The JSE index that tracks just the financial and industrial shares – it omits the mining shares – is almost back to the heady levels of late 2007. Those were the days before sub-prime became a nasty word and banks were trusted to be wise and prudent institutions. Interestingly, the total annual earnings of the shares that comprise that index are also presently at just about the level that they were back then. You may recall that earnings continued to grow modestly for another 12 months or so, but the share prices plunged, eventually bottoming out in early 2009.
The recovery of prices since then has been brisk and exciting but those of us who did not believe that the economic downturn could really be as short-lived as that, failed to participate. Frankly it is even harder now to believe that business is booming, but share market performance in July has been spectacular. The All Share index – which includes the mining sector – will be up almost 10% in the month. Strangely, today’s news that Anglo American has resumed dividend payments has been greeted with some rather substantial selling.
The state is spending an average of R63bn per month; an amount that has been growing at almost 15%pa. The trouble is that we are not getting value for our money. This kind of growth is certainly no longer visible in the construction counters which one might hope would be seeing the promised infrastructural spend. However, the state is an important source of income for much of the country and the leakage of this money through corruption and inefficiency and mispricing is probably substantial. Undoubtedly one can detect some of these flows into several of the consumer oriented sectors.
Furthermore, state income is averaging not even R50bn per month; an amount that has been shrinking as tax receipts have crumbled. Something has got to give. And it is investors who are giving – or rather, lending – to the government to cover this shortfall. So keen are these lenders that their supply of money has outstripped the supply of bonds and yields have been dropping. The bond market has also enjoyed a lovely little bull market. It seems that simply the news that the consumer inflation rate continues to decline steadily has been sufficient to keep investors queuing up to lend their cash to the government. There another serious disconnect here also however. Producer price inflation is soaring fast and is now well into double digits. Presumably that will result in even more pressure on the earnings of our already beleaguered manufacturing sectors?
Johannesburg’s reputation as a mining camp where a never ending stream of dodgy crooks and shysters ply their trade has endured firmly into the new millennium. A court case is now underway that is trying to find out how and why one of the more colourful and robust recent characters in this parade came to his particularly gruesome and sticky end. The investment community is inevitably linked to this drama as of course large sums of money were seen to have been flowing in unusual directions. Astonishing tales of professional hit men with malfunction weapons and financial analysts who got whacked for asking why balance sheets didn’t balance have been filling the press. It is riveting stuff.
And it is way better than the embarrassment of watching the national rugby team trying to fathom the new rules of the game. The coaches are clearly also baffled by it all. Perhaps SARU have not bought a DVD player and are still waiting for the VCR tapes to review the games. Sadly the incident at the last Formula 1 race where the team on the pit wall chose the winner has diluted my interest in that sport also. So it’s back to women’s beach volley ball and of course there are a lot of excited horses down here in Durban this weekend.
James Greener
30th July 2010.
