Finweek 7 May 2020

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contents Opinion

from the editor

4 Investment for the long run 6 The urgency of land reform finalisation

hile South Africa is now officially in its sixth week of lockdown, it’s been nearly six months since the coronavirus that has swept across the globe first made headlines. As the world confronts the reality of this virus, a parlance has emerged to describe the events that are unfolding. Particularly when it comes to making sense of this pandemic and the world it will leave us with.

Unprecedented times: Often coupled with references to the 1918 Spanish flu and the Great Depression at the start of the 1930s. Uncertainty: A world in lockdown, with no clear roadmap as to when it will end.

“In the midst of crisis there is opportunity”: Liberally paraphrased quote often attributed to Albert Einstein, which will hopefully help lead us to a new normal (the other much-used phrase in the parlance).

And, of course, the term that has tangibly shaped our reality: essential services. When this outbreak began, most of us would never really have engaged with this concept. This definition, however, has now become the determinant of survival for many. Small businesses have been forced into bankruptcy; employees have lost substantial portions of their income, or their jobs completely, because the company they work for or the industry they work in doesn’t fall into this category.

Before our president announced the hard lockdown, many businesses knew this to be an inevitable eventuality and began to prepare. Entrepreneurs and small business owners found innovative ways to potentially navigate the restrictions that would impact them and their staff.

When the hard lockdown hit and their doors had to close, many came up with ways in which they could contribute to these essential services in order to generate some revenue and support the people that work for them. But that can only carry them so far.

Given this, the move towards a phased reopening of the economy, and the R500bn stimulus package that is going towards alleviating the devastating effects of this lockdown, will certainly provide breathing room for those in distress. But for how long? (That ever-present uncertainty.)

As government walks the tightrope between keeping our economy from collapse and guarding against the human cost of the likely Covid-19 outbreak we are still to experience, they are making decisions that will shape an irrevocable reality.

But these emergency measures are ultimately not only up against Covid-19. They are answering to the deeply entrenched economic divide and abject inequality that have plagued the majority of South Africans for decades. ■ Due to the national lockdown restrictions, the distribution of the print edition of finweek has been limited.

Print subscribers that have been affected by this can contact us at editorial@finweek.co.za for assistance.

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8 10 12 13 14

In brief

News in numbers Social initiative with economic spin-off A gem that remains hidden Diamonds lose their lustre, for now South Africa’s economic output set to contract by more than 10% 15 Which companies will wear it better?

16 Are the mall heydays over?

Marketplace

17 Fund in Focus: Looking for diamonds in the rough 18 House View: Food retail, Pan African Resources 19 Killer Trade: MultiChoice, Woolworths 20 Invest DIY: Look to retail bonds for cash flow when dividends disappear 21 Investment: How to beta build your portfolio 22 Simon Says: Asburton Global 1 200 ETF, Clicks, healthcare sector, MTN, oil, PSG, RCL Foods, Standard Bank, Zeder 24 Share View: Johnson & Johnson at a canter 25 Invest DIY: The rarity of guidance among SA companies 26 Markets: The return to normalcy is fraught with uncertainty 27 Technical Study: ‘Tough times ahead for SA’

Cover

28 Investing offshore after the rout

In depth

36 Assessing bank quality in a complicated Covid-19 environment

On the money

40 Spotlight: Should investors be going for gold?

42 Motoring: Toyota Corolla Quest – Beefed up and more bang for your buck 44 Management: Insuring against a pandemic 45 Quiz and crossword 46 Piker

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JANA JACOBS

opinion

By Johan Fourie

ECONOMY

Investment for the long run

k

What will the economic landscape look like on the other side of this pandemic?

eynes’ famous quip that “in the long run, we’re all dead” has run, we’re all dead”. Consider what came after the Spanish flu in the been misunderstood for almost a century. Many have interpreted US: Firstly, a short but sharp recession, and then the roaring 1920s. it to mean that he cared little about the future. But that would Luxury goods and unique experiences may see a quick rebound if be a mistake. He used it to explain how the quantity theory of consumers’ future time horizon shortens. money was subject to what we today call the Lucas critique: Printing But more fundamental changes will also come. Business tycoon more money would also affect money demand. The point being that Johann Rupert believes that we’ll enter an entirely different economic whatever we do today with monetary policy – like expanding the landscape. What could this look like? money supply – might not have the desired consequences, due Perhaps a shift towards an uncompetitive market. The to how consumers respond. rise of network industries over the last two decades has This holds true when thinking about the economic reduced competition in the fast-growing ICT sector. response to the current pandemic. Print more These conglomerates with their fat pockets can swoop money, and banks may be less willing to grant loans in to poach any upstart that promises to be a future for fear of future inflation. Borrow more to cover competitor and consolidate them into their increasingly a fiscal stimulus, and the rich might hold back complex structures. See Instagram (Facebook) and expenditure to save for future taxes. There’s no easy LinkedIn (Microsoft). Another example: In the five years solution to stimulate an economy that is constrained between 2014 and 2019, Alphabet, parent company on the supply side. of Google, acquired 94 small firms. It’s currently in talks If these are difficult times for politicians to act, to buy Fitbit. Such market dominance was also a feature they’re equally perilous for fund managers in search of of the US economy after the Spanish flu; from 1920, mergers Johann Rupert a safe haven. What type of economy will emerge when increased substantially in almost all US industries until the Executive chairman of this pandemic passes – as it inevitably will – is a question Great Depression of the 1930s. luxury brand company Richemont SA with no obvious answers. Recent financial crises were all The current pandemic may not only change market demand-side crises: The question wasn’t whether demand structures but will, ultimately, create entirely new markets. will pick up, but when? Today is different: Some predict that a third of As people prefer to work from home, more services will have to be South African businesses will be forced to close. Unemployment could rendered online. See the sharp stock price increases of Amazon and reach 50%. Who will remain when this is all over? firms that provide videoconferencing services. Architecture and History offers one source of wisdom. In crises, especially when we fashion and food and entertainment will change. still lack enough evidence to fit our models, the past becomes our The rise of some will be the end of others. Travel restrictions may first recourse. Such analogical reasoning should be done with caution, severely dent those hotels geared toward the mass market. Much as Barry Eichengreen warns, because we can easily like books, the local grocery store may lose to online choose the wrong history as our analogy. Keeping this ordering. Restaurants may have to switch from on-site Some predict that a third of in mind, what can we learn from the past to inform our consumption to deliveries. Sports tournaments with South African businesses investment strategies today? their large (often empty) stadiums will need a rethink; as will be forced to close.

Unemployment could reach The most obvious industry to be affected is e-sports become more realistic and more competitive, insurance. A pandemic, by its very nature, kills. Mortality they’ll give their more expensive real-world rivals a go. rates increase significantly, as does morbidity. The The same for public services. The switch to solar will burden on life and medical insurance companies can speed up. Schools and, in particular, our universities will need be enormous. Yet, as historian Howard Phillips explains, to adjust curriculums to better prepare students for this new Who will remain when this the “sense of personal vulnerability” with 1918’s Spanish world. Even the health sector, now in high demand, must is all over? flu, “underlay record sales of life assurance in the carefully consider how to prepare for future pandemics. following months, particularly as it was widely forecast It’s useful to remember that things have been bleak that another flu wave was imminent, a possibility that the country’s before. Keynes summed it up well during the Great Depression: insurance companies did everything to highlight in their post-epidemic “We are suffering just now from a bad attack of economic advertising campaigns”. New clients for insurance brokers in 1919 pessimism. It is common to hear people say that … a decline in easily made up for losses suffered during the epidemic. prosperity is more likely than an improvement in the decade This isn’t to say things will be the same a century later. One which lies ahead of us. I believe that this is a wildly mistaken reason for caution is that the Spanish flu and Covid-19 differ in an interpretation of what is happening to us. We are suffering, not from important respect: The former predominantly killed young adults; the rheumatics of old age, but from the growing-pains of overCovid-19 mostly targets the old. This could lead to very different rapid changes, from the painfulness of readjustment between one insurance preferences. economic period and another.”

Consumers’ psychology won’t only affect insurance. People who Hear! Hear! ■ survive the crisis may choose to either be thriftier in their spending or editorial@finweek.co.za Johan Fourie is associate professor in economics at Stellenbosch University. choose to live it up because, to misquote Keynes again, “in the long

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50%

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finweek 7 May 2020

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Times change.

Time doesn’t.

KINGJAMESJHB 3131

Allan Gray is an authorised financial services provider.

opinion

By Andile Ntingi

ECONOMY

The urgency of land reform finalisation

s

Persistent uncertainty around government’s land reform policy debate could derail the entire project and prolong an investment strike into South Africa.

outh Africa’s land reform policy debate is so chaotic even whether the state pays for expropriated land or not. In such a regulatory experts on the topic appear to be confused, unsure where this set-up, courts will have no role to play. As things stand now, Section 25 merry-go-round circus is going. The Covid-19 pandemic has makes provision for land to only be expropriated after compensation is given us a small reprieve, but the show will no doubt continue agreed by affected parties and approved by a court of law. in the not too distant future.

As the land reform debate rages on, the question that needs to Seasoned investors use the word “uncertainty” to describe chaos be posed is how feasible it is to expropriate land? To answer this and confusion that threaten market stability. In this case, large-scale, question, I have explored two case studies of England and Zimbabwe capital-intensive agriculture could be in the firing line if a drawn-out to understand how the land ownership took shape in those countries land debate leads to persistent uncertainty as investors struggle to after a colonial conquest. decipher the future. Uncertainty is dangerous because it kills investor Before England became a global colonial power, it too was invaded confidence and eventually the economy. and colonised. The invasion that had a lasting impact was During chaotic times, the wise thing to do is to in the 11th century when the Normans, French-speaking The failure has come at defer to history as the best teacher. descendants of the Vikings, invaded England in 1066 from a huge cost. According to agricultural economist Nick After placing its faith in the “willing buyer, willing Normandy, France, and defeated the native Anglo-Saxons.

Vink, government has seller” (WBWS) land reform policy since 1994, SA’s More than 1 000 years on, Norman descendants hold spent close to government dumped the policy after it failed to the bulk of English lands to this day. According to an article meet the target of redistributing 30% of land to published by The Guardian in 2012, 66.6% of England’s black people by 2014, returning only 6.78% of land land remains in the hands of Norman descendants, who to its original owners. make up about 0.3% of England’s population.

The policy was intended to reverse historical Since 1980, Zimbabwe’s land reform has undergone two on land reform since 1994. injustices committed during the colonial era in distinct phases. The first was initially based on the WBWS which blacks were dispossessed of their land by policy, which was partially funded by the British government early European settlers and later by descendants of the settlers during to acquire land from white farmers for black resettlement. the apartheid era.

Between 1980 and 1987, 20% of land initially owned by white The reason the WBWS policy failed is two-pronged. Firstly, its impact farmers was transferred to black agricultural labourers. However, was slowed down by white farmers inflating prices on land bought by in the early 1990s, the Zimbabwean government announced new government and transferred to black beneficiary farmers. Secondly, many plans to quicken land reform through expropriating land with of the farms redistributed to blacks became unproductive as a majority of compensation, marking the beginning of a second phase of land the beneficiaries had no experience in commercial farming. reform to fast-track the process. In 1998, Zimbabwe began a The failure has come at a huge cost. According to agricultural process of amending its constitution to allow EWoC, abandoning economist Nick Vink, government has spent close to R69bn on expropriation with compensation. land reform since 1994.

In 2000, liberation war veterans evicted between 2 000 The ditching of the WBWS policy marked the end and 3 500 white farmers, mostly British descendants, of implementation of the first phase of land reform from their farms. This collapsed Zimbabwe’s economy policy. A second phase is yet to kick in, but it will as investment capital left the country. take the form of expropriation of land, either with Having explored England’s and Zimbabwe’s land compensation or without. experiences, I am of the view that SA could end From 2017, the ruling ANC started debating up drifting into one of the extreme land ownership land expropriation to replace the failed WBWS policy. scenarios if drastic steps are not taken.

Two strands of expropriation policy proposals began As SA transitions into the second phase of its to emerge within the party, with one camp favouring land reform, it should avoid falling into the trap that expropriation without compensation (EWoC) and another Zimbabwe fell into. This can be done by transferring land supporting expropriation with compensation. to skilled black farmers instead of politically connected people The key difference between the two schools of thought is that with no skills.

EWoC will require amending Section 25 of the Constitution while I suspect government will use expropriation policies to find land for supporters of expropriation with compensation initially envisaged urban housing development to ease housing backlogs in major cities introduction of a valuer-general, who would determine the value and will tread carefully not to threaten food security by expropriating (or compensation) of land earmarked for expropriation to counter productive commercial farms. ■ government acquiring land at inflated prices. editorial@finweek.co.za Recently, a third strand of expropriation emerged, whereby the ANC Andile Ntingi is the chief executive and co-founder of GetBiz, an e-procurement and tender proposes that the minister of land reform must be the sole arbiter on notification service.

Photo: Shutterstock

R69bn

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in brief EDITORIAL & SALES Acting Editor Jana Jacobs Deputy Editor Jaco Visser Journalists and Contributors Simon Brown, Lucas de Lange, Johan Fourie, Moxima Gama, Mariam Isa, Glenneis Kriel, Schalk Louw, David McKay, Maarten Mittner, Andile Ntingi, Brendan Peacock, Timothy Rangongo, Peet Serfontein, Melusi Tshabalala, Amanda Visser, Glenda Williams Sub-Editor Katrien Smit Editorial Assistant Thato Marolen Layout Artists David Kyslinger, Beku Mbotoli, Nadine Smith Advertising Paul Goddard 082 650 9231/paul@ fivetwelve.co.za Clive Kotze 082 335 4957/ clive@mediamatic.co.za 082 882 7375 Sales Executive Tanya Finch 082 961 9429/tanya@ fivetwelve.co.za Publisher Sandra Ladas sandra. ladas@newmedia.co.za General Manager Dev Naidoo Production Angela Silver angela.silver@ newmedia.co.za

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finweek 7 May 2020

>> Trend: The clean-up initiative that became a leg-up initiative p.10 >> Mining: Gemfields’ net asset value remains under lockdown p.12 >> It’s not going to be a good year for the diamond industry p.13 >> Economy: Expect a severe recession p.14 >> Clothing retailers: What to do with all the inventory? p.15 >> Listed property: Breathing life back into malls won’t be easy p.16

“AND THEN I SEE THE DISINFECTANT WHERE IT KNOCKS IT OUT IN A MINUTE. ONE MINUTE. AND IS THERE A WAY WE CAN DO SOMETHING LIKE THAT, BY INJECTION INSIDE OR ALMOST A CLEANING?”

US President Donald Trump

– US President Donald Trump has been criticised by the medical community after saying US government research indicated the coronavirus might be treated by injecting disinfectant into the body. Pulmonologist Dr Vin Gupta told NBC News that “this notion of injecting or ingesting any type of cleansing product into the body is irresponsible and it’s dangerous”, and that “it’s a common method that people utilise when they want to kill themselves”. The US Centers for Disease Control and Prevention’s weekly morbidity and mortality report stated that “calls to poison centres increased sharply at the beginning of March 2020 for exposures to both cleaners and disinfectants”.

“Our people need to eat. They need to earn a living…”

– President Cyril Ramaphosa announced that the government has decided that beyond 30 April the country should begin a gradual and phased resuming of economic activity. Ramaphosa said restrictions would be lowered from level 5 – the strictest lockdown stage – to level 4. International borders remain closed while travel will only be allowed for essential services. Social distancing rules remain in place, people must wear masks in public, deliveries from restaurants are allowed, no more than three people are allowed in private cars, and public transport will operate at 70%. There is also a curfew in place from 8pm to 5am.

“We have been warning from day one that this is a devil that everyone should fight.”

– Director general of the World Health Organization (WHO) Tedros Adhanom Ghebreyesus responded to critics claiming that the WHO should have acted earlier on the coronavirus outbreak. US President Donald Trump criticised the WHO’s handling of the pandemic and announced that he was suspending funding to the agency. During a virtual briefing, the head of the WHO said he hoped the US will reconsider their freezing of funding and once again support the WHO’s work and continue to save lives. www.fin24.com/finweek

THE GOOD

DOUBLE TAKE

BY RICO

Nine out of 15 economists polled by Reuters expected the Reserve Bank to cut interest rates by 0.5 percentage points to 3.75% in May, three expected a cut of 0.25 percentage points, two expected no move, and one a cut of 1 percentage point. SA is probably also set for a second month of fuel price declines for some fuel types, the AA said in a statement. Following on March’s record fuel price reductions, if current market conditions persist to the end of April, petrol prices could drop by between R1.81 and R1.89 per litre, and diesel by between R1.14 and R1.17 per litre.

THE BAD Spur Corporation, with close to 600 restaurants and about 30 000 staff, will not reopen after the nationwide lockdown. In an interview on CapeTalk, chief operating officer Mark Farrelly said the pandemic and lockdown have been extremely challenging for the group.

Spur was impacted the moment the first case of the virus was confirmed in March. “What looked like it was going to be a good month at that stage ended up with turnover being down around 60%.

I can tell you our franchisees lost tens of thousands of rand by the end of March.”

The group has waived franchise fees for the time being and says it’s doing what it can to support franchisees and staff.

Photo: Gallo/Getty Images

THE UGLY The Competition Commission has referred Dis-Chem to the Competition Tribunal for prosecution for excessive pricing during the coronavirus outbreak, it said in a statement. Among others, “for surgical face mask blue 50PC, the average price was inflated from R43.47 (excl. VAT) per unit (50 masks) in February 2020 to R156.95 (excl. VAT) per unit (50 masks) in March 2020, a price increase of 261%”. The commission said it received a high number of complaints at the end of March, most regarding excessive pricing of products related to Covid-19 essentials.

Some Spar, Makro and Pick n Pay outlets were named specifically. Most of the complaints related to hand sanitisers and face masks, followed by toilet paper and flu medication. @finweek

finweek

SCALE OF THE CRISIS

R500bn

President Cyril Ramaphosa announced a R500bn rescue package to cushion the economic blow of the coronavirus pandemic. In a televised address, he said the current crisis requires an “economic response that is equal to the scale of the disruption it is causing”.

The package is equal to 10% of SA’s GDP and has seen the country calling on global finance institutions such as the World Bank, International Monetary Fund and African Development Bank. The package aims to support healthcare interventions worth R20bn, increased social grant payments, delayed tax receipts and a R200bn loan guarantee scheme to commercial banks to keep them lending (see story on p.36). ... AND COUNTING

4 793

The number of positive coronavirus cases in SA, according to the health department, neared the 5 000 mark in late-April while the death toll climbed to 90. The Western Cape overtook Gauteng as the province with the highest number of cases at 1 737 (at the time of publication). Meanwhile, a study on Covid-19 indicated that most South Africans were complying with the nationwide lockdown to curb the spread of coronavirus, said Dr Blade Nzimande, the minister of higher education, science and technology. The results show that 99% either left their homes for food, medicine and social grants or stayed home. The study showed that 30% had not left home since the start of lockdown and 62% had only left to get food and/or medicine.

finweekmagazine

GROWTH FORECASTS WORSENING

-6.5%

Moody’s Investors Service cut its GDP growth forecast for SA’s economy to a 6.5% contraction in 2020. This is 0.3 percentage points lower than the previous forecast issued in mid-February. In a note on SA’s forecast 2020 GDP contraction, Investec’s chief economist Annabel Bishop said “the additional expenditure measures government seeks to institute in SA to provide some support in the face of Covid-19 will worsen government finances, as will the contraction in GDP and the negative impact on corporate and household incomes of the shutdown … However, breaking the spread of Covid-19 is paramount, and the costs will be even more substantial if it is not.”

