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Don't lose sight of the big picture

Maybe we can blame Twitter or Snapchat or maybe it’s always been like this, but it seems our attention span just keeps getting shorter and shorter.

Remember last December? Three finance ministers in four days? Of course we do; we also remember how panicked we were back then. For me it was a watershed moment that would most definitely lead to a downgrade of South Africa’s sovereign debt to junk status by rating agencies.

Yet by the beginning of August it was as if last December had never happened. Our market was moving along just fine, bank share prices had rebounded strongly, the rand was strengthening, we were winning Olympic medals and local government elections showed us to be a matured democracy with excellent election processes.

We were happily making money and a downgrade was the last thing on our minds.

But a few weeks later the wheels are falling off again and everybody is in a panic after finance minister Pravin Gordhan was called to present himself to the Hawks.

The reality is that while everything seemed all sunny and rosy, not much had changed. We’ve managed to avoid a technical recession, but the South African Reserve Bank is forecasting zero GDP growth for the year. The lack of economic growth is one of the big concerns for ratings agency Standard & Poor’s and the rating review at the end of the year.

Our mining sector remains firmly in the doldrums – sure, stock prices have rallied but the underlying commodity prices have not moved much higher. As a result they are struggling to make profits and are mostly relying on rand weakness to grow the bottom line.

Local SA Inc. stocks have been reporting very modest growth with headline earnings per share (HEPS) growth in the single digits the new normal. This is best illustrated in the difference between the now-split Bidvest. Bidcorp, the offshore business, had awesome results while Bidvest, the local operation, had very modest numbers.

The reality is that trends play out over a long time, not the seconds it takes to send or read a tweet.

What happens is we notice the trends only when they are at their darkest and we respond accordingly during those dark days. Then, once the sun comes out, we feel that everything is going to be perfect, ignoring the bigger picture.

Locally that bigger picture is that our economy is under serious pressure and a downgrade by Standard & Poor’s is pretty much a certainty for December.

We always need to have that big picture firmly in our minds when investing and be very careful not to be blinded by short-term noise. This works both ways. In 2008/9 when global markets were crashing, my big-picture investing view of a growing consumer class globally remained firmly intact and I was a happy buyer of excellent stocks at very cheap prices.

Right now there is no short-term solution that will get SA’s economy back on track. The next three, five or maybe even seven years are going to be very tough. We need to constantly remember that when we’re investing.

My rule for this tough period is to largely avoid SA Inc. stocks, especially banks and retailers, while focusing on excellent and very defensive dividend-paying SA Inc. stocks (such as Metrofile*), or those local stocks earning a solid chunk from offshore operations.

This not about being negative about the country, it is about keeping that big picture in mind and acting accordingly until strong evidence comes showing a change. So far we’re not seeing any change to my big picture view on SA Inc. so caution remains the strategy.

*The writer owns shares in Metrofile.

This article originally appeared in the 15 September edition of finweek. Buy and download the magazine here.

 

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