Alec Hogg
boardroom talk
If you ever needed confirmation of the underlying trend for local share prices, the market’s response to some major announcements of the past month provided it.
The investment terms bull and bear are in themselves rather innocuous, the first used to describe optimists, the other of the genre that believe the glass is half empty. Mistaking one species for the other when you put actual money down, though, can result in people throwing themselves off tall buildings.
Right now there can be no confusion the Johannesburg Stock Exchange is most certainly in a bear market. These are times when good news falls on barren ground. Which means for a share to merely retain its value takes some doing.
The market’s treatment over the past three weeks of specialist banking group Investec drives the point home with the force of a Cape southeaster.
First was concern that Investec might be paying too much in its takeover of insurer Fedsure. Two downward adjustments in the price lopping nearly R1-billion off the cost and the fact that Investec has never made a bad acquisition should have quelled those fears. Not for long.
Then came nervousness about Investec’s ability to manage an insurance operation. It would be like a Ferrari dragging a trailer, a market commentator suggested. Once more, the bankers produced an ace with the surprise news that Fedsure’s insurance operations would be outsourced to the ambitious life office Capital Alliance. Again, no public acknowledgement from the marketplace.
Now investment professionals are expressing concern about whether Investec can compete effectively in the United Kingdom market where the group anticipates much of its future growth will be derived. And it doesn’t help to remind the critics that Investec has for some years already been doing a roaring trade in London, where it has more than 1 000 staffers and holds dominant positions in a number of profitable niche markets.
The share price tells the story. Investec stock began in March at R262 a share. It is currently just above R200 a drop of almost a quarter. And it’s not like the stock was overvalued to start with, having traded in the past year in the same range as during 1998.
There’s a similar tale at Nedcor. Towards the end of February South Africa’s most admired banking group unveiled a new strategy. Chair Chris Liebenberg explained that a new approach would be pursued after the authorities made it clear they would not allow growth by acquisition. Nedcor took its cue after Minister of Finance Trevor Manuel vetoed last year’s hostile takeover bid for Standard Bank.
Very much in sync with the New Economy philosophy of strategic alliances and partnerships rather than outright ownership, Nedcor has moved at great speed to tie up what Liebenberg describes as the “gateways” to the mass market. Among the exclusive partnerships are those with the country’s leading retailers in furniture (JD Group), motor (Imperial) and groceries (Pick ‘n Pay).
Add in the closer working relationship with parent Old Mutual and the joint venture with the new owner of the Health & Racquet Clubs, Virgin Active, and the bankers have transformed their reach and network. In effect, says Nedcor CEO Richard Laubscher, with these alliances Nedcor has ballooned from an operation with 395 branches serving 2,2-million clients to one that with its partners has 1 600 outlets reaching a potential 9-million clients.
But we’re in a bear market. Instead of giving credit for what I believe history will show was a brilliant new strategy, investors sold Nedcor shares, the price tumbling from the pre-results R175 to R140, a knock of 20%. This time investment professionals are concerned that as Nedcor has been so successful in cutting costs and raising productivity that it will struggle to keep growing profits in future. Hello? What’s the new strategy about then? The bear’s growls seem to have blanked out the response.
All of which adds credence to the views of former United States treasury secretary Larry Summers who, at the height of the American tech stock boom maintained: “The efficient market hypothesis is the most remarkable error in the history of economic theory.” That’s not only true on the way up. As the recent examples of Investec and Nedcor prove, markets are no more efficient on the way down.
That doesn’t mean you should rush out to invest all your money in Investec, Nedcor and other stocks like them that are offering incredible value right now. Chances are they could get cheaper still, so a phased-in approach (buying small amounts over the next few months) is advised.
In every walk of life, the real winners are those who remain calm, ignore the hype and stick to the basics. With shares, that means accumulating when the herd is dumping. Right now.