RETRENCHMENTS LIKELY

4 700

Business rescue practitioners for South African Airways (SAA) proposed a winding-down process that involves retrenching employees, saying they have two choices: carry on and implement that plan, or throw in the towel and apply for liquidation, reported Business Day. A draft proposal from the practitioners to unions set out the process for the termination of all 4 700 employees at the end of April, with severance packages only to be paid if funds remain at the end of the winding down.

SAA can’t pay salaries beyond April after government refused to give it more cash. The National Union of Metalworkers and the SA Cabin Crew Association together form the largest union representation at SAA. They rejected the retrenchment offer. finweek 7 May 2020

9

By Glenneis Kriel

trend

Social initiative with economic spin-off

a

With its unique business model, Help Up is raising awareness of communal environmental responsibilities while creating jobs for the unemployed.

is possible. Using shock-and-horror stories don’t help, as it fter getting fed up with the poor state of the Black paralyses people into apathy; we prefer good-news stories,” River, which flows past Observatory and parts of says McTaggart. the Cape Flats on the Cape Peninsula, Georgia McTaggart in 2018 launched Help Up – an initiative aimed at cleaning river pathways while creating jobs Monetary value for the unemployed.

At present, there are two franchises operating. One consists McTaggart, who is an efficiencies consultant, started by of three people from Langa, who have been cleaning a critical self-funding the initiative and now relies on crowdfunding canal, the Jakkalsvlei, which flows into the Black River. The to finance clean-up operations across the peninsula. “People second, ranging between five and ten people from Khayelitsha, pledge R150 and more on the BackaBuddy platform and we is centred around a school where there is a lot of dumping by then use the funds to pay unemployed people, who help with builders and the broader community, to prevent rubbish from the clean-up,” she says. ending up in the underground canals of this neighbourhood.

In November last year, after seeing the initiative’s “It is really risky to clean in the rivers, so we want to get potential to change lives, she registered Help Up as a the trash contained before it reaches the waterways and, non-profit company (NPC) to increase the organisation’s ultimately, the ocean,” McTaggart says.

“People pledge ability to draw funding from corporates and thus offering Clean-ups are still coordinated around the Black River, them tax benefits for donations. with many voluntary participants.

“I wasn’t sure if registering as an NPC was the right The lockdown has come as a major blow to Help Up, with move, as the increased administrative and management McTaggart estimating that the cessation of their cleaning and more on the burden has turned it into a full-time job, but it is well worth efforts may lead to roughly five tonnes of plastic waste BackaBuddy platform and the extra effort. Securing funding for sustainable expansions we then use the funds to pay building up and flowing into the ocean each week. has been our greatest challenge, so we are seeking reliable “It is difficult to quantify the value of what we are doing. unemployed people, who corporate partnerships,” McTaggart says.

The rubbish not only obstructs river flow, but it pollutes help with the clean-up.” the water, with devastating consequences for plants, animals and people,” she says.

Franchising The clean-ups are also not only helping to address While the initiative started out with volunteers and the pollution and creating awareness of the negative impact remuneration of unemployed participants, Help Up of waste on rivers, they also present unemployed people has since embraced a franchise model. The franchises with potential opportunities. are free of charge to self-starters who have “shown “The clean-ups create an opportunity for people with initiative in their own communities and wish to limited skillsets to participate in group activities and expand their personal projects”. form part of a winning team. This helps to build self“Franchisees pitch for cleaning contracts in a specific esteem and equips them with valuable communication, area, and available funding dictates the frequency and social and practical skills,” McTaggart says. number of contracts,” McTaggart explains.

During the Covid-19 lockdown she has made use of the Help Up franchisees receive training to reduce health Georgia McTaggart The founder of relationships she has built through the clean-ups and her and safety risks while doing clean-ups and are equipped with Help Up professional partnerships to facilitate supplies to feeding the necessary tools, such as rakes and bags, required to do schemes in low-income neighbourhoods. the job. The clean-ups are coordinated with municipalities to ensure the rubbish is removed from the various sites after the clean-up is finished. Once the trash is collected, the The future franchisees are paid via e-banking.

Through the franchise model, and increased financial Help Up is in the process of going high-tech, with an app commitment from corporate partners, McTaggart plans to that will be launched in May to streamline and track the work expand the reach of the initiative across the rest of the country. done. “The idea is to inform franchise holders of the available “The activities will be carefully coordinated with any jobs via the app and for them to record their work by taking ongoing government interventions to ensure we are adding before and after photos that are uploaded onto the app,” value and not duplicating work. Some of our groups, for McTaggart says. example, have already worked closely with the province’s The app will also create an opportunity to record and Expanded Public Works Programme (EPWP),” she says. coordinate clean-up jobs of volunteer groups, which in turn Besides this, she would like the government to more can be used to create awareness of socially responsible actively measure pollutants and the impact of industry endeavours of companies. on river causeways. “It is only by measuring the impact of Most of Help Up’s marketing is done via social media, pollutants that we will be able to quantify the value of clean primarily Facebook and Instagram. “The drive behind our rivers,” McTaggart says. ■ campaigns is to mobilise people by raising awareness of what editorial@finweek.co.za

Photo: Munashe Makado

R150

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finweek 7 May 2020

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$

R

in brief in the news

By David McKay

MINING

A gem that remains hidden

I

Photos: Gallo/Getty Images I www.gemfieldsgroup.com

Gemfields’ poor performance in the last 12 months adds another year onto the company’s inability to unlock its net asset value. And now the gemstone miner is contending with Covid-19-related delays to operations.

t is not often that retail investors speak out at the presentations of companies in which they are shareholders. But that is what happened in April to Gemfields, the Johannesburg- and London-listed coloured gemstone mining and marketing firm.

“You look after us and we’ll look after the share price,” an investor instructed management during question time after having absorbed the disappointing news that Gemfields’ 2019 financial year would not conclude with a dividend.

Gemfields CEO Sean Gilbertson and his right-hand executive, David Lovett, chief financial officer, had earlier in the presentation mused in disbelieving tones at the poor performance of the firm’s share over the last 12 months. Better than the firm’s rivals in the diamond space, and other gemstone miners, but far below what they expected. (The share was once at R5).

In truth, shares in Gemfields languish at lowly sub-R2/share levels, equal to $100m in market capitalisation. This is despite having had its two main assets – the Kagem and Montepuez mines in Zambia and Mozambique, respectively – valued by SRK, the consulting engineering firm, at some $1.2bn.

The investor was, of course, right though.

Gemfields has chronically failed to unlock its net asset value in the 13 years of its existence, having for most of those years traded as Pallinghurst Resources.

Pallinghurst, launched by mining industry titan Brian Gilbertson, was a closed-end investment company that promised much but never quite caught the imagination of the investment market. Only its stake in the spectacular manganese mine Tshipi in SA’s Northern Cape province – a mine shared with Saki Macozoma’s Safika Holdings – bore substantial fruit, the group’s diversified platinum, iron ore and gemstone offering notwithstanding.

Since 2018, Pallinghurst has slowly shucked its investments, retaining only the coloured gemstones rump, which was rebranded and relisted in London as Gemfields. The liquidations included shares in Jupiter Mines, a steel feed company, which netted a cash pile some of which was passed down through dividends. The last tranche of capital from selling Jupiter Mines’ 12

finweek 7 May 2020

Sean Gilbertson CEO of Gemfields

“The name of the game is to make remaining cash last for as long as possible as we don’t know the extent of the delay we could be facing.”

David Lovett Chief financial officer of Gemfields

shares, however, will never see the light of day.

Gemfields is very far from paying another dividend. In fact, the watchword for the firm’s 2020 financial year is ‘survival’, going by the comments of Sean Gilbertson, who is – should you be wondering – the son of Brian.

Speaking during the results presentation, Gilbertson said the company was hoping $45m in net cash at the end of February, generated on the back of a good operating performance in 2019, might be enough to see it through the year given that it might be difficult to generate any revenue in that time.

“The name of the game is to make remaining cash last for as long as possible as we don’t know the extent of the delay we could be facing,” said Gilbertson. The delay refers to the effect of Covid-19-related travel restrictions that make it impossible for Gemfields to convene auctions for emeralds and rubies it mines from Kagem and Montepuez respectively.

One of the first auctions for the gemstones would have been in May, but the likelihood of that happening seems slim. The firm has pencilled in an auction in the final quarter of the year, but it is also preparing for longer downtime, possibly by up to 15 months.

Without a fully-functioning coloured gemstones business, there’s not much else to inspire at Gemfields. It has a residual 6% stake in Sedibelo Platinum Mines, but Gilbertson said interest was low, given the illiquid nature of the investment. The company also controls Fabergé, the jeweller, through which Gemfields markets its rubies and emeralds.

Fabergé looks expensive to run, involving hefty marketing fees. The once iconic brand – described by Gilbertson as the most substantial outside of the major and corporatised luxury jewellery brands – has failed so far to capitalise on its history in a way that registers with today’s society. One tends to think of Fabergé in terms of ornate eggs, curious glittering museum pieces, rather than trendy, utility-style accessory wear.

Gilbertson confirmed Gemfields had received five or six bids for Fabergé. Why hadn’t the company plumped for one of those offers, an analyst wanted to know? “Because it didn’t meet our internal valuation,” said Gilbertson – the story of Gemfields’ life, it seems. ■ editorial@finweek.co.za www.fin24.com/finweek

in brief in the news

By David McKay

MINING XXXXXXXXXXXXX

Diamonds lose their lustre, for now At a time when consumers are under lockdown and economic operations are limited to what have been deemed essential, there is no room for luxury. A reality reflected in the current state of the diamond industry.

i

n a world boiled down to “essentials”, it’s easy to see why the anguished cries of celebrities “trapped” in their multimillion-dollar holiday homes has become faintly risible, deeply contemptible at worst.

So, too, the need to indulge in luxuries. Even were your local jewellery store open for business, it would seem somewhat off-message to be paddling down there to participate in a bit of high-end retail therapy.

That’s why the world’s diamond sector is back where it started 2019: in the doldrums.

Mines are largely closed, or on limited production schedules, while stockpiled rough diamonds are gathering dust in the workshops of India’s Gujarat region – which cuts and polishes 80% of world production – following lockdown restrictions imposed by Prime Minister Narendra Modi.

Even newly-mined diamonds, the rough goods that Eira Thomas may have been mined during the first quarter, are not CEO of Lucara being negotiated owing to travel restrictions. There’s a Diamond Corp. skeleton crew operating at the Antwerp diamond bourse in Belgium, a price-buying centre, but most of the diamond producers have called off their sales cycles, including De Beers, 85%-owned by the JSE-listed Anglo American, and Petra Diamonds, listed in London.

“How do we traverse this period without placing was supposed to be the year undue pressure on the full chain of supply?” asked of recovery: That is now Gaetano Cavalieri, president of the World Jewellery scotched with a potentially more disruptive impact on the Confederation, in a note. sector still to come.

Disruptions to the luxury industries, as with any industry, can be profound, as evidenced by the first Gulf War in 1991.

So concerned were Israeli diamond traders at impending isolation that might be forced upon them during the war that they sent parcels of diamonds on consignment, allowing buyers to choose and return items.

Buyers were subsequently reticent to give up the new conditions of trade once the war was over, placing funding pressure on the so-called midstream of the industry to finance the supply chain ever since.

Photos: Gallo/Getty Images

2020

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Financial pressure on the midstream was the reason for the dip in the diamond sector up to and including last year. 2020 was supposed to be the year of recovery: That is now scotched with a potentially more disruptive impact on the sector still to come.

Plans by De Beers to overhaul its sales process in which it currently invites 80-odd pre-selected buyers from the midstream to Gaborone in Botswana to view and purchase rough diamonds will surely be hastened by Covid-19.

This in part may be facilitated by the move towards online diamond sales as adopted more than two years ago

by Lucara Diamond Corp., a Toronto-listed firm that mines the Karowe operation in Botswana.

It patented ‘Clara’, blockchain technology that pairs diamonds with buyers and is therefore more receptive to midstream requirements in a way that, say, the current De Beers process is not. A diamantaire in business with De Beers is normally offered a selection of goods to buy on a take-it-or-leave-it-basis.

“Never, we feel, has this innovation been more relevant or more important,” said Eira Thomas, CEO of Lucara Diamond Corp. about Clara. A total of six sales had been completed on Clara in 2020 in which 25 out of 32 total on-boarded manufacturers had participated – the highest participation rate to date. A total of just over 1 800 carats and 821 diamonds had been transacted.

Lucara is also assisted by the fact that Karowe’s diamonds are often large in size. Another London-listed counter, GEM Diamonds – which operates in Lesotho – and Lucapa Diamond Company, a Sydney-listed firm which mines in Lesotho and Angola, also produce big stones.

“There are some limited transactions happening in the big diamond sector,” said Patrick Mann, an analyst for Bank of America Merrill Lynch in a note earlier in April.

“As such, we think that high-value and big stone producers could outperform short term relative to small diamond producers in the current environment,” he said. ■ editorial@finweek.co.za finweek 7 May 2020

13

in brief in the news

By Mariam Isa

ECONOMY

South Africa’s economic output set to contract by more than 10%

s

The government’s risk-adjusted strategy to lift restrictions on the economy slowly comes at a huge cost. outh Africa’s economic outlook has worsened in the face of plans to lift limits on business activity very gradually over the next few months, muting the benefits of extraordinary measures taken by Treasury and the Reserve Bank to cushion the blow of a five-week lockdown.

A severe recession is expected, with some analysts predicting that the economy will contract by around 10% this year. Restrictions of varying degrees are set to remain in place until September, when the spread of the coronavirus in the country is expected to peak.

“Unfortunately, the size of the impact, and the uncertainty around it, is going to be much more than we initially anticipated,” says Lullu Krugel, chief economist at PwC in SA. “The challenge is that a lot of SA businesses, and the economy, were in a tough position before the pandemic.”

Krugel expects the economy to shrink by between 10% and 11% this year, despite the R500bn support package announced by President Cyril Ramaphosa on 21 April, and the Reserve Bank’s decision to slash interest rates and ease banking regulations to encourage lending to distressed companies.

It has become clear that the government’s riskadjusted strategy, which links easing of restrictions in different parts of the country to the spread of the virus and the readiness of the health system, will slow the pace of economic recovery and makes it impossible to predict when normality will be restored.

Hugo Pienaar, chief economist at the Bureau for Economic Research, says that a “V-shaped” pick-up in economic activity during the second half of the year is now very unlikely and he would probably revise his forecast for 2020 to a contraction of between 9% and 10% from 7% in early April.

Peter Attard Montalto, head of capital markets research at Intellidex, estimates an average daily loss to the economy of R3.5bn between now and September, and expects output to fall by 10.6%. “We think that the market vastly underestimates the way the lockdown will unfold and its damage to the economy from here,” he said in a research note.

The numbers are alarming but reflect the global reality, which will make it much more difficult for SA’s economy to recover. The International Monetary Fund (IMF) said on 14 April that 170 countries could slip into a recession this year, with the world economy contracting by 3% – the worst contraction since the Great Depression nearly a century ago. It warned that the pandemic could stretch into 2021, and that the cumulative loss to global gross domestic product may amount to $9tr. Much worse outcomes are “possible and maybe even likely”, according to IMF chief economist Gita Gopinath.

David Masondo Director general of National Treasury

Millions of jobs in SA are at risk, and despite the tax relief and loan guarantees which will be extended to companies in distress, many small businesses will collapse, particularly those in the hospitality and tourism sectors which will be unable to operate before September.

A Stats SA survey published on 21 April showed that nearly a third of 700 companies could survive for less than a month without any turnover, while just over half said that they could survive for between one and three months. Nearly 37% expected the size of their workforce to decrease.

SA’s budget deficit will explode in response to a surge in government borrowing, partly to cover increased spending, but mainly to compensate for the massive blow to expected tax revenues. Both Krugel and Attard Montalto expect the shortfall to widen to more than 16% of GDP in the 2020/2021 financial year, compared with Treasury’s estimate of 6.8% in its February Budget.

The country’s key debt-to-GDP ratio is expected to climb to more than 85%, from the Budget forecast of 65%, Moody’s Investors Service said on 24 April. In a separate research note on 27 April, the rating agency changed its outlook for the SA banking system to negative from stable, saying that the pandemic would weaken the creditworthiness of banks over the next 12 to 18 months, hurting loan performance and profitability.

One of the big questions is how Treasury intends to finance its enlarged borrowing requirement, as the ability of the government bond market to absorb increased issuance is limited, and rising yields are making the cost of that debt increasingly expensive.

Treasury’s director general, David Masondo, has said that it will borrow R95bn from international finance institutions, including the IMF, the World Bank, the National Development Bank and the African Development Bank.

Interest rates on these loans will be very low and conditions limited, as the lenders are making emergency funds available to developing countries that need support in fighting the pandemic.

Mike Keenan, fixed-income and currency strategist at Absa Capital, says Treasury could also issue foreign currencydenominated bonds worth $3bn to help take the pressure off its borrowing costs. He sees scope for the bond market to stabilise and the rand to claw back some of its losses towards the end of this year, as volatility in international markets subsides. ■ editorial@finweek.co.za

Photo: Gallo/Getty Images

The pandemic could stretch into 2021, and the cumulative loss to global gross domestic product may amount to $9tr.

14

finweek 7 May 2020

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

www.fin24.com/finweek

in brief in the news

By Jaco Visser

CLOTHING RETAILERS XXXXXXXXXXXXX

Which companies will wear it better?

c

The Covid-19 lockdown will affect clothing retailers’ profitability this year, but not all will be equally affected. lothing retailers stand to lose roughly 10% of their annual turnover due to the government-imposed economic lockdown. They would need to cut costs – especially rentals – markedly in order to lessen the blow to their profits.

“The lockdown fell over the Easter period, which is generally one of the higher sales periods during the year,” Rella Suskin, head of research at Benguela Fund Managers, tells finweek. “We believe that Covid-19 will have a longerlasting impact, beyond the lockdown period.”

With share prices already under strain, the initial loss of five weeks’ worth of trading is compounding the listed apparel sector’s fortunes. Pre-lockdown escalating unemployment, an economic recession and high real interest rates all bore down on these companies’ customers.

“Five weeks of lockdown will have a dramatic impact on clothing retailers’ earnings, as these companies will be sitting with a large amount of inventory that they will not be able to move,” Adrian Saville, chief executive of Cannon Asset Managers, tells finweek. “So when ‘normal trading’ resumes, each of these companies will be faced with the same dilemma – moving this stock as quickly as possible.”

But there’s a catch. The lines that the retailers had when lockdown began in March will not be relevant to May, given the onset of winter, says Saville.

Thus, expect large sales promotions in early winter in order to move stock from warehouses through tills. In addition, to curtail their expected losses for the current fiscal year, the apparel retailers would need to pull out all the available and remaining stops.

They would need to look at streamlining costs to manage the depressed sales outlook that analysts are expecting, says Suskin.

