Interview: Stephen van Coller
What are some evident trends in terms of investor appetite for specific asset classes?
STEPHEN VAN COLLER: We are seeing a lot of investor appetite for credit in the bond market. Money is relatively cheap now so people are not just depositing in banks. Instead, they are looking for more in terms of yield pickup and, as such, are finding general corporate credit to be increasingly attractive.
After the global financial crisis, equity is not seen as such a sure bet anymore. Their yields are not always generating much more than credit and now there has been a fundamental mind shift about the balance between equity and credit. Credit is perceived as more certain and less volatile, with fewer losses attached to it. It’s as if the global financial crisis has educated the masses about credit as an asset class as previously we really struggled to get the debt markets going in South Africa.
What impact have sovereign ratings downgrades had on public and corporate fundraising?
VAN COLLER: The recent sovereign ratings downgrades have had very little impact on fundraising so far. South Africa is still a long way from being a junk bond and until that happens, or until we are at least on the cusp of it happening, investors will still see us as investment grade. The biggest issue going forward in determining South Africa’s investment grade is the National Development Plan. South Africa has had a negative perception for some time because it lacked a long term plan and after the World Cup in 2010, which brought some positive focus, there has been a lack of tangible delivery.
Once the National Development Plan is implemented and gains traction, the market sentiment and herd mentality will turn around. There is a lot of infrastructure development in the pipeline that should catalyse future growth. The parastatals, like Eskom and Transnet, that are spearheading such developments have massive balance sheets for them.
Which sectors have the most potential for displaying strong or weak performances?
VAN COLLER: The South African capital markets are highly driven by global and macroeconomic conditions, because the South African rand is one of the most liquid emerging market currencies available. As such, the Johannesburg Stock Exchange (JSE) has grown and achieved repeated record highs during the past few years, despite the poor level of domestic growth and a weakening of the rand.
That said, while the mining sector, for example, is strongly driven by commodity prices, domestic factors are now playing a role in share prices. Specifically, the labour unrest in the platinum sector that saw a five month strike has weakened performance. Mining companies such as Anglo American are increasing production in every segment except platinum and they may eventually divest those assets. Coupled with a general global oversupply, this will continue to hamper performance and will have a knock-on effect on contractors and equipment providers in the construction sector.
Nevertheless, it is difficult to look at South Africa in isolation, given that many large corporations listed on the JSE have been expanding north, throughout Africa. If a company has a decent presence in those African markets that are experiencing high single-digit growth, then it is unlikely to struggle as much as those that have more exposure to only the South African market. In addition to gaining some uptick in growth driven by unsecured lending, which has now subsided as household indebtedness has risen, retailers like Shoprite will fare well overall, given their growth in the rest of the continent. Fast-moving consumer good and retail players will be active because they have to scale up. The JSE is skewed toward large cap firms that can weather domestic storms by either going abroad, making acquisitions or issuing shares. It is small firms that struggle until domestic growth surpasses 3% or so.
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