On the JSE, 2017 was another turbulent year and with the Steinhoff accounting scandal exploding in December, industrial counters (and the overall market) took a significant hit, declining by 4.8% MoM (+23.0% YoY, largely due to the stellar performance from Naspers with its heavy weighting in the index). Resources ended December 1.1% MoM lower, but the sector rose 13.0% YoY, bolstered for most of the year by stronger commodity prices, relatively steady local labour conditions and investors retreating to so-called safe-haven assets (such as gold). Financials put in a robust December showing (+9.6% MoM) after a lacklustre few months (+18.5% YoY). The FTSE JSE All Share Index, which in November had breached the 60,000-points mark for the first time in its history, retreated by 0.4% MoM in December as a lower Naspers share price (-6.4% MoM) and the sell-off in Steinhoff weighed on the local bourse. YoY, however, the index gained 17.4%. The rand received a bump from positive sentiment arising from the election of Cyril Ramaphosa as ANC president and a weaker dollar, with the local currency rising 9.6% MoM against the greenback and breaching the R12.40/$1 level for the first time since March. YoY, the rand strengthened 9.9% vs the US dollar.
Overall, 2017 was a annus horribilis for the country as low growth, high unemployment, credit downgrades, the Gupta leaks, maladministration of public funds, the dire situation at state-owned enterprises [SOEs]), the Steinhoff accounting scandal and political machinations dominated news headlines and the minds of investors. In March, President Jacob Zuma’s dismissal of respected finance minister, Pravin Gordhan, along with his deputy Mcebisi Jonas, resulted in the rand plummeting. Zuma was also at the centre of growing critical public sentiment, with calls for his resignation or recall growing as his legal woes continued throughout the year. In August, he survived another motion of no confidence in Parliament. The impact of elevated political uncertainty, following yet another cabinet reshuffle in November, and the disappointing medium-term budget policy statement (MTBPS) in October also weighed on investor sentiment. However, the outcome of the ANC elective conference in December seemed to give investors a glimmer of hope as the Ramaphosa camp claimed victory, although many commentators believe the new ANC president will be hamstrung by a national executive committee (NEC) seen to be made up of 50% Zuma loyalists.
On the SA economic front, data released in early December showed that 3Q17 GDP grew by 2% from an upwardly revised 2.8% print in 2Q17 – slightly ahead of consensus economist expectations. The largest contributor to 3Q17 growth was agriculture, with a 44.2% share, following 2Q17’s impressive 30% growth. Headline inflation slowed to 4.6% YoY in November vs October’s 4.8%, while MoM inflation slowed to 0.1% in November from 0.3% in October. Better-than-expected October mining data saw mining production increase by 5.2% YoY – above the consensus forecast of a 4.1% YoY rise.
Revelations of accounting improprieties at Steinhoff International and the abrupt resignation of its CEO in early December saw the shares decline over 90% during the month. Most worrying of all the revelations to surface is the announcement by the company that it is casting doubt on the “validity and recoverability” of €6bn worth of assets in Europe, a figure which highlights the potential that fraud on a grand scale has occurred. While at this stage facts are scant, it appears that the potential exists that losses may have been concealed in off-balance sheet entities, thus inflating earnings. It has already been announced that financial results from at least as far back as FY15 will need to be restated, and that restatements further back cannot be ruled out. Both the Chairman (Wiese) and CFO (La Grange) have subsequently relinquished their respective positions, while La Grange remains with the group in a different role. Because of this, we believe it is very difficult to establish a reliable basis on which to estimate a sufficiently fair estimate of the value for the company at this stage given the opacity of the situation. Furthermore, in line with our original statements immediately following these revelations, a key risk which appears to be manifesting itself is that of funding lines being cut off, curtailed or made more expensive to operating subsidiaries as a consequence of the loss of trust in Steinhoff on the part of financial institutions. Bizarrely, some operating subsidiaries have announced they have been able to secure lines of liquidity (eg Mattress Firm) without the parent company making any announcements, but we believe this remains a material risk to the operating performance of the group. We also do not know the extent of liability which could arise from likely numerous lawsuits against the company in the coming months. As a consequence, we judged Steinhoff to be essentially ‘uninvestable’ following these revelations and took the decision to exit our clients’ holdings fairly swiftly post the initial announcement in early December.