“Those that are able to produce more inventory locally will be better off as the rand weakens,” she says. “Efficiencies in supply chain, operating costs and employee costs will need to be prioritised. Certainly, growth prospects – new store openings – will be halted.”

Another attempt to curtail expenses includes renegotiating leases – a large chunk of the cost to operate.

The large apparel retailers will hold substantial bargaining power in these negotiations as landlords certainly cannot afford to lose them, according to Suskin (see p.16). “SA has one of the highest concentration of malls globally, and the days of international retailers wanting their share of space has passed, for now at least.

The landlords rely on the listed retailers for survival.”

The likelihood of apparel retailers negotiating for payment holidays, a reduction in actual rental amounts, or the reduction of future rental increases is high and might be critical to the survival of some retailers, explains Saville.

Adrian Saville Chief executive of Cannon Asset Managers

“In fact, the Retailer group, representing South Africa’s five biggest clothing retailers, has already begun negotiating with landlords for an 80% reduction in rent for April,” he says.

“And under the circumstances, there can be little doubt that retailers and landlords will have to find each other, and then reach new agreements to deal with events beyond the current crisis.”

So, which apparel retailers stand to be worst affected by the coronavirus lockdown and which will be least affected?

Mr Price, Truworths and TFG will be among the most impacted in terms of contribution of clothing and accessories to total revenue, although Mr Price’s margins offer it more resilience, says Saville.

“In my view, Mr Price will be able to weather the storm best,” says Suskin. “The company has a strong balance sheet – no debt – and they have a proven track record of above-average operating cost management.” The company’s net cash position also allows them to raise debt for additional liquidity if need be, she explains.

“Peers do not have this optionality to the same extent,” Suskin says.

This is also reflected in the share prices of the apparel retailers. Mr Price has surged 18% – the most among its peers – over the last 30 days. It’s down 29% – the least among them – since the start of the year.

Woolworths stands to be saved by its food division. “While Woolworths’ clothing retail section will have shut down almost entirely during the lockdown, the group will be substantially sheltered by its food division, which accounts for some 45% of its revenue, as well as its Australian operations,” Saville says. Woolworths’ share price is the second-best performer after Mr Price and rose 7% over the past month, although its year-to-date decline is 39%.

“On the other hand, TFG has been struggling to manage their operating cost base over the years,” says Suskin. “Their focus has rather been on gaining market share by discounting. This, however, has not translated into an improved bottom line.” Add to that a likely jump in Truworths and TFG’s credit books due to customers not being able to pay their retail accounts amid job losses and foregone salaries. “TFG’s cash flows will be under pressure,” she says.

This sentiment is echoed in the two stocks’ price. TFG is up 2% over the past month and down 48% since the beginning of the year. Truworths rose more than 6% over the past 30 days and is 36% lower than the beginning of the year.

Another view, according to Saville, is that TFG and Truworths’ offshore operations, which account for 30% of their total revenue, may come to their rescue. ■ editorial@finweek.co.za

Photo: www.cannonassets.co.za

“The lockdown will have a dramatic impact on clothing retailers’ earnings, as these companies will be sitting with a large amount of inventory that they will not be able to move.”

@finweek

finweek

finweekmagazine

finweek 7 May 2020

15

in brief in the news

By Glenda Williams

LISTED PROPERTY

Are the mall heydays over?

o

Can life be breathed back into SA’s shopping centres? Or will the oversupply of retail space prove to be a Reit nemesis? nce the hub of social life, South Africa’s malls have become virtual ghost centres during the Covid-19 lockdown.

SA is oversupplied with shopping centres, ranking third behind the US and Canada for shopping centre exposure by GDP. During the lockdown only around 15% of shopping centre space was able to trade.

It’s not going to be easy to breathe life back into these former gathering places. We are likely to operate differently after the lockdown; social distancing will continue and unease about public spaces will likely linger, perpetuating the adverse effect on retail spaces.

“Even when the lockdown is lifted people will probably be uncomfortable about visiting public spaces. That’s likely to impact negatively on our retail centres, more so given the oversupply of retail space combined with a lower economic outlook and job losses,” Stanlib’s head of listed property funds, Keillen Ndlovu, tells finweek. “We think the impact will be felt more by the larger regional and super-regional malls. Neighbourhood and community centres are better-positioned.”

Restaurants and entertainment are among those likely to be the most affected and vacancies in the retail space will increase, says Ndlovu. “We’re likely to see rent reductions, concessions or payment holidays, and arrears and bad debt will increase.”

Shopping behaviour too has changed and more online shopping, click and collect, and drive-through is anticipated.

This doesn’t augur well for the landlords of these spaces, many of them SA’s listed real estate investment trusts (Reits) who, according to Ndlovu, have an exposure of around 56% to malls.

Estienne de Klerk, spokesperson for The Property Industry Group, confirms that the sector most affected by the lockdown is retail.

The Property Industry Group, comprised of real estate bodies SA REIT, SA Property Owners Association (SAPOA) and the SA Council of Shopping Centres (SACSC), has put in place a relief and assistance package (including rental reductions) for retail tenants affected during the lockdown period.

But some retailers are already falling by the wayside.

Struggling retail giant Edcon has already indicated that its Edgars stores may not reopen.

16

finweek 7 May 2020

MASSMART EXPOSURE – THE LISTED PROPERTY SECTOR

Company

Resilient REIT Hyprop Investments Emira Property Fund Attacq Vukile Property Fund Investec Property Fund Liberty Two Degrees Redefine Properties Fortress REIT SA Corporate Real Estate Growthpoint Properties Other (incl. offshore)

Code

RES HYP EMI ATT VKE IPF L2D* RDF FIF SAC* GRT

SAPY Weighting 6% 5% 2% 3% 6% 2% 1%* 14% 10% 2%* 21% 29%

Massmart exposure of SA-only portfolio income/GLA 5% 4% 3% 3% 3% 2% 2%* 2% 2% 2%* 1% 0%

Massmart exposure to total revenue (incl. offshore investments for SA Reits) 4% 3% 3% 3% 2% 2% 2%* 1% 1% 1%* 1% 0%

* Anchor Stockbrokers estimates – not company data Source: Stanlib, company data, ASB

Reits are less exposed to Edcon than they were prior to the group’s store rationalisation and closures; down from 2% to around 1% of income for the property sector. Most Reits have been conservative in accounting for Edcon income, some even excluding Edcon numbers in their forecasts as a precautionary measure, says Ndlovu.

Massmart Holdings is also feeling the pressure.

The group, whose brands include Game, Makro, Dion Wired and Builders Warehouse, closed all its Dion Wired stores and there is a concern that it may close or reduce the size of its Game stores. Massmart comprises 1.2% of total income for the listed property sector (see table).

The country’s five big banks have significant exposure to commercial property.

According to Nedsec data, the total exposure to SA Reits amounts to R120bn (this excludes exposure through the domestic medium-term note programme).

The shock that the pandemic has delivered to trading brings with it risk that some Reits may begin to breach their bank debt covenants. Will banks end up owning these assets?

“Right now, everyone is on the same page, so as long as companies are servicing their interest, I don’t think there’s much risk of that in the short term,” Paul Duncan,

portfolio manager at Catalyst Fund Managers Alternative Investments, tells finweek. “Banks will be working with the property companies.

They don’t want to take those assets on so I suspect they will relax their covenants.” Most Reits have adequate liquidity to see them through the next six to 12 months to pay their operating overheads and interest bill, even without receiving any rent, he says.

Cash that Reits would normally pay out in the form of dividends will likely be retained to pay operating overheads.

De Klerk expects some Reits to cut or suspend dividends for a period – even into next year if they get the thumbs up from the JSE and National Treasury. Reits are obliged to pay out 75% of distributable earnings, maintain rental income of 75% and loan-to-value ratios below 60%. While the JSE has indicated its support for SA Reits, a dispensation for tax relief on the retained income from National Treasury is less of a given.

For investors who rely on dividend income, it’s a tough call. But with revenues impacted and uncertainty around valuations and future income, Reits have been left with little choice if they wish to maintain long-term sustainability.

Ndlovu says Stanlib advocates prudence and sticking to Reits with sufficient liquidity and interest cover, loan-to-value ratios and net asset values. ■ editorial@finweek.co.za www.fin24.com/finweek

market place

>> >> >> >> >> >> >> >> >>

House View: Food retail, Pan African Resources p.18 Killer Trade: MultiChoice, Woolworths p.19 Invest DIY: What to do when dividends disappear p.20 Investment: A beta way to structure your portfolio p.21 Simon Says: Ashburton Global 1 200 ETF, Clicks, healthcare sector, MTN, oil, PSG, RCL Foods, Standard Bank, Zeder p.22 Share View: In times like these, look to stocks like Johnson & Johnson p.24 Invest DIY: Some guidance now will be helpful p.25 Markets: Don’t expect a speedy return to business as usual p.26 Technical Study: A hard road to recovery lies ahead p.27

FUND IN FOCUS: COUNTERPOINT SCI VALUE FUND

By Timothy Rangongo

Looking for diamonds in the rough Having sold off its banking stocks, this fund is now looking at small- and mid-cap stocks that pose value.

Fund manager insights:

FUND INFORMATION:

Benchmark: Fund managers:

FTSE/JSE All-Share Index Piet Viljoen, Sam Houlie and Ray Shapiro

Fund classification:

South African – Equity – General

Total investment charge:

2.88%

Fund size:

R44.2m

Minimum lump sum/ subsequent investment: Contact details:

R10 000/R500 021 943 4480/nicole@cpam.co.za

TOP 10 HOLDINGS AS AT 31 MARCH 2020:

1

RE:CM Equity Fund

19.6%

2

AngloGold Ashanti

5.7%

3

British American Tobacco

5.4%

4

New Gold ETF

5%

5

Gold Fields

4.6%

6

Newplat

3.9%

7

Assore

3.6%

8

Shoprite

3.5%

9

Netcare

2.6%

10

Metrofile

2%

TOTAL

55.9%

PERFORMANCE (ANNUALISED AFTER FEES)

As at 31 March 2020: ■ Counterpoint SCI Value Fund

■ Benchmark

10 7.1%

5

7.3%

0 -5

-8.4%

-10

Why finweek would consider adding it:

-15 -20

@finweek

The first quarter of 2020 saw record lows in both global and local equity benchmarks including the FTSE/JSE All Share Index. Counterpoint Asset Management’s SCI Value Fund is among many that took a beating from the depressed market. One of its fund managers, Sam Houlie, says that domestic equity valuations are still considered attractive relative to long-term growth prospects, despite the market turmoil.

“In the South African market, it’s now possible to buy good-quality businesses with excellent management teams at single-digit multiples and high free cash flow yields.

These opportunities don’t come around very often; and are always accompanied by massive negative sentiment.”

The fund aims for a slightly lower risk profile than typical equity funds by investing in shares with a low price-to-earnings ratio and those trading at a discount to their net asset value, among other things. The fund has a strong valuation bias that Houlie emphasises as being at the core of the investment strategy. For instance, during the ongoing coronavirus-induced market sell-off, British American Tobacco was a strong performer. Nevertheless, the fund reduced the holding in order to raise cash to buy a host of other stocks which were previously avoided but had recently become significantly undervalued over the period.

As of March, the fund holds no bank shares, having sold its local holdings, including Standard Bank and Absa, but this isn’t a permanent feature of the fund, says Houlie.

“Bank stocks are down 47% in 2020 and, at first glance, the valuations appear to be at multi-decade lows. What’s different this time, is the significant potential headwind to earnings as a result of the economic slowdown.”

He says that bank earnings will be down significantly, due to both declining margins and increasing bad debts. Market participants may be underestimating the earnings impact. In addition, investors do not have the customary benefit of high dividend yields (the SA Reserve Bank has recommended a temporary suspension of bank dividends) to bolster returns while waiting for the earnings visibility to improve.

Meanwhile the fund continues to be on the lookout for stocks with strong balance sheets. On the fund’s stock selection strategy going forward, Houlie says that surviving the impact of Covid-19 is a short-term criteria for the portfolio, with every single holding well-positioned to survive the next 12 to 18 months and likely to thrive beyond that, as current holdings’ competitors fall by the wayside.

The fund is currently attracted to mid- and small-cap stocks, the former having lost money every year for the last seven years, says Houlie. “Valuations are depressed, and we are finding exceptional opportunities in that space.”

-18.4%

1 year

finweek

Since inception in January 2012

finweekmagazine

The fund is valuation-conscious, intentionally not overpaying for stocks. It’s recording lower declines versus negative benchmark falls in a no-growth economic environment, despite the caveat that past performance is not indicative of future performance. ■ editorial@finweek.co.za finweek 7 May 2020

17

marketplace

house view

FOOD RETAIL

BUY

SELL

CAUTION

By Simon Brown

State aid could benefit grocers Please note that Simon Brown will be labelling all House View picks with “caution” during the pandemic.

One of the few sectors still operating is food retail. With level 4 lockdown, retailers that were already open can now sell their full product ranges, which will help revenues return closer to normal levels, as we’re not eating out and therefore buying more food.

Furthermore, social welfare grant increases will mostly go to food, but most of this will merely offset a part of lockdown losses. Pick n Pay and Shoprite’s* outlets focused on the lowerLSM segment of the market will definitely be benefitting.

The big question now is: What are the risks? I think it will be increased costs. This not only refers to screens and sanitisers at till points, but also the enforcement of social distancing within the stores and distribution centres. It also refers to increased wages of staff. The other big risk is inflation. So far, we’re seeing none, but with food supply chains potentially at risk, shortages could see inflation that will be hard to pass on to customers – and this could hurt grocers’ margins.

That said, this is definitely a sector to keep on a watch list. ■

Last trade ideas BUY

Diverse ETF 2 April issue

BUY

Grindrod Preference Shares 19 March issue

BUY

Sibanye-Stillwater 5 March issue

SELL

Sasol 20 February issue

*The writer owns shares in Shoprite.

PAN AFRICAN RESOURCES

BUY

SELL

HOLD

By Moxima Gama

Coining the gold

Photos: Gallo/Getty Images

Pan African Resources is a mid-tier South African-based gold miner, with a production capacity in excess of 170 000 ounces of gold a year. The group produces the metal from underground operations and from surface tailings, and is one of the lowest cash-cost producers of gold in Southern Africa. In February, Pan African reported that its earnings per share for the six months ended 31 December more than doubled to 1.14 US cents per share, and that the total gold sold increased by nearly 14% to just over 90 600 ounces – thanks to the surging gold price.

Pan African, which is listed both in Johannesburg and London, expects to produce 185 000 ounces of gold in its book year to the end of June, which would represent an increase of about 7.5% from the prior comparable period. However, the company warned investors that although the depreciation against the US dollar would help revenue, the movement against the pound would not be so kind.

How to trade it: Although Pan African has surged through a key resistance level at 290c/share which is dated back to May 2017 – thus triggering a good buy signal – both its weekly and daily relative strength indices (RSIs) are overbought (with the daily RSI in megaoverbought territory). This means a near-term pull-back is in the offing – possibly back to the 290c/share key level. Bouncing on that level would present another good buying opportunity, with potential gains to 390c/share and then 470c/share.

If the stock should extend its pull-back towards 215c/share, hold off, but go long once it recovers. A negative breakout of its current bull trend would only be confirmed below 165c/share. ■ editorial@finweek.co.za 18

finweek 7 May 2020

Last trade ideas BUY

Datatec 2 April issue

BUY

Aspen Pharmacare 19 March issue

CAUTION

Nepi Rockcastle 5 March issue

BUY

Mediclinic 20 February issue

Pan African, which is listed both in Johannesburg and London, expects to produce 185 000 ounces of gold in its book year to the end of June.

www.fin24.com/finweek

marketplace killer trade

By Moxima Gama

XXXXXXXXXXXXXXXX WOOLWORTHS

w

Recovery underway? oolworths updated the market on the impact of the Covid-19 pandemic, and South African lockdown, in a statement at the beginning of April. It said that its SA food division saw increased sales. “Sales in the four weeks to the end of March have increased by 27.6% on the prior comparable period compared to a growth of 7.5% in the preceding nine weeks of the second half,” a trading statement read. Its fashion, beauty and home division, however, felt the brunt of the lockdown as these stores were not permitted to trade. “Sales in the four weeks to the end of March declined by 27.8% on the prior comparable period, compared to a 1.9% increase in the first nine weeks of the second half of the financial year,” the statement read.

WOOLWORTHS

52-week range: R24.01 - R61.51 Price/earnings ratio: 8.28 1-year total return: -36.11% Market capitalisation: R29.12bn Earnings per share: R3.35 Dividend yield: 6.47% Average volume over 30 days: 7 700 148 SOURCE: IRESS

SOURCE: MetaStock Pro (Reuters)

Outlook: Woolworths’ share price is trading in a bear channel, which steepened in a recent plunge through support at 2 850c/share, triggered by selloffs in the markets due to the Covid-19 outbreak.

On the charts: Woolworths’ share price recently bounced on the lower slope of its long-term bear channel and traded up to the resistance trendline of its steeper bear trend (blue dashed trendline).

Though it failed to breach that

trendline, support retained at 2 390c/share could see the share price retest and possibly breach that trendline.

Go long: A positive breakout of the steeper bear trend would be confirmed above 3 495c/share – presenting a buying opportunity.

Such a move could trigger a recovery within the long-term bear channel towards 4 305c/share.

Long positions could be increased above that level, as the upward

momentum could then persist to either the upper slope of the channel or the 5 115c/share level – where positions may have to be revised as the share price could fail to trade through that slope again.

Go short: Refrain from going long if the share price trades through both the 2 390c/share support level and the lower slope of the channel, as Woolworths could topple to its prior low at 1 310c/share. ■

MULTICHOICE

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Bullish signs emerge ultiChoice’s share price has slid by more than 22% since the beginning of the year. The company is licenced to sell Showmax, the on-demand television company, subscriptions in SA. Showmax recently cited that the unfolding of the lockdown has significantly impacted viewing behaviour, and that the number of active users has jumped up 50%.

Outlook: MultiChoice’s share price is currently teetering on the resistance trendline of its bear trend and breaching that trendline should attract more buying interest. MultiChoice remains a sound investment now that it’s trading at its initial listing price. Because most of MultiChoice’s long-term content @finweek

finweek

MULTICHOICE

52-week range: R72.28 - R138.49 Price/earnings ratio: 1-year total return: -28.87% Market capitalisation: R39.16bn Loss per share: R0.90 Dividend yield: Average volume over 30 days: 3 200 524 SOURCE: IRESS SOURCE: MetaStock Pro (Reuters)

deals are agreed to be paid in US dollars, currency moves can affect earnings.

On the charts: MultiChoice has failed before to breach the resistance trendline of its bear trend. However, support retained at 8 510c/share – thus forming a higher bottom – should prompt further gains that would end the current bear trend.

finweekmagazine

Go long: A positive breakout of the bear trend would be confirmed above 9 970c/share and upside to 11 120c/share could then follow. Breaching that level would present another buying opportunity with potential upside to 13 850c/ share.

Go short: Refrain from going long if the share price should

drop below 8 510c/share, as it would mean MultiChoice is retaining its bear trend and could therefore fall back to the 7 225c/ share prior low. ■ editorial@finweek.co.za Moxima Gama has been rated as one of the top five technical analysts in South Africa.

