After a very strong start to the year, with the JSE All Share Index outpacing even the strong US market, things have been going south for South African equities over the last few months. It is a situation where you just want to put your head in your hands to smother a scream. The problem with investing in domestic stocks is that, although the general sentiment towards equities is negative all over the world, we add to that our ability to score own goals every opportunity we get. We cannot judge the performance of some of the companies listed on our stock exchange against things that are happening in the rest of the world, or for the specific negative conditions in their business cycle; but when the local consumer-driven stocks are washed out, we know it is an internal problem.
Borrowing a graph from Traders Corner, we can see that assuming a $10,000 investment in each of a variety of domestic-focused stocks, we get the illustrated outcome (in USD). Only the Clicks group is close to giving you your money back. And if you were a foreign investor who converted your dollars into rands five years ago to buy into one of these companies on the JSE, you would have suffered a substantial currency loss. The problems we face in South Africa are numerous. We have to take into consideration that the cost of living and the cost of borrowing will rise because the country has been mismanaged for decades and a potential coalition government in 2024 will have a negative impact.
Companies operating in South Africa have seen their profits being negatively affected by the cost of diesel for their generators; the reality of South Africans dying from cholera because municipalities do not maintain the water infrastructure; and a potential stage 8 load shedding causing a loss of 50% of operating hours over any four-day period. Add to this the fact that the most important rail network running between Durban and Gauteng operates at only 25% of capacity; and the fact that we get our money from the USA and Europe but prefer to cosy up with Russia and China; and the outlook becomes pretty grim.
The questions we have to ask ourselves as investors are: can our government change; can Eskom be fixed; can the intervention of the private sector save us? The answer can never be an absolute “no”, so that brings us to the next question: have domestic-facing shares priced in all the bad news yet? The answer has to be that they probably have not, but we are closer to the bottom than the top unless we do become a Zimbabwe or a Sudan. I think most investors today are of the opinion that holding a bit more cash than necessary is prudent, and when the currency opportunities arise, rather invest the surplus cash into international equities than local.