This column is endowed with the responsibility to look at current events from an investment perspective. It is a cold and calculating task amid the personal tragedy and loss of life we saw last week. But it was one that the financial markets were making as events unfolded.
The key question was: has the violence and mayhem of last week damaged the investment case for SA?
Looking at the markets, you would have to conclude “no”.
The currency showed some weakness on Tuesday and Wednesday when the looting and destruction of property seemed most widespread and out of control, but by the end of the week it was back at pre-crisis levels. Indeed, JSE-listed companies showed some strength on the worst days, particularly mining companies that benefit from a weak rand. Financial and retail stocks were down a few percent but, overall, the top 40 index ended up unmoved.
How can the destruction of billions of rand worth of stock and infrastructure not be reflecting in the values of SA companies? It is partly a function of the mathematics of valuations. Stock prices always reflect the future. A one-off event, even a large negative one, is quickly diluted in a long tail of cashflows that go into valuing an asset. One-off events can therefore be limited in their affect on share prices.
The real problem is change that leads to long-term underperformance. Has SA’s security situation fundamentally deteriorated to the point where investors must factor periodic riots and destruction of property into the outlook? There are other markets that work like this — investing in unstable regions, such as Nigeria’s Niger Delta or northern Mozambique, requires investors to factor in a large risk discount. It reflects that expected earnings are permanently affected by sporadic security events that must be “priced in”.