She has been a technical analyst for 12 years, working for BJM, Noah Financial Innovation and for Standard Bank as part of the research team in the Treasury division of CIB.

finweek 7 May 2020

19

marketplace invest DIY

By Simon Brown

CASH FLOW

Look to retail bonds for cash flow when dividends disappear

c

Photo: Archive

It’s likely that many companies will not be paying out ordinary dividends due to the economic fallout of Covid-19.

Simon Brown offers advice for investors that need to supplement this income they will be losing. apitec’s* annual results for the year ended 29 February teach us two important things right now. Firstly, while they were excellent, results to 29 February of this year are meaningless.

Anything before Covid-19 became a pandemic is interesting but tells us nothing about the next few years.

The bigger point is the disappearing dividends. Headline earnings per share was up 19% but the dividend was cancelled. If we take the 2019 final dividend of 1 120c per share and increase it by 19%, that would have been 1 332c. But dividends are disappearing fast. Earlier in April the Prudential Authority of the South African Reserve Bank (SARB) requested local banks not to pay “dividends on ordinary shares and no payments of cash bonuses to executive officers and material risk takers … in 2020”.

This makes sense. Sure, Capitec and the other banks have strong balance sheets and very adequate capital adequacy ratio requirements. But Covid-19 is the great unknown and conserving cash for now is good business sense. In Capitec’s case, skipping the dividend saves the company a little over R1.5bn, which may go a long way; Covid-19 will lead to rising bad debts, increased expenses and lower business activity for at least the rest of 2020 and likely for a few years going forward.

Other financial industry companies will also have a hard look at dividends; the property sector is already delaying and will certainly start cancelling dividend payments.

In fact, it’s only miners that will really continue with dividends and – to a lesser degree – food retail outlets, which carry less risk and continue to operate during the lockdown.

For me, not receiving dividends is not the end of the world. I like the cash flow that comes from them, but I’m not using that money for living; I rather just invest it back into the market.

But for a significant portion of investors dividends are a particularly important part of their retirement strategy as cash flow for

20

finweek 7 May 2020

living expenses, not reinvesting.

An alternative that I have written about before in finweek is preference shares, which pay chunky dividends. Grindrod’s preference share, for example, and – at one point – major bank preference shares, offered yields of over 13% in recent weeks.

The SARB’s statement does not preclude paying these dividends, but there remains a problem. These dividend payments are linked to the prime rate, and they average at about 80% of the prime interest rate and based on the preference share issue price. But prime is now 7.75%, having been cut by 2.25 percentage points this year already, with more cuts a distinct possibility. So, these preference share yields are falling. One benefit is that they’re taxed as dividends at 20%. Still, an investor is getting less yield.

There is, however, another option – the RSA Retail Savings Bonds from National Treasury. The fixed two-year rate is 7.75%, three-year 9% and the five-year a whopping 11.5%. That’s impressive, but some terms and conditions apply. They are fixed term with interest paid twice a year or monthly for pensioners. The capital can be withdrawn early (after a year) but a penalty applies and, most importantly, is the tax consideration. The interest you receive on these bonds is taxable.

The first R23 800 of interest income is exempt if you are under 65. If you are older, then the first R34 500 is tax exempt. Any interest above these amounts is added to your income and taxed accordingly at your marginal tax rate. So, these bonds may not be the most tax-effective investment vehicle for larger sums of money, but right now an 11.5% return before tax is attractive, especially if income is important to you.

These bonds have to be bought directly from Treasury’s website and the rate offered changes monthly, so May’s rate could be higher or lower than April’s. But don’t try to time this. If you like the rate, grab it. ■ editorial@finweek.co.za

These bonds may not be the most tax-effective investment vehicle for larger sums of money, but right now an

11.5% return before tax is attractive, especially if income is important to you.

*The writer owns shares in Capitec.

www.fin24.com/finweek

marketplace investment

By Schalk Louw

INVESTMENT

How to beta build your portfolio

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Photo: Archive

Looking at how a stock performs relative to an index is a useful tool for constructing your investment portfolio. hat a year it’s been so far. After the FTSE/JSE All Share Index ended 2019 with more than 12% growth, and the MSCI All Country World Index with a whopping 27% growth in US dollar terms, consensus forecasts for 2020 were optimistic. Sobering were the events that followed when our local market had already declined by 33% by mid-March (19 March 2020) due to the Covid-19 pandemic, which now has the whole world in a state of disarray. Suddenly optimism has turned into utter panic.

The two main drivers in the financial world – greed and fear – are constantly and increasingly battling one another.

This poses an important question. How do I get these two emotions to live together in peace?

The good news is that I have the answer to this question: Just own investments that offer the lowest risk and the highest returns. The bad news is that no one really has the appropriate method, or knows how to apply this solution practically.

Most investors who are currently invested in shares are one of two kinds of people: Long-term investors who are content with short-term price fluctuations, or short-term speculators who feel that the probability of share price increases are incredibly good. For the latter, taking a closer look at the beta value of their investments right now wouldn’t be a bad idea.

The beta defines the potential volatility of your share’s return or decline, compared with the volatility of the overall market or index. In simple terms, if a share has a beta of 1, it means that for every percentage point that the market moves up or down, your share price will move up or down by the same percentage.

A beta of 0.8 will mean that your share price will only rise by 0.8% for every 1% rise in the market, but it will also only decline by 0.8% for every 1% market decline. As the saying goes, “Half a loaf is better than none”. It might not be a bad idea to shift your focus to low-beta shares for the time being. That way, if analysts’ predictions are correct in that the market will rise, you will still benefit. If their predictions are wrong, your losses in a market decline should be lower.

I worked through the FTSE/JSE Top 40 Index and identified the five shares with the highest and lowest fiveyear average betas (see tables).

The remarkable thing about these two tables is that shares from the Top 40 index that have the highest fiveyear average betas are mostly platinum mines, but, more importantly, also some of the best performers on the JSE over the last five years. The five lowest beta shares are companies that can mainly be described as consumerdriven businesses.

I took things one step further by building two separate @finweek

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TOP FIVE-YEAR AVERAGE HIGHEST BETAS (IN ALPHABETICAL ORDER)

TOP FIVE-YEAR AVERAGE LOWEST BETAS (IN ALPHABETICAL ORDER)

1. AngloGold Ashanti 2. Clicks 3. Shoprite 4. Spar 5. Vodacom

1. Anglo American 2. Anglo American Platinum 3. Impala Platinum 4. Northam Platinum 5. Sasol

FTSE/JSE TOP 40 INDEX AGAINST THE FIVE HIGHEST AND LOWEST BETA SHARES 180 160 140 120 100 80 60 40 20 0 Apr ’19

May ’19

Jun ’19

Jul ’19

FTSE/JSE Top 40 Index

Aug ’19 High Beta

Sep ’19

Oct ’19

Low Beta

Nov ’19

Dec ’19 Jan ’20

Feb ’20 Mar ’20

SOURCES: IRESS and PSG Wealth Old Oak

portfolios from each of the list of the five highest betas, and the five lowest betas, and then compared these two portfolios’ performance with that of the Top 40 index, and the results were quite staggering (see graph).

Three of the five highest beta shares are platinum mines, which had good runs in 2019, so it makes sense that the high beta shares outperformed the index over the past 12 months (until 17 April 2020). What made this so interesting, however, is the fact that “low risk” didn’t necessarily mean “low returns” over this period. Not only are the five lowest beta share prices still (up to 17 April 2020) trading 25% higher compared with 12 months ago, but in the graph you can clearly see that they were much less volatile than the high beta shares and the index.

I’m not recommending that investors run wild in search of only low beta shares right now. Doing your homework remains key to your portfolio’s success. This is simply another tool you can use in compiling your personal share portfolio. Always invest with your mind and keep your emotions out of the management process. ■ editorial@finweek.co.za

JSE offices in Sandton, Johannesburg.

Schalk Louw is a portfolio manager at PSG Wealth.

finweek 7 May 2020

21

marketplace Simon says

By Simon Brown

RCL FOODS

Simon’s stock tips Founder and director of investment website JustOneLap.com, Simon Brown, is finweek’s resident expert on the stock markets. In this column he provides insight into recent market developments.

Photo: rclfoods.com

Minority to decide on share plan In an apparent concession to minority shareholders, Remgro, which owns 71% of RCL Foods, said it will not be voting in a decision whereby the owner of Rainbow Chicken and Selati sugar plans to buy back shares from its executive directors. The crux of the issue is that these directors received shares in lieu of bonus payments. Due to a lack of liquidity in the trading of RCL’s shares, the board decided to buy back these shares rather than having the execuctive directors try to sell them on the open market.

This was for some 14m shares that the board proposed buying at 1 029c, or almost R150m. Shareholders would get to vote, but should Remgro also vote, it would carry the vote with its majority holding. Now, however, after an investor outcry, Remgro won’t vote, leaving it up to minority shareholders to decide. Remgro has every right to vote their shares but, instead, they’ve listened to concerns and have taken what I consider to be the correct decision. A last point: Remgro will directly buy enough shares to cover tax payments if the remaining shareholders vote against RCL Foods buying back the directors’ shares – an elegant solution that doesn’t negatively impact the minorities.

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finweek 7 May 2020

ASHBURTON GLOBAL 1 200 ETF

Passive rules actively bent The Ashburton Global 1 200 exchange-traded fund (ASHGEQ ETF*) issued an interesting stock exchange announcement, in which they said that S&P Dow Jones Indices, the calculation agent of the S&P Global 1 200 Index which is tracked by ASHGEQ ETF, would delay the rebalancing of the index from 23 March to 22 June. They cited “unprecedented volatility in global equity markets caused by the Covid19 pandemic” as the reason. Now, I agree, the volatility endured from late-February to late-March was unprecedented, but delaying a rebalancing due to such volatility is equally unprecedented and sounds suspiciously “active” to me. The idea behind an index, and hence an ETF tracking said index, is that it is passive.

There is a set of rules used to structure the index and those rules are followed, regardless of market conditions. Essentially changing the rules due to wild markets is an active decision – and in my opinion completely wrong.

Earnings attributable to ordinary shareholders were

27%

lower in the three months compared with the same period a year earlier.

ZEDER

Deep discount to NAV Zeder has paid its special dividend to shareholders after receiving the cash payout from its Pioneer Foods holding, following the PepsiCo buyout. The special dividend came in lower than expected at 230c per share, with the market expecting a payout of between 249c and 278c. This was due to the board deciding to hold on to more of the cash. After payment of the dividend, Zeder’s share price is now around 190c and trading well below the net asset value (NAV) of its various holdings (including cash). Aside from cash, valuing its holdings is subjective as none of them are listed. Even a cautious valuation, however, suggests a deep discount to NAV. But for now, even with food services continuing to operate amid lockdown, food production is tricky. Costs are likely to rise, so a tough year or two are likely. Ultimately, I suspect we may eventually see an offer to minorities, but with PSG holding around 44%, it’ll have to be an offer that PSG agrees with. Or maybe an offer driven by PSG, and I think it will be a year or two before we see that.

STANDARD BANK

First quarter profits sink Standard Bank’s trading update for the first quarter of 2020 saw increased trading volumes, while pretty much everything else was under pressure by the end of March. ATM and credit card transactions were down, and credit impairments were “significantly higher” with part of the impairments due to the bank taking a cautious approach to expected credit losses.

Overall, the bank says that earnings attributable to ordinary shareholders were 27% lower in the three months compared with the same period a year earlier. This could be lower as the second quarter sees even less activity (aside from trading revenue) and loan impairments that may come in higher than the bank is expecting (also see story on p. 36). www.fin24.com/finweek

marketplace Simon says

CLICKS

OIL

Waiting for year-end

The curious case of corona

Clicks’ results for the six months ending February were, as always, excellent. A few points really stood out. The company said that during the seven weeks after the period end to 19 April saw huge sales growth ahead of the lockdown. Thereafter sales markedly declined as they had to close Musica, The Body Shop and Claire’s. Restricted product lines and trading hours also hurt. But the update did not give details as to the level of sales during lockdown, nor did they split out the closed brands as a percentage of sales, albeit this will be small.

Ultimately, the company decided not to declare an interim dividend, despite sitting with R2.3bn in cash and no debt. A final dividend will be considered at year-end (August 2020) when there is greater certainty as to the impact of Covid-19 and the ability of the group to trade.

I’d expect them to find it tough going, but their pharmacy and health divisions will do well and by the end of August directors will have a much clearer picture of the business and the profits.

Trading updates from the three hospital groups, namely Life Healthcare, Netcare and Mediclinic, all broadly detail the same issues. Occupancies are down as non-elective surgeries are delayed with Life reporting 40% occupancy – that’s down from a “weighted occupancy” of 69.7% for the year ending September 2019. Netcare reported it’s ready to assist the government on a “not-for-profit, cost-recovery basis”. If demand for private healthcare during the pandemic surges, they will have very limited capacity. The companies are also reporting declines in sales of most medical equipment and increased costs, with Netcare already spending R150m to enhance its Covid-19 response. Basically, while hospitals are going to be busy in the months ahead, this is not going to translate into booming profits as costs rise and some areas see reduced demand.

PSG

Capitec under consideration?

Photos: Archive | Shutterstock

HEALTHCARE SECTOR

After I wrote about Zeder (see piece on p.22), PSG issued a cautionary stock exchange announcement saying they’re “considering a corporate action/transaction”. PSG is likely not going after Zeder, Curro, PSG Konsult or Stadio as there were no announcements from any of them. Maybe they’re considering unbundling or selling their stake in Capitec*? The PSG discount to the sum of its parts is huge, leading to a valuation of PSG below that of its more than 30% stake in Capitec. But Capitec also pays great dividends, providing cash flow to PSG to use in other areas. With no Capitec dividends likely for at least two years, this could be an opportune time to exit the stake via a sale (who would be the buyer?) or, more likely, an unbundling. @finweek

finweek

finweekmagazine

Don’t think this is easy money I always thought that negative interest rates were the craziest thing I’d ever see. Then in late April we saw negative oil prices as traders paid people to take oil off their hands. This was for the May delivery of the West Texas Intermediate (WTI) futures contract. The problem was a lack of available storage space as demand for oil collapsed while production increased in Brent crude and remained flat for WTI. The June and July delivery contracts for WTI are trading at levels below $20 a barrel and now everybody wants to be an oil trader.

The JSE has Brent oil future contracts and an exchange-traded note from Standard Bank, called SBAOIL. It tracks WTI, but don’t think for a moment this is easy money. With extremely weak demand for oil, it’ll require serious production cuts to get the price moving and the contracts for current delivery may trade exceedingly low, or even negative again.

Newly-reduced prices in SA coupled with pressure in Nigeria is hurting MTN’s share price and will continue to do so.

MTN

Share price pain The MTN share price has been under severe pressure, trading below 3 000c in late-March.

Even after a recovery, it traded just above 4 200c/share in April. The major concern is the oil price collapse and its effect on Nigeria, which relies heavily on the oil economy and is MTN’s largest market. So, even while lockdown is seeing increased demand for data, the newly-reduced prices in SA coupled with pressure in Nigeria is hurting the share price and will continue to do so. ■ editorial@finweek.co.za *The writer owns shares in ASHGEQ and Capitec.

finweek 7 May 2020

23

marketplace share view

By Peet Serfontein

OFFSHORE

Johnson & Johnson at a canter

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This share is a good example of one that suits a beta investment strategy. ost of us were amazed by the extent to which the Covid-19 pandemic affected the world and the financial markets.

However, the age-old theory that I always keep in mind and value is that of the Kondratieff wave analysis, named after the Russian economist Nikolai Kondratieff.

It refers to cycles that last approximately 40 to 60 years and that occur in capitalist economies. There are many arguments for and against this theory.

What is truly interesting about this theory is that the period 2019 to 2023 is one where panic will reign (see graph 1). As no theory is 100% accurate, the question is always when.

This leads to the question about which shares are best to invest in when markets experience severe volatility. Remember, volatility is the erratic movement of prices over time. As an investor, you don’t want to miss out should the market run like it did after the recent slump.

I suggest that investors should look at shares with a high beta within an index, such as the S&P 500. Beta is a financial indicator that measures how sensitive a share price is to a change in the index. A beta of above 1 usually means that the share is very volatile and tends to fluctuate in line with the market.

Negative betas are possible for shares that tend to fall when the market rises, and vice versa. One should therefore concentrate on the heavyweights in such an index.

A beta investment strategy is usually

passive by nature. But be warned: To make this strategy work, one should be able to sit on one’s hands through the downward periods. Should you therefore sell during these downward periods, you will probably have negative returns.

Against this background, my choice of share is Johnson & Johnson (J&J), which is listed on the New York Stock Exchange (code JNJ).

This US-based multinational company was established in 1886 to develop medical equipment, medicine and consumer health products.

Recently, the company announced an undertaking to donate $250m over a period of ten years to inspiring, recruiting, training, mobilising and retaining health workers.

Its heritage dates back to the 1900s when the company helped contain the spread of the Spanish flu of 1918 by introducing the epidemic mask.

In January, J&J announced the launch of a campaign to combat the outbreak of the coronavirus. This would include attempts to develop a vaccine against the disease and identify existing medicine that could be used in the treatment of Covid-19.

What can one expect from the share?

The company recently released its trading update for the first quarter.

It shows sales of $20.7bn – growth of 3.3%. Operating growth is 4.8%, and adjusted operating growth is 5.6%, which includes the total estimated negative impact of the

1999

20

2019

16

2035

Years of good times,

high prices times to sell values of all kinds

9

1989

10

1999

8

2007

9

I will classify the buy as being speculative in nature as one must assume that the current upward price momentum will support the bull trend.

The share remains in the parallel channel (see the black parallel lines, top of graph 2), and the price movement is testing the bottom part of this channel. The share is expected to move towards the upper portion of this channel. This channel stretches back to 2013.

Should the share reach the resistance level of $190 it will be an indication to take profits and to reduce exposure.

The reason why there is upward potential stems from the MACD indicator (moving average convergence divergence – see the bottom panel of graph 2).

When the MACD indicator (blue line) crosses above the MACD signal line (orange), it serves as a sign that a bull trend is starting to develop.

Should the price break through below $135 per share, one can expect that the share will drop further. Regard this level as a stoploss to protect capital. ■ editorial@finweek.co.za Peet Serfontein is an independent market analyst.

– 200.00

KONDRATIEFF WAVE COUNT (PROJECTED)

Years in which panics have occurred and will occur again 18

But should you buy?

GRAPH 2: JOHNSON & JOHNSON

GRAPH 1: KONDRATIEFF WAVE

1981

coronavirus pandemic.

Earnings per share increased by 56.1% to $2.17 and its dividend by 6.3%. The share is already trading above its 200-day exponential moving average. A price movement above its 200-day average classifies the share as a bull.

2016

10

2026

8

2034

9

– 160.00 – 151.67 9d 7h

52-week range: $154.86 - $156.05 Price/earnings ratio: 23.69 1-year total return: 12.98% Market capitalisation: $406.76bn Earnings per share: $6.51 Dividend yield: 2.62% Average volume over 30 days: 13 746 633

– 120.00 – 100.00 – 80.00 – 68.00 – 58.00 – 50.00 – 43.00 – 5.31 – 4.81 – 0.49

SOURCE: IRESS 7

1985

11

1996

9

2005

7

2012

11

2023

9

2032

7

2039

Years of hard times, low prices. good times to buY stocks, goods etc. and hold until the Years of good times

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finweek 7 May 2020

2011

2013

2015

2017

2019

2021

2023

SOURCE: Peet Serfontein, published on Tradingview.com

www.fin24.com/finweek

marketplace invest DIY

By Simon Brown

FORECASTS

The rarity of guidance among SA companies

Locally-listed companies don’t provide the elaborate revenue and profit guidance that their US counterparts do.

