SA’s energy crisis remains a big overhang for domestically orientated shares, which have capitulated almost indiscriminately over the past six months when it became apparent that the situation could be worse before it gets better.
The electricity supply crunch came while the country’s GDP was punching below its potential, a situation aggravated by the fallout of the Covid-19 pandemic.
“It’s difficult to see a catalyst that will drive up the SA Inc stocks in the short term, with domestic interest rates set to stay elevated and restrictive,” said Craig Pheiffer, chief investment strategist at Sasfin Wealth.
While banks, in particular, tend to benefit from the rising interest rate environment as it boosts their margins, there is also a potential risk of higher impairments as cash-strapped consumers and businesses start to fall behind, or even default, on loan repayments.
The index of JSE banking stocks is down 10% this year, indicating market concerns about economic growth. Capitec is the worst performer among banks with a drop of about 25%, though the decline came off a high base after years of outperformance.
Domestic industrial stocks have also been in the firing line, with KAP losing half its market value in year to date, indicating the far-reaching impact of load-shedding. Bidvest is one of the outliers as its share price is up 12%.
The implosion of local stocks is also due to foreign investors continuing to bail out of the local share market. They have sold more than R20bn in local shares this year on a net basis.
Huge cost
“It’s going to be a tough second half for the market, and individual stock selection will be the name of the game. The market as a whole does appear to offer value but there is no short-term catalyst to put a fire under the JSE to help realise that value,” Pheiffer said.
SA’s economic projections have deteriorated in step with record power blackouts, which have come at huge extra cost to businesses that have to run generators or alternative power sources to keep operations running.
In addition, the weaker rand has inflated the cost of imports for local businesses, though it is a potential boon for exporters.
While SA Inc shares have sold off aggressively in recent months, the impact is negligible on the JSE all share index, which is dominated by big industrial stocks such as Richemont, and miners, which all generate revenue outside SA.
Unravelling
The index rose as much as 10% at one stage earlier in the year before unravelling most of its gains as optimism about the reopening of China’s borders faded and caused weak commodity prices, which hit mining shares.
Marco de Matos, researcher at Anchor Capital, said the sell-off in SA-focused stocks ramped up in May as rolling power cuts and politics weighed on sentiment.
“On the JSE it was red across the board, with the continuing sell-off in domestic-orientated counters ... leading the declines as the financial costs of stage 6 load-shedding continued to weigh heavily on sentiment.
“As SA battles load-shedding, its consequences and costs, as well as tepid consumer spending, rampant corruption [and so on], the government continues to score own goals, with the US ambassador to SA last month accusing the country of supplying arms to Russia.”
Data released by the Reserve Bank last week shows that shares on the local bourse are trading at decade-low valuations. “This is largely attributable to SA’s poor growth outlook,” the central bank said in the financial stability review.
“Domestic business confidence continues to slip as business conditions soured in the wake of higher stages of load-shedding. Similarly, a deteriorating rail infrastructure could place added pressure on companies relying on exports if their goods cannot be transported to harbours in a timely manner.”
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