I did some “proper” analysis this week and what did it reveal? Well just that there are really no nice clear themes in the markets at the moment. There are no “gimme” situations.
Bonds are looking dreadful. My worry is that the government has a great deal of borrowing to do. My estimate is that expenditure this year will be at least R50bn greater than revenue. Last year the deficit was less than R30bn. That’s a big jump.
So the country’s biggest borrower will be making plenty of trips around town with the slotted tin. (He does of course borrow offshore as well – different tin) And I am sure you have noticed all the new borrowers (e.g. Joburg city) who have crawled out of the woodwork after being attracted by the low interest rates. It seems to me that the price (interest rates) of the commodity (money!) in demand is very likely to rise. Not what a bond investor needs to see.
The picture for the share market is not all that peachy either. Dividend yields are admittedly not in “no value at all” territory – but what is interesting is that they have been maintained only by a savaging of dividend cover ratios. That is, companies have been holding or growing their dividend payouts only by paying more and more and retaining less and less of their earnings.
I guess that this means that when earnings growth resumes (did you realise that the earnings of the shares in the Top 40 index are down 20% year on year?) dividends will not increase in unison. Companies will try to restore the cover ratio. The good news is the pleasing number of companies that in the current reporting season have been coming out with some rather fine results.
On a relative basis the analysis suggested that the financial sector is the best of an uninspiring bunch. But on a fundamental level I wonder how much time and attention that industry has to devote to collecting all that “know your client” data. Did you see that some bank branches are going to stay open late to try and meet the deadline? It’s an industry right in the cross hairs of all the bureaucrats, politicians, and other assorted freeloaders who are “following the money”. That must be costly and irksome.
It is worth remembering that the indices that I used for this work contain no companies with a market cap. of below about R200m. (Anglo has a market cap of R200bn) To some extent, that is a reasonable cut off, especially in respect of liquidity as well. But it doesn’t mean there are no good ideas below that level – especially if one is looking for a home for R50k or so. So there’s some more “proper” analysis in the offing. Watch this space.
Final thought: “Will the bank freeze my overdrawn account if I don’t show them my ID book?”
James Greener
Watermark Securities
28 May 2004