Normally, this isn’t a problem. But, given the current crisis, a little bit of guidance wouldn’t be amiss.

Photo: Shutterstock

o

ne of the features of financial results releases in the US that has fortunately not made its way to South Africa, is guidance.

Companies in the US will offer guidance for the subsequent quarter, year and sometimes even further ahead with every set of results they release.

This will be in different forms, with some companies only offering a range of what is expected from revenue and earnings per share. Other companies add divisional sales and more. The idea is that it helps investors get an insider view of the company’s future.

I said it’s fortunate that we don’t have it in SA, because I feel that investors get far too fixated on the guidance. Often, companies will low-ball the numbers as no CEO wants to miss their own stated guidance. But they’re also bland and seldom tell of any imminent trouble, especially if, like the Covid-19 pandemic, nobody sees it coming. The only real benefit perhaps comes in when things are booming. Then guidance will help investors understand the reigning boom and when it will start to flatten off.

But, suddenly, we find ourselves in a totally different world where the results that are now hitting the market are totally useless. So, a company giving me details of revenue and profits up to the end of February 2020 is merely a lesson in history.

It’s interesting but has no bearing on the future. With this in mind, what should we be looking for?

Many listed companies on the JSE have already issued some level of Covid-19 guidance, with healthcare stocks offering great insight into how they are functioning right now, ahead of the pandemic seriously breaking out in SA. Standard Bank, for example, has warned that the first quarter of 2020 will see earnings down some 27%, largely due to increased provisions for bad debts.

But the problem remains. So far pretty much everybody has underestimated the actual impact of Covid-19. And I am not passing blame here. What we’re currently @finweek

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experiencing is unprecedented, with the last pandemic being the Spanish flu of 1918. That was before vaccines were even a concept.

In other words, the guidance coming out of JSE-listed companies recently is worth the read, but we must understand that it really is written in sand and can change from day to day. Offering any guidance out to next year remains a guessing game.

Meanwhile, there are some tricks that I have always used to gauge future performance, and they can be useful in these unprecedented times.

Most companies will have a short paragraph or two on their outlook that they include with results. Furthermore, the annual report will often offer some level of outlook for the future. They’re seldom on the level of US companies in terms of actual hard numbers and, more often, they’re just the company’s view of the current operating environment.

My trick is to always go back five years and read previous outlook statements. I can then compare the old outlooks with what actually happened in the years after that statement was issued.

What you very quickly pick up is which companies put in real thought and, as such, share truly useful information in their outlook statements. Some CEOs or, as the case may sometimes be, chairpersons write insightful outlooks while others largely say extraordinarily little.

There was a CEO of a company, which is now delisted, who, when the company was still listed, stated each year that the past year was tough but that the following one would be better. Yet, every year remained tough; either the CEO was lying to us or he had no grasp of reality.

So, read the outlooks, but first review previous statements and understand the weakness of prediction during a pandemic and understand how good the company usually is at guidance to investors. ■ editorial@finweek.co.za

So far pretty much everybody has underestimated the actual impact of Covid-19. And I’m not passing blame.

finweek 7 May 2020

25

marketplace markets

By Maarten Mittner

OUTLOOK

The return to normalcy is fraught with uncertainty

t

Maarten Mittner analyses the road ahead for economic revival, equity and fixed-income markets and how politics may change as a result. he return to normalcy in global markets may take much other asset classes. Placing life savings in equities has proven longer than anticipated. to be very risky for most. It would be prudent to investigate The average surge of 20% in global markets at the other asset classes, such as houses, as an alternative, hopefully end of April, following the March meltdown, may be an accompanied by a more favourable tax environment. indication of a swift recovery going forward, similar to how At present, only equity and capital market investments markets reacted in 2009. But should the Covid-19 pandemic for retirement purposes qualify for a generous local taxation not be a one-off event, which seems likely, any recovery may dispensation in that contributions are tax-deductible, to a limit. prove to be premature.

Paying off a bond by Joe Average in SA has no similar benefits, Greater volatility seems assured. And expect anomalies, not even interest may be deducted. Changes in this area could such as oil prices falling into negative territory, some tech reduce risk by lessening the overreliance on share markets. companies surging and markets climbing at times, Despite everything possible being done to prevent a despite a continued rise in coronavirus infections. deflationary scenario, “Japanification” is still a distinct The response to the present economic malaise possibility for the US and the eurozone, brought on by is under much more difficult circumstances than lower oil prices and reduced spending. That means in 2008. Governments then discounted the fiscal living with a huge debt burden, subdued demand in option, which was the preferred response to the the economy and the hoarding of money in whatever Great Depression of the 1930s. On the contrary, form, causing tepid economic growth, could become fiscal spending was allowed to contract in developed the new norm. countries, under the guise of “austerity”, and as bigger The big question is where future economic growth will companies started to pay less tax. predominantly come from? Digital or online companies could To stimulate economies, and to stave off a real depression, be the big winners, with Amazon CEO Jeff Bezos increasing monetary tools were used. Central banks increased money his personal wealth by $24bn in a few weeks amid tumbling creation, mostly by expanding bond offerings in the capital markets. Bricks-and-mortar have been the main losers, with the markets, and kept interest rates at historic lows. This retail sector and commercial property particularly hard hit. boosted equity markets, causing flipside problems of The future is fraught with uncertainty. Consumer Digital or online companies could ballooning debt and rising inequality. spending had been the main driver of economic growth be the big winners, with Amazon Global economies held on to steady growth in developed countries for decades. If consumers spend CEO Jeff Bezos increasing his over the past decade, but nothing was really less within the parameters of mainstream businesses, and personal wealth by done to address the root causes of the 2008 cheaper online systems are the winners, inequality could imbroglio. Nobody was held to account, least of all increase further, with digital companies extending gains, financial institutions and banks. Apart from a few having very little incentive to pay employees higher wages. prosecutions of top managers at selected banks, Distrust in markets could spiral out further. Gold mostly unsuccessful, and some discomfort from IFRS could be a short-term winner. The US 10-year bond in a few weeks amid tumbling (international financial reporting standards) rules, could test 0%. Developing countries are expected to markets. these institutions were all designated “too big to fail”. deal with hunger issues, in addition to fiscal deterioration Assets have been massively mispriced over the past and capital flight. Populist movements are set to grow, decade. The real value of companies was much lower, inflated which would probably entail stronger governments and less and supported by taking up increased debt in a low-interest efficient markets, save for the owners of capital. environment. The top-income earners benefitted, but for most, Geopolitically, things can also change dramatically. The life had become more of a struggle, particularly for middle- and effects of 70 years of globalisation since the end of World War II lower-income workers as medical and educational costs rose. is likely to be questioned more, mainly in the US. This will have The inherent fragility of this system is yet to be felt, as profound implications for countries such as China and Germany, unemployment and financial distress climb in developed which have been the main beneficiaries up to now. countries. But at least, this time around, there has been more The growing uncertainty and fundamental changes are of a concerted response from the authorities in that monetary unlikely to foster confidence in equity markets over the short rescue efforts are now accompanied by massive fiscal stimulus. term, which may further inhibit a speedy return to normalcy. ■ There is sure to be a reappraisal of risk management. editorial@finweek.co.za Investors paid a heavy price for the lack of diversification into Maarten Mittner is a freelance financial journalist and a markets expert.

Photo: Shutterstock

$24bn

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marketplace technical study

By Lucas de Lange

JSE

‘Tough times ahead for SA’

t

... but gold producers and Krugerrands are flourishing here is one clear thread running through comments currently being made regarding the JSE and the South African economy: Sentiment is virtually entirely negative, and probably summed up best by economist Mike Schüssler: “We’re facing extremely tough times.”

And Schüssler isn’t the only one predicting that it could take five years or more for our GDP to reach the same level it enjoyed before the coronavirus crisis. In fact, there are pessimistic predictions that it could take up to ten years.

The emphasis has generally been on the fact that our economy was already in deep trouble before Covid-19 struck. Not only is the economy shrinking, but the country will drown in debt.

Investors on the JSE are currently experiencing tough times. There was a recovery after the steep drop in February and March, but as is apparent from the accompanying tables, the bear is still completely dominant. More than 80% of the 100 biggest shares by market capitalisation lie below their 200-day exponential moving averages (EMAs). It is, however, an improvement on a month ago when 96% of them were below their 200-day EMAs, when stalwarts such as Sasol and Remgro reached frightening lows of R22 and R101.50 respectively.

Some analysts expect a second downward leg for the JSE. Should this occur, and the problems surrounding oil are mentioned, there will once again be opportunities for exceptional bargains. As Adrian Gore, the founder and CEO of the Discovery Group, puts it: “When it’s not Armageddon, you should build. If people are worried, the prices of opportunities are usually undervalued.”

It has happened in the past that it’s taken the JSE about ten years to reach the same levels it enjoyed before the bear struck. For example, after the market collapse in May 1969 in the wake of one of the wildest bull markets ever experienced by the JSE, it took about a decade for the general market index to reach the highest level attained in 1969. The market dropped by more than 60% between @finweek

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May 1969 and October 1971. The average man suffered painful losses after having invested via the unit trust industry, which was still in its infancy. The extent of these investments is apparent from the fact that in May 1969 alone – just before the decline – R562m was invested in the industry, as opposed to R141m during the whole of 1967 and R455m in 1968.

This was a major setback for the young industry, but fortunately, a bull market has always followed on a bear market, during which the highs of the preceding bull markets are exceeded – even if it takes long. Today, the unit trust industry is flourishing.

But the current situation is different: The spark for the strong declines was initiated by the Covid-19 pandemic.

No one knows how this situation will pan out, but it is evident that the US Federal Reserve (Fed) and other financial authorities are prepared to act firmly this time by creating liquidity. This is usually fuel for share markets. In fact, the current recovery on Wall Street has been attributed to the Fed’s actions. The US remains the undisputed market leader and is watched by one and all.

From time immemorial, gold has been a haven of safety during disruptive times. So it’s noteworthy that the top five strongest shares are gold miners. The Krugerrand is not included in the table, but has also increased significantly – up 47% since the beginning of the year. Over the past 20 years its value has increased by 1 750%.

Among the weakest shares, Sasol and property shares such as Hammerson and Redefine stand out, and even healthy banks such as Nedbank and Investec.

Sasol, in particular, is under the cosh, but the question is whether its new plant in the US – which is regarded as one of the most modern and potentially among the most cost-effective in the world – is really worth so little. And what about the valuable shopping centres of the large property companies? ■ editorial@finweek.co.za Lucas de Lange is a former editor of finweek and the author of two books on investment.

finweekmagazine

WEAKEST SHARES* COMPANY

% BELOW 200-DAY EMA

TSOGO SUN SASOL BRAIT HAMMERSON REDEFINE ADCORP TELKOM PPC NEDBANK KAP INVESTEC PLC TFG SAPPI MTN GROUP MASSMART IMPERIAL FORTRESS A RESILIENT ABSA GROUP STANDARD BANK TRUWORTHS DISTELL WOOLWORTHS BARLOWORLD LIBERTY HOLDINGS GROWTHPOINT PEPKOR HOLDINGS MAS REAL ESTATE REUNERT NEPI ROCKCASTLE OLD MUTUAL FIRSTRAND AB INBEV RMB HOLDINGS TRANSACTION CAPITAL BIDVEST CAPITEC DISCOVERY REMGRO VIVO BIDCORP ITALTILE MR PRICE PSG LIFE HEALTHCARE SANLAM AECI LIBSTAR GLENCORE MC-GROUP NETCARE ROYAL BAFOKENG PLATINUM EXXARO SHOPRITE ADCOCK INGRAM

-72.7 -70.6 -69 -68.3 -66.2 -66.1 -57.1 -56.9 -53.7 -51.6 -49.6 -49 -48.2 -45.7 -45.6 -42.9 -41.8 -41.3 -41.2 -39.8 -39.5 -37 -36.7 -35.5 -35.1 -34.7 -34.6 -34.1 -32.7 -31 -30.6 -30 -26.8 -26.3 -25.7 -24.8 -24.7 -24.2 -24.1 -23 -22 -21 -20.7 -20.2 -20.1 -19.9 -19.4 -19.2 -17 -16.4 -15.4 -15.4 -15.1 -14.8 -14.5

WEAKEST SHARES* COMPANY

MEDICLINIC SOUTH32 RMI HOLDINGS EQUITES DIS-CHEM CAPCO MOMENTUM METROP TIGER BRANDS AFRICAN RAINBOW MINERALS RCL PSG KONSULT CORONATION ANGLO AMERICAN JSE ALTRON A AVI RICHEMONT AMPLATS CLICKS PICK N PAY KUMBA IRON ORE ZAMBEZI PLATINUM PREF NORTHAM PLATINUM BHP ASPEN SANTAM

% BELOW 200-DAY EMA

-14.5 -14.4 -14.2 -14.1 -13.1 -12.5 -12.2 -12.2 -11.5 -11.1 -9.4 -8.2 -6.9 -6.5 -6.3 -6.1 -5.4 -5.3 -4.3 -3.7 -3.4 -2.9 -2.1 -1.6 -0.4 -0.1

STRONGEST SHARES* COMPANY

DRD GOLD GOLD FIELDS ANGLOGOLD ASHANTI HARMONY GOLD PAN AFRICAN RESOURCES BAT ASSORE NASPERS N SIRIUS IMPLATS VODACOM REINET QUILTER CARTRACK SPAR MONDI ASTRAL

% ABOVE 200-DAY EMA

113.8 75.6 72.6 57.1 54.6 16.3 12.8 11.1 8.1 4.4 4.1 2.4 1.6 1.4 1.2 1 0

BREAKING THROUGH* COMPANY

QUILTER CARTRACK SPAR

% ABOVE 200-DAY EMA

1.6 1.4 1.2

*Based on the 100 largest market caps.

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INVESTING OFFSHORE AFTER THE ROUT

The rand cushioned the blow of the global stock market rout for many local investors.

Now the question is how stocks and bonds will emerge from the largest sell-off in a generation.

w Photos: Gallo/Getty Images I Supplied

By Jaco Visser

@finweek

hen markets tank, and subsequently since the beginning of the year before rebounding rebound somewhat, the broad 24.3% to settle at 15.2% down for the year by the questions investors will ask are what time of writing (see table on p.31). they should have done during the rout The MSCI Emerging Markets Index, which and what they should do once it’s run. constitutes 1 404 stocks from 26 emerging countries, The coronavirus pandemic has wreaked havoc dropped 32% during the initial sell-off since the across global equity and fixed-income markets, with beginning of the year and subsequently rebounded by uncertainty about the future economic 16% for a year-to-date return of -21.1%. fallout only adding to investors’ anxiety.

These are, however, general indices and most But one global piece of advice from fund managers follow a bottom-up approach to various fund managers rings clear stock selection. As in any portfolio, it is wise to during these tumultuous times: Stick to have some form of protection against extreme your initial investment strategy. market events, such as the current coronavirus Where such a strategy included pandemic. exposure to offshore assets, whether During periods of heightened volatility, Anet Ahern shares or bonds, the same advice applies. everything – except dollar cash – seems to fall, CEO of PSG Asset “The foundation of any investment cheap assets get cheaper and usually nonManagement strategy starts with the right long-term correlated sectors sell off in tandem, explains structure based on your time horizon and risk profile,” Ahern. This makes investors doubt the principle of a says Anet Ahern, CEO of PSG Asset Management. diversified portfolio, she says.

“If that was inappropriate to start with, it is much more “The pain of opening the latest statement and difficult to navigate the current situation.” seeing your assets decline, even if only on paper, And difficult the current situation is. The MSCI induces the temptation to move to cash,” Ahern says.

World Index, which tracks 1 643 stocks from 23 The best hedge for most investors remains correct risk developed countries, declined by as much as 31.8% profiling and diversification, she says.

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“The primary effect of moving from shares into fixed income during a market downturn is that it can turn a temporary loss into a permanent one.”

Most funds utilise strategies to hedge themselves. That is also the case with offshore funds where the volatility of the rand can either boost a portfolio or diminish it in a heartbeat. There are several strategies that can be used to hedge against market downturns too.

This varies from put options, put spreads and fences that offset the downside in risk assets such as equities and bonds, says Kurt Benn, head of the balanced franchise at Absa Asset Management.

“Rand hedge strategies are the cheapest and arguably the most effective strategy, especially when applied to developed market bonds,” he says. “This is generally the safe-haven asset class of choice when investors get fearful.”

In times of market stress there “is no substitute for high-quality government bonds”, says Michael Adsetts, deputy chief investment officer at Momentum Investments. “In equity market sell-offs, prevailing yields tend to fall, and the price of these instruments goes up.”

The S&P Global Developed Sovereign Bond Index, which includes locally-denominated government debt in developed countries, returned 2.06% since the beginning of the year. The S&P 500 Bond Index, which tracks the corporate debt of the constituents of the S&P 500 Index in the US, returned 2.3% this year. It is noticeable that this index fell by 13.6% between 6 March and 19 March to reach a low of 445.3 points on the latter date. It has risen by 12.5% since.

“The issue with these securities – such as US Treasuries and UK gilts – is that as prevailing yields are low, they look pretty expensive most of the time,” Adsetts says. “The diversification benefit for a portfolio is huge, however, so you have to look at them as a form of portfolio insurance. A little expensive to own when things are going well but you will be glad you had them when the going gets tough.”

Christo Lineveldt, investment specialist at Coronation Fund Managers, also touts the benefits of diversification, especially before a market event such as the coronavirus sell-off.

Diversification is an essential strategy when constructing robust portfolios. However, one of the unique features of the coronavirus pandemic rout has been the universal sell-off of almost all asset classes, even gold, he explains. “Only cash and developed market bonds managed to preserve capital,” he says.

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Shifting to cash

Kurt Benn Head of the balanced franchise at Absa Asset Management

Arno Lawrenz Global investment strategist at Ashburton Investments

Christo Lineveldt Investment specialist at Coronation Fund Managers

As investors piled into fixed-income assets, both offshore and locally, the question arose whether this move benefits them.

“If you’re a long-term investor, then absolutely not,” says Lineveldt. “Shifting from risk assets to fixedincome assets implies an attempt at timing, and timing the markets successfully is near impossible in a normal environment, not to mention during a crisis.”

The shift out of equities into fixed-income assets was driven purely by fear, says Arno Lawrenz, global investment strategist at Ashburton Investments.

“Given that the Covid-19 pandemic was of necessity a completely unknown factor, this meant that the ramifications – both economically and in a healthcare sense – would be similarly completely unknown,” he says. “Accordingly, faced with not just uncertainty, but with complete lack of knowledge, one could argue whether selling equities and buying fixed income was a rational thing to do.”

Taking the decision to move your funds from equities to fixed-income assets may, in addition to doing it without sufficient knowledge and amid uncertainty, lead to permanent losses.

