In 1987, the band REM came out with a song that has become a classic, and as a carefree student at the time I would merrily belt out the lyrics: “It’s the end of the world as we know it, and I feel fine.”
It is trite but true that with all major crises come great opportunities. The major opportunities so far have been in the global tech companies as the transition to online has become an everyday way of life in less than a year. Tech companies such as Amazon, Google, Facebook, Etsy, Alibaba, Tencent and Airbnb have made their shareholders extremely happy and wealthy — on paper at least.
But the attention given to investing in all that is new and shiny has come at the expense of the old-economy stalwarts. Try to talk to someone about the opportunity to invest in a coal mine and you will get a quizzical look, indicating that you may have lost touch with reality. Clean energy is taking over and coal and all its dirty associates will soon have no use in the world.
The sooner this happens the better for our planet and for humanity. However, the world, and certainly SA, will still need coal for at least the next five and possibly even 10 years. Negative sentiments around these types of old-economy stalwart companies have meant the prices at which investors can buy their shares have become extremely low.
Let us look at two companies at opposite ends of the spectrum. Tesla, the world’s leading electric vehicle (EV) company, has a price to earnings (PE) ratio of about 1.15 times and has paid zero dividends. Exxaro, the largest thermal coal producer in SA, has a PE ratio of only about five times, and a dividend yield of 8%.
Tesla is spoken about as a battery company, with a nice-looking car chassis over it. The company’s co-founder and CEO, Elon Musk, is a genius, and he will adapt the battery to be able to fly planes, be used by cruise ships, even launch his own rockets into space. Exxaro, on the other hand, is a coal producer and its ambition is to increase its production to 60-million tonnes a year by 2022. How very unsexy.
One of these companies is priced for perfection, and the other is priced to plod along and, eventually, perhaps even die. However, even if Exxaro’s share price does not move for five years, you will have made a 40% gain just from the dividends (2.5 times more than cash), and the PE will then be 2.5 times. Even if Tesla’s sales grow by 50% per annum for the next decade, the company’s current margin is not high enough to justify the 100 times multiplier of the rest of the industry.
I am grateful for what Musk’s company is doing for the planet, but I think it is a very bad investment. Yes, EVs will change the world, but I thought the same of cellular phones when they arrived in the 1980s. They have changed the world, but not all cellular phone companies have changed the world with them — just ask Nokia and Blackberry.
Just as companies get forgotten, so do countries. Which country would you rather own, regardless of the price: SA or the US? As humans, we are wired to always assume the trend of the recent past will continue to be the trend of the immediate future. But this is rarely, if ever, the case.
In 2001, I arrived back in SA after living abroad for five years. Over the previous 10 years, the S&P 500 had risen by 500% and the JSE by 75%. The rand had weakened from R3/$ to R7.50. It was extremely difficult to convince any of my clients to invest in SA, despite how well priced our assets were.
Yet by 2010, the rand had strengthened to R6.50/$ and the JSE had risen 500%. The S&P 500, meanwhile, was down 21% over the same 10 years. Over the next two years it became as difficult to convince my clients to invest offshore as it had been to convince them to invest in SA 10 years earlier.
I am under no illusions about how troublesome our level of debt-to-GDP is. But the Covid-19 crisis has forced the government’s hand on decisions we have been desperate to make for two decades (including clipping the wings of the unions, allowing private energy suppliers to make excess energy available, and privatising or semi-privatising some state-owned enterprises).
South Africans are resilient. We are adapting quite well to the changes asked of us to combat the Covid-19 pandemic, while our “superior” counterparts in the UK, parts of Europe and the US seem to be floundering.
Could the Covid crisis be just what SA needed to start the process of sorting out some of our systemic issues? Only time will tell. I believe investors should absolutely continue to diversify and add quality offshore investments. But the many challenges we have faced as a country have made us more resilient to a crisis. Maybe our future in SA is not as dark as it seems.
• Cairns is wealth manager at Anchor Capital.
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