticals. Wine and spirits group Distell is making inroads internationally, where it now derives roughly a third of sales. In each case, this is the result of investment decision taken a decade or more ago.
Now, of course, is not a good time to be shifting money abroad. Those who made this decision five or 10 years ago are smiling, but if you believe the rand will hit R18 to the US dollar over the next few years, then a case could be made for getting out now. But as Warren Ingram of Galileo Capital cautions, if you invest abroad now and the rand strengthens from here, you are locking in a certain loss. Recall what happened in 2002, the last time the rand hit R14 to the dollar. By 2005 it had dropped to below R6, and there are many sour memories of the rush to expatriate funds when the rand was weak. Many investors have yet to recover from this shock.
This is the new corporate South Africa: moving the furniture abroad as fast as possible.