“The primary effect of moving from shares into fixed income during a market downturn is that it can turn a temporary loss into a permanent one,” says Sangeeth Sewnath, deputy managing director of Ninety One (previously Investec Asset Management). “While the return from fixed income at that point in the market seems tempting, it is almost inevitably lower than the potential return as equity markets digest information calmly and return to normality.”

Many believe that that they will be able to step out of the market temporarily and return, but the reality is that while it is very easy to discern the points at which to return in retrospect, it is almost impossible to do so at the time of exit, he says.

Joao Frasco, chief investment officer at Stanlib Multi-Manager, shares a similar sentiment. “Most people never got this timing right, and certainly never ended up protecting capital in the process if they moved to bonds with substantial duration,” he says.

On the other hand, a move into shorter duration assets, with less interest rate risk, would have been the best strategy, he says. “But again, it required perfect market timing, not only in getting out of risky assets, but also getting back in. US Treasuries were the exception as they remain a ‘safe haven’ during times of market uncertainty,” Frasco says.

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Photos: Supplied I Archive I www.absainvestmentmanagement.co.za

Building in protection

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Offshore allocation

GLOBAL MARKETS’ PERFORMANCE IN DOLLARS

An allocation to offshore assets would have stymied Index Year-to-date 12 months the blow of the market rout to an extent. The rand S&P 500 -12.2% -3.1% depreciated by 35.4% this year and reached a low S&P 500 Bond 2.3% 10.6% of R19.35 to the dollar on 3 April. This currency S&P Global Developed Sovereign Bond Index 3.8% 7.1% weakness supported offshore portfolios when their MSCI Emerging Markets -21.1% -18.9% values are converted back to rand.

MSCI World -15.2% -6.5% “Certainly it makes sense to have had a larger MSCI Frontier Markets -26.1% -20.8% offshore allocation, but this is always an insight with SOURCE: S&P and MSCI the benefit of hindsight,” says Lawrenz of Ashburton.

Against the backdrop of the rand’s depreciation, if you were invested in the S&P 500, you would – at Global stocks The effects of economies around the planet – the time of writing – be down roughly 12% since the especially developed markets – grinding to a beginning of the year in dollar terms, but 19% up in standstill will work their way through to the stock rand terms, he explains. markets.

Lawrenz says that an important consideration in The UK’s Office of Budget Responsibility terms of performance is that if a crisis is global – as estimates that output in the UK will contract by 35% with the coronavirus pandemic – then economically in the second quarter. Keith Wade, chief economist vulnerable countries like South Africa generally have limited ability to respond financially and therefore their at Schroders, said in a recent webcast he expects the US economy to contract by between 22% and 25% currencies generally depreciate. “In terms of hedging against global crises, it then makes enormous sense to in the same three-month period. Many companies are reliant on consumer spending to achieve revenue have an offshore allocation,” he says. and earnings.

“Offshore assets helped substantially during this Even as the economic outlook gets more sombre, rout because of the rand depreciation,” says Stanlib’s some investors have taken heart from the easy cash Frasco. “Being in cash or US Treasuries would have that is sloshing around the globe and its possible helped more than being in offshore equities, which impact on company earnings. were also substantially down.”

“Equities have rebounded sharply from Absa’s Benn also says that a Having an offshore their recent lows driven by unprecedented larger offshore exposure would have allocation of global fiscal and monetary stimulus,” says translated into better performance Absa’s Benn. “This coordinated global and an improved ability to protect an Sangeeth Sewnath Deputy managing effort has given markets the confidence to investor’s capital. director of Ninety One look through the coming earnings trough.”

“Our asset allocation modelling during a period of Markets have discounted a V-shaped indicates an optimal long-term “significant rand appreciation recovery to the extent that the forward allocation to offshore assets ranging is also risky as this will reduce price-to-earnings ratio of the MSCI World between 40% and 50%,” he says. returns in a material way”.

Index is higher than pre-pandemic levels, “Given the rand’s inherent volatility, it he explains. “This is a little premature as it is prone to bouts of sharp depreciation leaves little room for disappointment,” he says. and appreciation.”

Lawrenz says an important consideration is when For such large exposure, Benn says they’ll consider a vaccine or, even better, another drug treatment is a hedged equity strategy. Having an offshore discovered to treat the coronavirus. “This means the allocation of 50% during a period of “significant rand Joao Frasco key question is how to exit from a lockdown strategy appreciation is also risky as this will reduce returns in Chief investment officer and how long it will be before that exit is completed,” a material way,” he says. at Stanlib Multi-Manager explains Lawrenz.

PSG’s Ahern says the extreme volatility in the If it takes too long, the economic damage to rand’s exchange rate, fuelled by both specific concerns consumers and businesses becomes larger, according about SA and worries about emerging markets, showed once again that while purchasing power parity to him. “However, the speed and size of the fiscal and monetary stimulus on a global scale is almost and long-term trends may work in the long term, it is unprecedented,” he says. “This must mean some sort always “wise to diversify your currency exposure”. of a backstop for risk assets and so the medium- to One of the reasons for this, regardless of the longer-term outlook for stocks is largely positive.” valuation of the rand, SA’s floating currency policy As most fund managers use a bottom-up approach and the fact that the rand is very liquid, is that the to stock selection, or rather look at a company’s rand acts as a shock absorber for local and emerging fundamentals and thus prospects before buying it, it is market sentiment, says Ahern.

50%

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advertorial INN8

Navigating your offshore plan

e

By Michael Summerton

While international travel might be curtailed for the next few months, it doesn’t mean your money can’t still find new opportunities. ven in a time of negative sentiment, market volatility and frightening forecasts, the reasons for investing offshore still hold true.

• Diversification. Many investors will have first-hand experience of the rollercoaster assets have been on with Covid-19. Including assets in your portfolio that don’t go up or down in value at the same time (uncorrelated assets) lowers volatility relative to expected return. This means investing in different sectors and industries, located in different regions or countries, or priced in different currencies.

• Political risk in the form of prescribed assets, which requires retirement funds to invest in government-managed institutions. Holding your investments directly in a foreign jurisdiction is one way to mitigate this risk.

• Matching your assets with future liabilities. It’s likely that many of your current expenses, while paid in rand, are priced in foreign currency. SA imports many goods and services, so by investing in foreign currency, you reduce the risk of your income not keeping up with a devaluation in the rand.

How to get started

In these challenging times where we can barely leave the house, you need to think differently. So, after you have consulted your financial adviser virtually, download Shyft – a standalone foreign exchange service from Standard Bank – from your app store. Moving money abroad has never been easier and you can achieve it from the comfort of your armchair.

If you are fortunate enough to be able to take more than R1m offshore each year, there are many providers that can help you with your tax clearance paperwork and foreign remittance of larger sums for a very reasonable fee.

Another way is to use funds that are already offshore.

We hear of many clients with cash in their US or UK bank accounts earning next to nothing in interest and just never ‘getting around to’ investing to earn a better return on their money. Now is the time to get around to putting your hardearned savings to work.

It really is as simple as an EFT.

But, what should you look for in an offshore investment provider? Here are a few considerations: Location

The investment platform must be domiciled offshore in a country with strong regulatory regimes and low levels of political risk, such as Jersey in the Channel Islands, the selfgoverning Crown Dependency of the UK. However, service support should be offered locally in order for you and your adviser to open your account and transact easily.

Ease of use and reporting

Photo: Supplied

Any investment platform should be easy to use and have an intuitive online interface. It’s helpful when offshore investment reports are done in the currency of your choice and integrated with reports for local assets.

Research and portfolio construction

A thoroughly researched guided fund range can help highlight the best fund managers across different fund categories and sectors. Your wealth manager might employ

the services of a discretionary fund manager and your selected investment platform should be able to host their investment proposition equally well.

Transparency

Complete transparency is required with regard to fees and any potential conflicts of interest. Independent platforms offer ‘best of breed’ investment options from a wide range of both active and passive funds, rather than a narrow fund range biased towards one investment manager.

Long-term commitment

Finally, is your investment platform committed to the SA market? Their business model should be sustainable in order to continually invest in improving their service and technology. Offshore platforms that are owned by SA companies tend to be more familiar with our regulations and tax laws and are more eager to assist and resolve any issues that may arise.

Michael Summerton is the head of proposition and marketing at INN8.

INN8 is an independent, Jersey-domiciled investment platform of the future, where your new offshore investment is set up and in the market in less than 48 hours. Selecting us means no longer having to complete forms and couriering your personal documents overseas. Speak to your wealth manager today to kickstart your money’s offshore plan and achieve your financial objectives.

INN8 is a registered trademark of STANLIB Wealth Management (Pty) Limited, an Authorised Financial Services Provider, with license number 590 and registered office residing at 17 Melrose Boulevard, Melrose Arch, Johannesburg, 2196, South Africa; and a registered business name of STANLIB Fund Managers Jersey Limited, regulated by the Jersey Financial Services Commission, with registration number 30487 and registered office residing at Standard Bank House, 47-49 La Motte Street, St Helier, Jersey JE2 4SZ. © 2019 INN8

Visit inn8.co.za for more information 32

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that look your client gets when you decide to take it off.

Offshore, that is.

Our simple to use, digital offshore investment platform means your clients will always have a real-time view of their investment.

Even if they are a bit old school.

PURPOSE BUILT. Adviser inspired. quazar.co.za • INN8/OFF/005

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Photo: www.stonehagefleming.com

cover story investment

not easy sailing through the murky waters of depressed global shares.

“Right now, it is taking extraordinary effort and skill to determine these [company] prospects, given the difficult trading circumstances forged by near-global lockdown,” says Ninety One’s Sewnath.

“Traditional metrics depending on dividends have been skewed by withheld dividends in key offshore sectors such as banks. The downdraught has pulled down the mighty together with the weak, and there are some very tempting situations, particularly in the North American market.”

Another view holds that before the outbreak of the pandemic, equities in developed markets were correctly priced.

“Our view throughout 2019 and into the crisis was that global equities, especially in developed markets, were fully priced and we were consequently underweight the asset class,” says Coronation’s Lineveldt. “Given the sharp sell-off, we are generally more constructive on global equities going forward as valuations are very attractive.”

Once the pandemic has passed, he believes that companies’ profitability in developed markets will recover as they benefit from a combination of “unprecedented” fiscal stimulus, record-low interest rates, low energy prices and pent-up consumer demand when lockdown measures are lifted.

The outlook for shares in developing markets, however, are less rosy.

According to Lawrenz, the damage in emerging markets will potentially be substantially greater than in developed markets.

“For now, it makes sense to reduce or avoid exposure to them,” he says. “Some of these countries may experience systemic failure.” The focus should, at this stage, be on quality stocks in regions that have the combination of the ability to respond coupled with the willingness to respond, according to him.

Some funds are gauging what the world will look like following the pandemic.

“We believe we face a ‘new normal’ in many different aspects once the Covid-19 issues are over,” says Gerrit Smit, head of equity management at Stonehage

Fleming. “Our dependence on technology may continue to increase and we believe the health sector will remain a focus area of many governments and continue to offer many solid investment opportunities.”

Smit has his reservations about whether world travel will soon return to normal levels and is worried about subsequent overcapacity in this sector.

Global fixed income

On the other hand, the fixed-income markets will likely remain resilient, especially government bonds.

This is evident from the monetary and fiscal stimulus packages announced in all major economies.

“Global fixed-income markets will remain well-supported by massive quantitative easing programmes,” says Absa’s Benn. “Moreover, global central banks are committed to keeping interest rates low until we are well into the global economic recovery.”

Momentum’s Adsetts expects interest rates in developed markets to be low or even negative in some countries “for as far as the eye can see”.

Will this easy cash find its way to consumers in order to spend the economy back to life, or will it, as it happened after the 2008 and 2009 financial crisis, get pumped into assets, leading to asset inflation?

“Many lessons were learned post-2008, and the prospect of seeing stimulus either stuck inside banks or spent on asset purchases and buybacks is an unpleasant one,” says Sewnath. “We believe that with the enormous monetary stimulus joined by fiscal stimulus, much sooner than at the comparable point in the global financial crisis of 2008, the money should reach its intended homes much more effectively this time around.”

Fund managers are divided about the inflationary outlook, which is a key consideration in the pricing of longer-dated bonds. The underlying debt of a bond is a fixed amount which gets eroded by inflation over time.

The price that investors are willing to pay for a bond is dependent on the investors’ outlook on inflation, which gets discounted into the price.

The current environment is “inherently disinflationary” and therefore there should be no

Gerrit Smit Head of equity management at Stonehage Fleming

“Traditional metrics depending on dividends have been skewed by withheld dividends in key offshore sectors such as banks.”

The rand’s support to offshore portfolios it makes SA fixed-interest investments relatively less attractive, he says.

The depreciation of the rand against the dollar this year supported local investors with offshore holdings, even as those holdings declined in termsName The rand tends to be highly dependent on global growth as it is one of the xxxxxxxxxxxxxxxx most liquid emerging market currencies, according to him. of their local currencies. The rand’s weakness may be extended too far.

“On almost any metric you care to use, the rand is very weak indeed,” “Our view is that the rand is oversold, although when we could expect to says Sangeeth Sewnath, deputy managing director of Ninety One (formerly see currency strength is anyone’s guess,” says James Klempster, director of investment management at Momentum Global Investment Management. Investec Asset Management). “But ultimately its level in the shorter term is a function of liquidity, not valuation.”

The 2.25 percentage point repo rate cut by the South African Reserve He explains that even as SA is not importing much during the Bank this year is welcome in order to boost local economic conditions, but

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concerns about inflation in the short term, says Ashburton’s Lawrenz. “Monetary policy support through interest rate cuts do not easily translate into inflation as much of the world’s consumers are in lockdown, unable to resume normal buying patterns,” he explains.

The lower interest-rate environment – although not great in terms of returns for investors – may have an added benefit to companies who borrow in the bond market.

“It will also help leveraged businesses survive by cutting the cost of capital,” says Lawrenz. “Post the crisis, one may expect businesses to begin shifting global supply chains as risk assessments may point them away from the lowest cost supplier to the lower risk supplier. This may translate into higher input costs being passed on to consumers in time.”

Sewnath reckons it is too early to comment on the inflation prospects, “but given the catastrophe in job markets and subsequent expected slump in demand, inflation may be the least of our problems”.

From an economic output perspective, the global production setup may be key to whether inflation picks up or not.

“While the global economy will get back to work, there will be significant excess capacity in major industries such as hospitality, travel, tourism and retail shopping centres,” says Benn. “The excess fiscal debt will also be a long-term drag on economic growth.”

Therefore, taxes will need to rise “systematically to repay the debt”, he says. “These are large disinflationary forces which should support fixed-income assets.”

These high government debt levels may pose future financial risks.

“We remain very negative on developed market government bonds, given sovereign debt levels,” says Coronation’s Lineveldt. “For example, the US fiscal deficit in 2020 is estimated to be the highest since the Second World War – at up to 18% of GDP – and debtto-GDP is expected to eclipse 100% by next year.”

After two decades of declining inflation, he is concerned that “all of this fiscal and monetary stimulus will ultimately be inflationary over the very long term”. ■ editorial@finweek.co.za

government-imposed lockdown and with oil being “extremely cheap”, the country is also exporting almost nothing, meaning the rand has found a temporary level.

“The sooner the mines reopen, the sooner an equilibrium level for the rand will be found,” he says. Whether that is higher or lower than its current level is hard to tell, but the balance of probabilities favours strengthening from these levels in the medium to longer term, he says. ■

By James Crawford

Guernsey is the solution for South African structuring The international business development director at Guernsey Finance explains why this global centre should be considered by local investment managers.

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Castle Cornet on Guernsey, one of the English Channel Islands off the coast of France.

hy would South African investment managers structure their funds in Guernsey? There are many compelling reasons.

South Africans often invest their offshore allowance into mutual funds operated by the same fund managers who manage their money at home – names including Momentum, PSG, Peregrine, and SA Alpha Capital Management – but domiciled in a specialist finance centre such as Guernsey.

Following relaxation of exchange controls, investment managers in South Africa have realised not only the opportunity to reinvest client money outside the country, but also to encourage inward investment from overseas institutions and individuals.

Guernsey, a specialist global centre for investment funds, has made significant gains in the number of locally domiciled funds registered to be sold to retail investors in South Africa.

Official Financial Sector Conduct Authority (FSCA) figures from earlier this year show that Guernsey had moved into the top three of foreign markets for SA managers looking to sell back into their domestic market, with a near 25% market share for new fund portfolios.

Guernsey is recognised in South Africa as a quality jurisdiction, well-regulated and well-managed, with significant substance behind businesses, and offering tax neutrality.

We are Europe’s leading specialist centre for private equity administration; the number one location outside of the UK for London-listed funds; are whitelisted as a non-harmful tax jurisdiction; and offer a simple funds regime with respected and responsive regulation.

I was in South Africa in the early months of the year, seeing the vibrant and diverse private equity and venture capital market in the country and the demand for a new fund domicile to work with.

As South African managers seek the comfort of stability, security, sustainability and substance in politically and economically turbulent times, Guernsey offers the solution. ■

James Crawford is the international business development director at Guernsey Finance.

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finweek 7 May 2020

35

in depth banking

ASSESSING BAN COMPLICATED COVI

t

Local banking stocks have been under pressure for a number of years, and the their insights about the investment outlook for this sector, which will be h

hough there are 19 locally registered banks doing business in South Africa, the banking sector continues to be dominated by five players, which together hold the majority of all assets in the sector. Any retail investor looking to pick a performer among local banks will almost certainly be weighing up their options from the big five.

The banking sector has been under significant pressure for years, with expectations of economic recovery in SA continually deferred. In the second half of 2019, PwC, in its Major Banks Analysis report, said banks are sensitive to stresses in the domestic economy and the broader global economic context.

Lacklustre growth meant heightened credit risk and subdued economic activity across all customer segments, which contributed to earnings pressure, the report said. And that was before Covid-19 and lockdown laid waste to remaining economic activity.

According to the South African Reserve Bank’s (SARB’s) sector trends report from February, shortly before Covid-19 entered our consciousness, the sector controlled just more than R6tr in assets, 9.7% up on the prior year, with R4.4tr in gross loans and advances, R1tr in home loans and R986bn in term loans.

Sector returns on equity were down from 15.9% to 14.3%, return on assets was down from 1.29% to 1.14% and the sector’s cost-to-income ratio had slid from 57.3% to 58.6%. Capital adequacy had also declined from 16.3% on average to 16.2%.

Covid-19 wrought destruction on banking shares as investors weighed up the prospects of loan books turning bad, transactional activity grinding to a halt and the large-scale liquidation of investments to obtain much-needed cash.

It is a bleak picture. Going by order of market capitalisation, FirstRand has shed 37.7% of its share price in 2020 to R221bn at a price-to-earnings ratio (P/E) of 7.7 times. Standard Bank has lost 44.8% of its value to R150bn and is trading at a P/E of 5.2.

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finweek 7 May 2020

Chris Steward Portfolio manager at Ninety One

Zaid Paruk Portfolio manager at Aeon Investment Management

Capitec, now worth R108bn, has lost 35.6%, though its P/E remains a sturdy and demanding 17. Absa is down to R67bn, having shed 67% of its value since the beginning of the year and is at a P/E of 4.5.

Nedbank brings up the rear after losing 67% to be worth R43bn at a lowly P/E of 3.3.

