The JSE Today: Tobacco, Beer and Chinese Texting
September 27, 2016 - David Buckham CEO of Monocle
If one were to conjure up a perennial image of apartheid South Africa, it would have to be one of the grainy photographs taken in Soweto on 16 June 1976. There are the shots of the South African Defence Force armoured vehicles in a stand-off with the baying scholars who had formed a roughshod group on the outskirts of Soweto, and there are shots of the crowd in panic after the first bullets had been fired. And then there are the photos of Hector Pieterson.
These are the images that are conjured, that have been nurtured by the process of history into permanence, that are now indistinguishable from the concept of apartheid itself.
I grew up in apartheid South Africa, and these were not the images that I had in my head at the time. The images I had were of large, loosely-fenced properties, of dull brown and grey landscapes in winter, of single-story houses, and of pastel-coloured cars, of Saturday barbecues with neighbours’ children, and of swimming, endlessly, throughout summer.
There were of course some small anxieties of things to come. There was the moment when I was told that we should not go to school because it was ‘kill-a-white day’. It would only be many years later that I would come to realise that this day was the anniversary of the Soweto massacre.
But they were only ripples. Like any totalitarian regime, there was a bubble that was carefully maintained around us. We had little real notion of the world in which we lived. Our main convictions of ourselves were that we were somewhat politically behind, that the international community was repulsed by us, that we would spend two years in the army, and that we were pretty good at rugby.
On Saturday afternoons, having been excluded from international sport, we would watch the Currie Cup games. My father and his friends would drink South African Breweries-made beer, and smoke British American Tobacco-made cigarettes. They would watch the rugby whilst keeping an eye on us in the pool.
The extent to which things have changed since the 1970s is dramatic. This country has had, for some time now, the most liberal forward-thinking constitution ever written – in any country, anywhere. Our freedoms are guaranteed. Two decades of self-realisation through the implementation of democratic principles, and our inclusion into the international fold, have made South Africa and its people change enormously.
Nevertheless, in spite of these freedoms, and in spite of tremendous structural change, the economic reality for many in this country has altered very little. Frequently, and particularly more recently, stagnant growth and continued stifling inequality is blamed either on externalities or on the idiosyncrasies of leadership.
These externalities are often the same kind of externalities that any emerging economy with a heavy reliance on commodities would cite: the pull-back in Chinese demand, the falling copper price, the oversupply of steel. These are the structural arguments; the medium- to long-term reasons given for lacklustre performance.
In the short-term, one recognises clearly that the enormous gyrations in the value of the currency, and the immediate impact this has on the ‘markets’ – meaning bond prices and the value of JSE tickers – are primarily driven by the notion that the utterances of leadership itself are events, rather than utterances only. These are not structural impingements, but the fear is that they could become institutionalised.
What is not spoken of however, what is analytically absent, is the extent to which the financial markets – in spite of all of the remarkable changes we have experienced as a society – have not changed very much. This is not because the economy has not changed. The economy today is radically different to what it looked like in the 1970s. It is the markets that look distressingly similar to apartheid South Africa. The markets have become substantially, audaciously, out of sync with our economy.
Just a few facts elicit this. Looking at the JSE holistically and then drilling down, one notices that SAB Miller and Anheuser-Busch – two enormous beer-making firms that are set to merge after international competition commissions approve their R1.5 trillion deal – constitute 27% of the total value of the JSE. That is remarkable: the brewing of beer is valued by investors at over a quarter of the total stock market. Now add British American Tobacco, another ‘sin-tax’ firm, and we have three JSE firms that make up roughly 39% of the total stock market value of the JSE.
Even more absurdly, if one then adds Naspers, the next largest company by market capitalisation on the JSE, that fraction goes up to 46%. Naspers, in and of itself, is worth interrogating. Of its R1.0 trillion market capitalisation, more than 80% of that value is made up of its investment in Tencent, a Chinese messaging app.
To put that into perspective consider this: The largest four banks in South Africa employ about 190 000 people, whereas Naspers employs only 24 000 people. The Big Four banks are all considered blue-chip shares, yet their total market value, all together, is worth less than Naspers alone.
The party line amongst local and international economists reads something like this: The South African economy is likely to grow sluggishly in 2016 and 2017, afflicted by severe electricity constraints and the downturn in the global commodity cycle. Policy uncertainty, labour unrest and resultant investor uncertainty have also undermined SA’s potential growth trajectory in recent years, although South Africa is actively working to ease electricity supply constraints in the longer-term.
What the headline should read is this: Of the R15 trillion value in the South African equity markets, almost one-half is invested in a beer company, a cigarette company, and in a Chinese messaging app. This is because institutional investors are divesting themselves of South African economic exposure and SAB, BAT and Naspers will provide the investor approximately three quarters diversified offshore exposure.
As ironic as it is plain: the image in my head of a childhood spent growing up during apartheid in South Africa – men drinking beer, smoking cigarettes and watching rugby on TV – was accurately prescient of the constituents of the JSE more than thirty-five years later. My childhood image however has very little relevance to the broader economic reality that exists within South Africa today: a picture of tepid growth, violence, xenophobia, extreme unemployment, cronyism, and a proliferation of mediocrity in all echelons of utilities.
Most importantly however, this contrast between the JSE and the economy displays in the collective investment strategies of just about every investor within the borders of this country, including the State’s own investment arm, a substantial absence of faith in this country.
Little real equity investment has risked itself on our future. The distortion between the real economy and the markets – the structures through which the real economy is meant to be funded – is astonishing. In nominal terms, the figures are even more distressing: the value of unencumbered equity invested in the real economy in South Africa is strikingly low – something like a sixth to an eighth of the same ratio in the US.
Money has simply gone to what it knows best, its past successes. These are successes that have repeated themselves on a worldwide stage, but somehow only in industries that distract one from the rigours of reality.