Some investors may take a look at the “cheap” valuations on offer in the sector but may be wary of how to sort the wheat from the chaff in an environment where seemingly every company has shed value in irrational sell-offs.

Chris Steward, portfolio manager at Ninety One (previously Investec Asset Management), says a great deal of action in a very short time has changed the investment landscape materially. “Most banks reporting recently had recorded small single-digit earnings increments downwards or upwards for the last year, with Nedbank the weakest and FirstRand the strongest. But the global economy was looking reasonably supportive.

“When stocks are sold off as aggressively as during March, relative performance becomes less pronounced because it looks like they have all been annihilated. Some may have outperformed, but it’s less noticeable,” he says.

Before Covid-19 a quality bias in pricing was emerging, Steward says. “Banks with stronger capitalisation, better organic earnings generation, better performance track records of capital allocation and management delivery, like FirstRand, Capitec and to a lesser degree Standard Bank, were separated from the bottom performers by a good 20%.”

According to Steward, cuts in interest rates – already greater by April than expected for the whole of 2020 – are generally negative for bank earnings, since free capital plus interest-free deposits are reinvested at lower rates. “In a traditional cycle banks get compensation from an uptick in credit as consumers and corporates take advantage of cheaper

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in depth banking

NK QUALITY IN A D-19 ENVIRONMENT ID

share sts share Analysts prices.. Analy share prices on share ction on destruction ht destru wrought -19 wroug Covid-19 of Covid arriva arrivall of mic. pandemic. the pande of the es of quences consequenc mic conse economic the econo by the ned by burdened heavil heavilyy burde

Picking a winner

Photos: Photos: Supplied Supplied II Shutterstock Shutterstock

Experts weigh in on the outlook for local banking shares.

Ninety One’s Chris Steward says he has a bias towards good balance sheets. “Capital adequacy would generally steer me towards FirstRand and Capitec. Between those two I would prefer more diversification and select FirstRand as a consequence. Banking is a tough place to be and although valuations are attractive, I wouldn’t charge in just yet. Absa and Nedbank are trading on very low P/Es, but that’s based on historic revenue. On a forwardearnings basis the picture would be different.”

Aeon Investment Management’s Zaid Paruk says despite depressed valuations he would also remain cautious in calling a turning point in light of a poor fundamental economic outlook. “We believe earnings diversification is most important and Standard Bank is our preference in the sector. We will be adding to our current underweight position as the valuation and fundamentals improve.”

Denker Capital’s Kokkie Kooyman and Jan Meintjies have

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slightly differing views on sector winners. Kooyman selects Standard Bank and FirstRand as best-placed.

“Capitec is, in theory, most at risk due to where it lends, but we’ll see how good their credit scoring was, but given valuations this is an excellent time to be picking up Capitec and FirstRand, depending on your investment time horizon. If your time horizon is shorter, Absa and Nedbank should bounce back hardest when the market bottoms.

“In general, however, it’s a dangerous time to pick individual stocks because you won’t know which bank has unexpectedly large exposure. The whole sector has been sold down so I would rather just get the diversification offered by a good financials fund,” he says.

Meintjies points out that Capitec’s total credit book is protected from retrenchments and liquidations through thirdparty insurance and does not have the same corporate exposures as its competitors. “They may have the riskier book as far as retail banking goes, but I think they are better-placed compared with other banks.” ■

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By Brendan Peacock

borrowing. But the usual credit quality improvement associated with lower rates will not eventuate in the wake of Covid-19.”

With Mastercard reporting that transactional activity in SA has effectively fallen off a cliff during lockdown, banks lose out on their bread-and-butter earnings. No ATM withdrawals, no point-of-sale transactions, no corporate advisory work. The only upside is increased trading activity that brings fees. “There is the potential for an unprecedented uptick in non-performing loans and impairments, even superseding what we saw in the 2008 global financial crash. Bank earnings could fall by 40% year-on-year,” says Steward.

Essentially, Covid-19 doesn’t change the picture of quality in the sector, Steward adds. “The less well-positioned franchises like Absa and Nedbank have arguably less capital, generate lower returns on equity, and can generate less organic capital.”

What has confused the investment outlook has been the Prudential Authority’s (PA’s) interventions to ensure liquidity and capital adequacy in the sector.

“During a crash like this investors start withdrawing from funds, fund managers have to liquidate assets to give cash to investors, and typically government securities are sold off. Banks have to make a market, but then need to shore up their own liquidity. The first thing the PA did was to reduce Basel regulations from 100% to 80% to give banks the liquidity headroom to meet extraordinary demands for cash.

“Then the SARB went to market to buy government securities, which was portrayed less as quantitative easing and more as simply restoring functionality to the bond market. The second step taken by the authorities was to recognise the extraordinary demand for credit in a lockdownaffected economy. But banks worry about their books and the ability of borrowers to service their debts, so the PA announced that banks could eat into regulatory buffers to keep lending,” he explains.

finweek 7 May 2020

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in depth banking

Finally, the third important step was to allow banks to deal with an expected spike in non-performing loans. “A flood of loans could move from fullyperforming to stage 2 and even to stage 3, which is non-performing. When that happens and customers are recognised as being in distress, typically banks run into IFRS [international financial reporting standards] accounting issues that would cause their capital provisioning requirements to shoot up. Covid-19 has led to payment holidays or incremental liquidity for borrowers, to change contractual terms of loans and avoid accounting difficulties,” Steward says.

The obvious danger is that banks will have a hard time telling the genuine cases of Covid-19 hard-luck cases from customers who have less legitimate claims. Each bank’s loan book has millions of customers. “I know which route I’d prefer as a shareholder and which is more practical, and they aren’t the same,” says Steward.

The PA also initially announced that banks should pay no dividends, and then changed their minds. FirstRand had already paid its dividend, but subsequently Capitec elected to hold onto its payout as it eyed a tough and uncertain 2020.

The problem with these interventions, from an investor’s point of view, is that the regulator cannot discriminate between banks. According to Steward, this is the same globally. “Thinly-capitalised and wellcapitalised banks alike are told not to pay dividends.

It’s a false hobbling of the best runners in the race and generally we’ve been prepared to pay a premium for banks with better balance sheets, higher ROE [return-on-equity], and long-term capital allocation records. If you run a bank well and generate organic capital and can still pay a dividend, you’re hamstrung because other banks can’t. Any discrimination between banks by the regulator may lead to fears about some banks’ business models and a run on those banks by depositors.”

Kokkie Kooyman and Jan Meintjies, portfolio managers at Denker Capital, agree that the more diversified banks and high-quality operations will be best placed to deal with non-performing loans.

“The banks with the lowest cost-to-income ratios and highest capital ratios will be best placed, though I’d say all our banks are in good shape and have been cautious growing their books. Consumer loans like credit cards and personal loans will see the highest

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finweek 7 May 2020

Kokkie Kooyman Portfolio manager at Denker Capital

Jan Meintjies Portfolio manager at Denker Capital

percentage of bad debts. The segment showing the highest growth rate over the last 12 months has been personal loans, and this is where the pain will come from. A lot depends on how quickly lockdown ends and, for example, when tourists start coming back,” says Kooyman.

In order to boost liquidity in the economy, the government announced a R200bn loan guarantee scheme, supported by the SARB, to entice banks to continue lending amid the lockdown.

As for corporate banking, Kooyman says he has no reason to believe any corporates may fall over as a result of Covid-19, with the exception of Edcon. “But there will be pain. Retailers who have sold on credit will suffer.”

Zaid Paruk, portfolio manager at Aeon Investment Management, expects a risk-off mentality to persist after Covid-19 has passed. “We have seen a sharp rise in unsecured lending in the recent past. Of the traditional banks, excluding Capitec, the impairment provision as a percentage of the gross loan book is the most conservative at FirstRand, at 4.4%, with Nedbank the least conservative at 2.3%. Due to lower interest rates, all banks will see income dropping going forward on lower net interest margins. Some banks are more exposed to certain economic sectors than others, which means Covid-19 will have different consequences for different banks, but information is still limited at this point and will only come to light once transparency on non-performing loans starts to flow into the market.”

Paruk says local banks with offshore operations, such as Investec, may not necessarily have an advantage. “Almost half of Investec’s loan book consists of mortgages and commercial property advances. In an environment with valuations under pressure, we expect to see lower activity levels as property owners are ‘nursed’ back to good health.”

Kooyman agrees that while it depends on the particular footprint of the banks, certain local banks have been operating in other territories for a long time. “I don’t foresee a problem. Having said that, oil-producing countries like Nigeria and Angola are already battling and both Zambia and Zimbabwe are struggling, so exposure there right now is a negative.

The general rule is that if you can be on the front foot, this is an excellent time to take market share and buy competitors who struggle.” ■ editorial@finweek.co.za

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Photos: Supplied

The obvious danger is that banks will have a hard time telling the genuine cases of Covid-19 hard-luck cases from customers who have less legitimate claims.

in depth banking

Digital banks and the new normal Will digital retail banking continue cashing in post-lockdown?

Retailers, telecoms operators, fintech start-ups and fully digital banks are all vying to take a slice of the banking pie, whether through mobile payments, lending, deposits or asset management. Traditional banks are coming under additional pressure to provide more flexible digital channels and bank account value to defend market share.

Discovery and TymeBank launched fully digital banking offerings in 2019, with TymeBank already having more than 1m account holders, though fewer than half have been transacting regularly. With the world realising the ability to work remotely thanks to lockdown restrictions, how long before that translates into a headlong shift to digital retail banking?

“The good thing for Discovery and TymeBank is that neither will have a big lending book up and running yet,” says Ninety One’s Chris Steward. “It may be that digital banks can use recent events to push people towards digital banking, but in general the environment remains a difficult sell for them. Neither has yet made enough of an impact to affect the prospects of the big five yet.”

Aeon’s Zaid Paruk says digital upstarts have the capability to operate at a lower cost model because they have no legacy systems in place.

“Distribution channels are fundamental in their expansion, and the partnership between Pick n Pay and TymeBank has been successful due to the specific focus. Discovery has had some challenges in starting up, but the bank’s products are cross-sold with other Discovery products, so it has been expanding its market share off a low base. A branchless, online-only model should be least affected by Covid-19 at this stage, with a small advances book and better credit-quality customer,” says Paruk.

Denker Capital’s Kokkie Kooyman says credit quality will be an important issue, since banks looking to gain market share almost always pick up the highest percentage of bad debts. “TymeBank can thank its lucky stars it hasn’t been able to launch a credit card offering yet. I think Discovery may battle in that potential clients could be reluctant to move while income is uncertain, but if their digital offering is good, I expect they will be back. The drawback is that the lockdown gives the other banks a good three months to progress their own digital offerings.” ■

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FIRSTRAND

52-week range: R31.13 - R71.79 Price/earnings ratio: 7.75 1-year total return: -35.78% Market capitalisation: R221.18bn Earnings per share: R5.09 Dividend yield: 5.81% Average volume over 30 days: 22 998 910

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8 000 7 000 6 000 5 000 4 000

SOURCE: IRESS

3 000

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ABSA

52-week range: R63.30 - R182.72 Price/earnings ratio: 4.53 1-year total return: -42.84% Market capitalisation: R67.16bn Earnings per share: R17.50 Dividend yield: 13.55% Average volume over 30 days: 6 895 749

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CAPITEC

52-week range: R539.86 - R1497.56 Price/earnings ratio: 17.19 1-year total return: -33.18% Market capitalisation: R107.88bn Earnings per share: R54.28 Dividend yield: 0.08% Average volume over 30 days: 659 365

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NEDBANK

52-week range: R67.30 - R280.81 Price/earnings ratio: 3.38 1-year total return: -60.92% Market capitalisation: R44.17bn Earnings per share: R26.05 Dividend yield: 15.32% Average volume over 30 days: 4 350 997

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30 000 25 000 20 000 15 000 10 000 5 000

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STANDARD BANK

52-week range: R84.64 - R210.22 Price/earnings ratio: 5.27 1-year total return: -47.64% Market capitalisation: R150.85bn Earnings per share: R17.67 Dividend yield: 10.57% Average volume over 30 days: 7 789 850

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22 500 20 000 17 500 15 000 12 500 10 000 7 500

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finweek 7 May 2020

39

on the money

>> Motoring: Toyota’s Corolla delivers an appealing Quest p.42 >> Management: Lessons from Covid-19: Understand the wording and structure of your insurance policy p.44

GOLD

By David McKay

Should investors be going for gold?

t

Amid a global influx of easy cash, and the expected subsequent inflationary fallout, the spot price of gold is set for a rally.

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finweek 7 May 2020

Henk Langenhoven Chief economist at Minerals Council South Africa

Gwede Mantashe Minister of energy and mineral resources

compensation of silicosis sufferers who contracted the disease on the mines.

But Covid-19 is calling for a level of organisation that is particularly burdensome to the chain of mining industry logistics. Screening and then testing of employees before entering the ‘cages’ intended to take them underground might only be a process of a few seconds per miner, but in a shift of hundreds it could result in significantly longer lead times.

Even before mining companies can send miners underground, there’s the incredibly significant job of getting them back to the mine premises. This requires a recall of miners from labour-sending areas, some of which are in jurisdictions that have independent lockdown rules such as Lesotho, Zimbabwe, and Mozambique.

“You’ve got to get the right crews in, screen employees before new medical certificates can be issued and complete refresher programmes before new licences can be issued to operate,” said one industry source.

“Our estimation is that it would take almost a week to ensure that mining employees have got their medical certificates and have been refreshed,” he said. Impala Platinum (Implats) has estimated it will take a month before mines can ramp-up to production.

It wasn’t counting on the arrest of Mark Munroe, the head of Implats’ Rustenburg mines. Charged with breaking lockdown rules after issuing a letter to 6 000 employees asking them to assemble for work, Munroe’s arrest is what happens in the absence of joined-up thinking.

In a galaxy far away

Far beyond the mine gate, in a distant galaxy known as the global financial system, forces are combining to make gold mining an enormously profitable endeavour.

In fact, analysts believe the seeds have been sown for a long-term bull market for gold.

The macro outlook for the global economy is murky at best, at least for the next quarter amid bruising www.fin24.com/finweek

Photos: Gallo/Getty Images

he government’s plan is logical on paper: Get the mining sector operating again and a substantial part of the secondary and tertiary sectors that supply it will also be kicked into motion.

It makes perfect sense given the centrality of the resources sector to the economy as an employer, taxpayer, and earner of foreign exchange. According to data supplied by the Minerals Council South Africa’s chief economist, Henk Langenhoven, SA’s mining industry spent R22.6bn in 2018 procuring goods and services that included items such as R1.8bn worth of wholesale and retail goods, catering and accommodation.

In practice, however, the government’s plan to gradually emerge from the five-week lockdown is proving complex, and fraught. Miscommunication, poorly framed amendments to lockdown regulations, and the sheer trickiness of marshalling roughly half of the 450 000 people the industry employs back to work – the government has targeted 50% mining production by 30 April – is proving a logistical tribulation.

Firstly, the amended lockdown regulations as per government’s 16 April announcement on the extended lockdown confused almost everyone in the mining sector.

“What does that mean, people or tonnes?” asked Richard Spoor, an attorney who represents the Association of Mineworkers and Construction Union (Amcu), of government’s 50% production target.

Spoor also asked minister of energy and mineral resources, Gwede Mantashe, to couch additional guidelines in terms of the Mine and Health Amendment Act. That’s because miners face Covid-19 breakouts once operations restart. The last thing the sector needs is nebulous and ad-hoc direction.

It’s true that mining companies are extensively equipped, and have experience, in dealing with disease as evidenced in the sector’s rollout of HIV/Aids treatment, as well as screening and testing for tuberculosis.

More recently, the sector set down plans to tackle the

on the money spotlight

“As long as markets stay orderly, we think this environment should continue to be very constructive for both gold and silver.”

economic data reports and evolving economic fallout containment policies. These policies include the injection of liquidity by central banks, which has the effect of diluting the value of currencies. Set against zero interest on borrowing, a scenario for world markets could be one of low growth followed by high inflation.

This is like sunshine and rain for the gold price.

“As long as markets stay orderly, we think this environment should continue to be very constructive for both gold and silver,” said JP Morgan Cazenove analysts in a recent report. The bank sees gold trading higher to between $1 800 and $1 850 per ounce on a spot basis around the middle of the year.

“If you want a bull case for gold, look no further than this chart,” said Tyler Parrent, director of institutional equity trading at RBC Capital Markets, pointing to an almost vertical increase in US money supply. “While the US government might be downplaying potential inflation, this growth is staggering,” he said.

This new money began with the preEaster $2.3tr ‘bazooka’ issued by the US Federal Reserve aimed at keeping the financial system soupy, even as investors liquidated assets, even gold to some extent.

$2 000 an ounce?

There’s no escaping the economic impact of Covid-19, however; only amelioration. According to Ole Hansen, head of commodity strategy at Saxo Bank, dollar gold’s current value of about $1 700 an ounce is a temporary resting place before marching higher. Some think higher: Newmont Mining CEO Tom Palmer, and Edward Morse, global head of commodities at Citi Research, told Bloomberg News in separate interviews that gold could test $2 000 an ounce in the next two years.

“The level of stimulus currently going into the global economy is likely to support gold over the coming years with yield curve controls likely to push real yields deeper into negative territory,” said Saxo Bank’s Hansen.

Following the ‘bazooka’, yield curve controls are a different tactic being adopted by the US Fed in which it focuses on achieving a targeted level for interest rates by intervening in debt markets. This is done partly by buying government bonds and differs from the bazooka – or quantitative easing – which was about increasing the stock of money in the economy. @finweek

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The common aim of both, however, is to soften the blow of global recession. The way some economists describe it has positively blood-curdling effects: 2020 could be potentially worse than the Great Depression about 90 years ago. Only India and China are expected to end 2020 with positive GDP growth numbers.

Given the weakness in the rand, a function of the recent downgrade of SA’s credit rating as well as broad macroeconomic forces brought about by Covid-19, this makes for some handsome pickings for the gold price received by SA gold mining firms.

“I would agree that the outlook is very supportive given the economic slowdown facing the world and the amount of liquidity that has been injected into the global economy recently,” said James Wellsted, a spokesperson for Sibanye-Stillwater.

“This is good for the dollar gold price and for the SA gold producers who have the added benefit of a weak rand, which has pushed the rand gold price to unprecedented heights,” said Wellsted.

At the time of writing, the rand gold price was at a record of R1.08m per kilogram. The rand gold price was R530 000/kg when SibanyeStillwater listed in Johannesburg in 2013.

During the global financial crisis of 2008 and 2009, gold started its threeyear run-up to the intraday high of $2 000 an ounce of August 2011 in October 2008 – four months before the bottom of the market which occurred in February 2009, said René Hochreiter, an analyst for Noah Capital.

“What could happen this time? The warp speed of markets today may see a shorter period, maybe two years. The case for a $2 500 an ounce gold price by end-2020 with a range of $2 000 to $3 000 in 2021,” he said in a note.

Maybe. Only that gold price forecasts are almost always wrong, especially enthusiastic ones. JP Morgan, for instance, sees the gold price moderating again in 2021 as the world economy rebounds.

“If you look at the gold price, there are grounds for optimism, yes,” said Stewart Bailey, spokesperson for AngloGold Ashanti, which runs the world’s deepest gold mine, Mponeng.

“But right now, there are a lot of unknowns out there – here in SA and across the globe – so the immediate focus is ensuring our business and our communities remain resilient through the end of this crisis, and beyond.” ■ editorial@finweek.co.za finweek 7 May 2020

41

on the money motoring

By Glenda Williams

Beefed up and more bang for your buck

s

Toyota’s SA-made new Corolla Quest delivers an appealing and sensible proposition.

edans are becoming a trifle passé as buyers globally gravitate toward SUVs. But the Toyota Corolla and its more affordable Corolla Quest sibling remain hits on the domestic front.

The Toyota Corolla Quest is unique to South Africa and the latest generation comes with a bigger engine, beefed up specification level and an enticing price tag.

Manufactured at Toyota’s Durban Prospecton plant, the new Quest is based on the outgoing 11th-generation Corolla.

That brings improved specifications, enhanced safety features, modernised styling and, when compared with the cost of the outgoing Corolla, hefty savings.

The Quest’s engine has also been upsized from a 1.6-litre to a 1.8-litre coupled to either a 6-speed manual or CVT gearbox. An expanded line-up now offers three trim grades (Standard, Prestige and Exclusive) and six models. finweek took to the roads amid challenging weather conditions in the range-topping Toyota Corolla Quest Exclusive CVT.

Exterior facelift

External changes to the popular four-door sedan are mainly cosmetic, most noticeably when viewed head-on. It is arguably more handsome than its predecessor.

The front bumper has been updated, with the Standard and Prestige models utilising a continuous matte-black lower apron, while the Exclusive boasts partial colour coding. Headlight trim now matches the grille treatment, while at the rear the number plate garnish has been changed from chrome to body colour.

Inside story

It might be a compact sedan, but the cabin is anything but. It’s roomy with comfortable black leather seats with silver contrast stitching and a leather steering wheel. Soft-touch plastic on the dashboard is evidence of the durable yet quality materials used in the interior.

All models feature auto door-lock with remote operation, electric windows, air-conditioner, steering wheel switches, follow-me-home headlamps, radio/CD with USB/Bluetooth and a minimum of

four integrated speakers.

The Exclusive model is equipped with an upgraded touchscreen infotainment system with six speakers, reverse camera, cruise control and auto air-conditioner, push start with keyless entry, TFT-colour instrument cluster, rain-sensing wipers and LED headlamps.

Safety features have also been amplified. All Quest models now come with driver, passenger and driver-knee airbags while the Prestige and Exclusive models also have side airbags. ABS braking, hill assist, vehicle stability control and ISOFIX mountings (child restraint system), LED daytime running lights and rear fog lights are standard across the board.

The Quest does much of its work on the road as a ride-hailer, so rear passenger comfort and space is important. The car offers both. Legroom is impressive, there’s ample headroom and the rear seats, which can be split 60/40, are comfy.

Apart from noise insulation that could be improved, there’s little evidence of quality cuts in the cabin. But in the boot area there’s a conspicuous gap

The Toyota Corolla Quest’s facelifted facia and significant spec upgrade correspond to a great value offering.

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finweek 7 May 2020

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on the money motoring between the boot lid and body. Shutting the boot, too, is no soft-closing affair. Still, in true Corolla style, the boot is capacious, and all models feature a full-size spare wheel.

TESTED:

Photos:Supplied Supplied Photos:

Toyota Corolla Quest 1.8 Exclusive CVT Engine: 1.8-litre petrol engine Power/Torque: 103kW/173Nm 0-100km/h: 10.2 secs Top speed: 195km/h Transmission: CVT (6-speed automatic) Fuel tank: 55 litres Fuel consumption (combined cycle): 6 litres/100km CO2 emissions: 150g/km Safety: Driver and passenger airbags; driver-knee airbag; side airbags Luggage capacity: 452 litres Warranty/Service plan: 3 year/100 000km warranty 3 year/45 000km service plan Price: R317 700 The platform that underpins the new Corolla Quest is identical to the 11thgeneration Corolla.

hailstorm, I found the performance of the six-speed automatic more pleasing. Ironic perhaps, given that I’m a bit old school and thoroughly enjoy the engagement that comes with driving a manual.

The (stormy) road travelled But the gear ratios felt slightly out of Toyota’s cabins have always been driversync on the manual. With a high-revving friendly and that holds true for the Quest. engine and torque peaking at much It’s easy to just get in and drive. higher revs, at high speed I found myself Still, driving in adverse weather searching for another gear. This, however, conditions is testing, more so when you is unlikely to deter buyers who are less are driving a vehicle that you’re not too likely to be driving at high pace and more familiar with… The launch likely to be impressed by of the new Quest delivered added power, improved Toyota’s cabins have specs and cost savings. one such unexpected challenge in the form of a There was more finesse always been driver- to the rather nasty hailstorm.

CVT automatic and Water-logged roads and that made for a far more friendly and that pounding hail resulted in harmonious and effortless holds true for the a more circumspect drive performance. All told, the than usual. But the testing Quest Exclusive Quest. It’s easy to Corolla weather conditions allowed CVT delivered a solid for a better understanding just get in and drive. performance; steering was of how the car performs in well-weighted and direct, adverse conditions. the ride comfortable, and Rolling on 16-inch alloy the front-wheel drive wheels shod with 205-55-R16 rubber, sedan was stable on the road. the Quest cut effortlessly through the wet Ironically, given the bigger engine, fuel roads while its large auto rain-sensing consumption is better than the outgoing windscreen wipers more than matched 1.6-litre mill, listed as 7ℓ/100km for manual the hail. The Quest came away mostly models and 6.3ℓ/100km for CVT models. unscathed and even its windscreen was The new Corolla Quest is a pleasing drive impervious to the hailstones. and its few foibles do not, in my opinion, Back in blue skies and sunshine detract from a good overall package. the next day, I was able to put the Meshed with Toyota’s hallmarks of reliability Quest through its paces. Having and robustness, this compact sedan boils driven the manual variant on down to real bang for your buck. ■ editorial@finweek.co.za the previous day prior to the

KEEPING THE QUEST’S COST DOWN FOR SA BUYERS “Understanding that there is still a need for an affordable sedan in our market was one of the driving factors in developing the new Corolla Quest," says Glenn Crompton, vice president of marketing for Toyota South Africa Motors (TSAM).

The Corolla Quest underwent a thorough development programme aimed at maintaining quality, reliability and durability while implementing cost reduction, ultimately benefitting the customer. A more efficient production line, component part commonisation between model ranges, additional localisation and tweaking the specification of the vehicle have all contributed to cost savings.

Fitting a bigger engine invariably comes with higher costs, but TSAM says the 1.8-litre is standardised across more Toyota models globally against the previously fitted 1.6-litre engine. That, they say, provides cost and sourcing benefits.

The previous-generation Quest and Corolla duo racked up a combined 136 880 unit sales (Quest contributing 63 966 units), making them SA’s most popular sedans. The pair achieved a 71% share of the compact sedan C-segment.

Prices of the new Toyota Corolla Quest range from R249 900 to R317 700. ■

@finweek

finweek

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finweek 7 May 2020

43

on the money management

By Amanda Visser

Insuring against a pandemic

m

Many businesses that are not allowed to operate normally due to measures being taken to curb the coronavirus outbreak are finding that their insurance doesn’t cover Covid-19-related losses.

Policy structure and wording

Dinnie warns that companies will have to look carefully at the structure and wording of their policies, especially the “business interruption” wording.

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finweek 7 May 2020

Donald Dinnie Director at law firm Norton Rose Fulbright

He refers to a case brought in Illinois in the US where it was argued that the presence of, or contamination by, coronavirus constituted physical impairment to the property.

The Big Onion Tavern Group, owners and operators of restaurants and movie theatres in Chicago, was forced by the state of Illinois to cease their operations as part of the state’s efforts to slow the spread of the Covid-19 global pandemic. The group argued that the closures presented an existential threat to these small, local businesses. In an effort to protect the businesses, the group obtained business interruption insurance from an insurance company, Society Insurance.

The insurer denied claims arising from the stateordered interruption of their businesses. They based their denial on the assertion that the “actual or alleged presence of the coronavirus”, which led to the closure orders, did not constitute “direct physical loss”.

However, the court found that Society Insurance’s policies did not have an exclusion for loss caused by a virus. The Big Onion Tavern Group therefore reasonably expected that the insurance they purchased from Society Insurance included coverage for property damage and business interruption losses caused by viruses such as the coronavirus.

Mind the exclusions

Pamela Ramagaga Acting general manager for insurance risks at the SA Insurance Association

PJ Veldhuizen Managing director at law firm Gillan & Veldhuizen

The court said the insurance industry has created specific exclusions for pandemic-related losses under similar commercial property policies. These specific exclusions undermined Society Insurance’s assertion that the presence of a virus, like the coronavirus, does not cause “physical loss or damage” to property.

Indeed, if a virus could never result in a “physical loss” to property, there would be no need for such an exclusion, the court found.

Dinnie says in general SA courts require there to be physical damage or an alteration to the structure for the claim to be successful.

“It is not good enough that there is contamination.

However, the question is whether the impairment of use and function constitute physical damage as well.”

There are many businesses which are not directly or physically affected by the coronavirus but are losing income because of the statutory lockdown under the Disaster Management Act. “None of those are indemnifiable under the traditional defined events under the business interruption section of the policy,” says Dinnie.

He notes that there are instances where there are specific extensions to the cover. It depends on what www.fin24.com/finweek

Photos: Supplied I www.gvinc.law.za

ost South African businesses – big and small – are being affected by the global outbreak of the coronavirus and the subsequent harsh measures to curb the spread of the disease.

Many are now fervently reading their insurance policy documents trying to find answers to their financial woes. However, very few will be finding the answers they’re looking for.

Donald Dinnie, director at law firm Norton Rose Fulbright, says many will be looking to see if their insurance policies include business interruption, liability and event cancellation clauses.

A business interruption policy, a form of a contingency policy, underpins an underlying property damage insurance policy such as an assets all-risks insurance policy, a machinery breakdown or a marine hull policy.

Pamela Ramagaga, acting general manager for insurance risks at the SA Insurance Association (SAIA), says business interruption insurance is not sold as a separate policy, but is an add-on to an existing insurance policy.

“This also means that a business interruption claim would normally only be triggered if there is physical damage to an insured property from an insured peril or occurrence or risk.”

According to A-Z Claims Adjusters, based in Florida in the US, the top five causes of business interruptions include fire or explosion (44%), natural catastrophes or water damage (43%), supplier failure (33%), cyberattacks (29%) and machinery breakdown (29%).

Ramagaga says some common types of contingency policies are linked with sports, leisure and entertainment and can encompass a multitude of exposures such as an event cancellation policy, which provides for financial loss due to cancellation, abandonment, postponement, interruption, curtailment or relocation of any type of outdoor or indoor event due to, for example, a force majeure.

“A force majeure is a circumstance beyond one’s control, such as an earthquake, hurricane, natural disaster or freak accident, unless specifically excluded.

Cover can be for expenses or a loss of gross revenue and includes additional expenses to mitigate any loss – very much like a business interruption-type cover,” she says.

on the money quiz & crossword type of business is being insured. In the case of the hospitality industry, it is possible that the insured business has taken an extension for events such as cancellation of bookings.

There are policies that provide, under extensions, cover for loss caused by infectious diseases. But, he says, policies may have a “general section” that contains “general conditions and exceptions” that may have a “catch-all exclusion”, for example infectious diseases.

Dinnie says chances are that most policies only contain the traditional wording (requiring physical damage for a business interruption contingent policy cover to be triggered), which will not assist in the current environment.

It’s tough times for businesses, he says. They’ll need to take a hard look at their policies and the extensions they have, and they’ll need to get advice from their insurance brokers or legal representatives.

Proper risk analysis

“Often insurance is an afterthought,” says Dinnie.

“Maybe the lesson from the Covid-19 outbreak is to properly consider the risks and to properly underwrite the risks, where traditionally it has been done on a standard basis.”

He says it is not unthinkable that insurers will ensure that pandemics or epidemics are excluded from cover because of the significant financial exposure to the insurance industry.

Insurers may be amending their policies in the next few months to exclude Covid-19-related claims, so that if there is a resurgence in 2021, they will not be exposed to it.

There are some specialised insurance policies that can protect against more unusual risks or against specific situations which could completely derail a business that has taken many years to build, says PJ Veldhuizen, managing director of law firm Gillan & Veldhuizen.

This includes key person insurance, contingent liability insurance, life insurance on co-owners and business overhead expense disability insurance.

The coverage of each policy depends on its structure and wording. Some policies from different insurers which are superficially similar may actually be very different.

Veldhuizen, a board member of the South African Institute of Tax Professionals, warns that some insurance policies may have tax implications, particularly in the context of estate duty.

How up to date are you with current affairs? Find out by completing our latest quiz online via fin24.com/finweek from 4 May. 1. Former US president Jimmy Carter said that he is “distressed” by current President Donald Trump’s decision to withhold funding to the World Health Organization. In what year did Carter become president?

■ 1976 ■ 1977 ■ 1981 2. True or False? Gwede Mantashe is SA’s minister of mineral and energy resources.

3. SA’s strict coronavirus lockdown has caused miners to divert copper from the country’s ports to others in Africa, with Dar es Salaam the clear winner. In which country is the city of Dar es Salaam?

4. The 2020 Easter road death toll dropped drastically compared with last year’s 162. How many fatalities were there this year?

■ 127 ■ 64 ■ 28 5. True or False? Telkom reached an agreement with the Competition Commission to substantially reduce wholesale broadband access costs.

6. True or False? The head of Impala Platinum’s Rustenburg mining division, Mark Munroe, was arrested on charges of contravening the Covid-19 lockdown regulations in recalling about 6 000 people to work.

7. SA’s big five clothing retailers issued a takeit-or-leave-it offer to pay 20% rent for April to shopping mall owners as they scramble for cash to withstand the Covid-19 outbreak.

Which of the below is not part of the big five?

■ Pepkor ■ Mr Price ■ H&M 8. True or False? The G20 nations announced a one-year debt standstill for the world’s poorest nations as they struggle to deal with the coronavirus pandemic.

9. Finance minister Tito Mboweni said SA may approach the IMF for the first time ever to help with funding to deal with the fallout from the coronavirus outbreak. Who is the current head of the IMF? 10.True or False? The 95th edition of the Comrades Marathon has been postponed indefinitely.

CRYPTIC CROSSWORD

ACROSS 1 Deceive with mock cane (6) 4 A maths puzzle, fit to take one’s breath away (6) 9 Typist needing just two changes to work by professor (4,9) 10 It’s no good starting out in haulage (7) 11 French hens’ Christmas day (7) 12 What computer geeks do at five, say (5) 14 Join editor in supplementary production (5) 18 Has nothing to add to decision (3-2) 19 I heard right! Changing stylist may be responsible for this (3,4) 21 Indistinctly perceived odd naiveness about ague (2,1,5,5) 22 Side with the French in fifty-fifty situation (6) 23 Open car journey by Queen (6)

NO 752JD

DOWN 1 2 3 5 6

Give in an awful lot to involve batsman (4,2) Going price? (9,4) Friends in conflict – not half! (5) Suspect boss is wearing perfume (7) Army conduct in French island is one of aggressive behaviour (7,6) 7 Ordered artist abroad to reveal file (6) (6) 8 Kept in tea or talcum powder vessel (5) 13 Setter very overdue in quarantine (7) 15 Seek false praise (6) 16 Dispute necessity for regular guests (5) 17 Liability for a fancy car comes before auditor (6) 20 Racket coming from the street is loud music (5)

Riskier risks

Ramagaga says there are some risks that are “riskier” than others and are generally deemed “uneconomical to insure”. In SA, for example, reinsurers have found the risk related to drought insurance for the agricultural sector uneconomical due to the high claims experienced.

The question remains whether companies have the capacity to self-insure against risks that insurance companies consider “uneconomical” to insure. ■ editorial@finweek.co.za @finweek

finweek

Solution to Crossword NO 751JD ACROSS: 1 Windermere; 7 & 22 Now now; 8 Tea trolley; 11 Reoccurs; 12 Halo; 14 Raider; 15 Boston; 17 Oral; 18 Memsahib; 21 Propaganda; 22 See 7; 23 Bottleneck

DOWN: 1 Waterproof; 2 Neapolitan; 3 Earaches; 4 Milord; 5 Rued; 6 & 20 Toy boy; 9 Last chance; 10 Point-blank; 13 Consigne; 16 Despot; 19 Brio; 20 See 6

finweekmagazine

finweek 7 May 2020

45

Piker

On margin There’s no manual for this crisis

This issue’s isiZulu phrase is isebenza kanjani. Isebenza kanjani is a phrase that means “how it works”, or it can be used as a question: “how does it work?”

I think most of us don’t really know how any government functions – isebenza kanjani. I just let my imagination do the work. For instance, I imagine Bheki Cele, walking into the president’s office, frustrated: Bra Ramaphosa, we need to ban the yeast.

President: What?

Cele: Ban the yeast.

Jackson Mthembu: We can’t ban a direction.

President: Is he saying we must ban the east?

Cele: Yes, ban the yeast.

President: Let’s not be hasty. Sure, the virus came from China and the Chinese have allegedly been treating Africans poorly, but we can’t just ban an entire region.

Jackson: It’s also kind of racist, comrade.

Cele: With all due respect, what the hell are you on about? I didn’t say that.

President: Oh, you mean

Mpumalanga? Look, I have been thinking about offloading that dump for some time now. Covid-19 could definitely be a good cover to do so.

Jackson: That is a genius plan, President. It is an honour to serve under you.

Cele: Dude, you are from Mpumalanga.

I know your position involves sucking up, but this is just crazy. Anyway, back to the yeast – we need to ban it.

President: We just agreed to do that.

Like right now. Have you been drinking the confiscated booze?

Jackson: It’s that stupid fedora of his.

It’s on too tight.

President: Oh, Jackson, you kill me. I am DEAD. That is how the government works, right? If I am wrong, please tell me isebenza kanjani.

On a serious note – even though I don’t know how it works, the government knows isebenza kanjani. I do know it has been doing a great job in helping ensure the Covid-19 infection curve does not spike. For this they need to be commended and supported.

– Melusi’s #everydayzulu by Melusi Tshabalala

Verbatim

Sardine Bread @SardineBread What’s the difference between coronavirus and Covid-19? Anybody?

Your problems @igben54 Coronavirus is the username.

Covid-19 is the password.

Natalie Gregerson @nattygeeee Turns out my top three hobbies are: 1) Restaurants 2) Bars 3) Non-essential businesses Johann Biermann @JohannBiermann1 Basically, the difference between Level 5 and Level 4 is cigarettes.

Mxolisi Dlams @mxola_dlams Soldiers don’t take money for cold drinks, I repeat “Soldiers do not take money for cold drinks” #21daysLockdown.

Dan Corder On Your Radio @DanCorderOnAir Stop going to gym. You’re trying to flatten the wrong curve.

The Dad @thedad Family Quarantine Diary: Day 41 Just put ketchup on it. Whatever it is, the kids will eat it.

VeryBritishProblems @SoVeryBritish Wondering if an email is still valid if it fails to acknowledge “these strange times.”

Darren Townsend @ForrisHilier You have to sign off with ‘Stay safe’.

It’s the new ‘Kind regards’.

“There is little success where there is little laughter.”

— Andrew Carnegie, American industrialist (1835-1919)

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