Troubled waters will continue for the investment environment

December 4, 2023

By Julian Gwillim, Aprio Investor Relations

Globally the competition for capital is about to intensify. This may be a generic statement applicable to all sectors striving for investment attractiveness, in markets impacted by the effects of inflation rates rising to multi-decade highs and the consequential hike in interest rates. But in the case of Initial Public Offerings (IPOs), the indicators surfaced two years ago. Research done by the Edison Group showed that by August 2022,  84% IPOs launched since 2020 (in the US and Europe) were trading below their issue price. Asset classes the world over, began to reset, driven by less stimulus.

Locally this played out with many sectors re-rated downward. Yet, even as far back as five years ago, South Africa was already experiencing a dearth of new investment and mediocre performance driven by political instability, high unemployment, infrastructure challenges, and the more recent deepening of the Eskom power crisis. While these are negative scenarios, what has manifested is some rather attractive and tempting discounts in the investment market.

However, investors may still ask whether it is safe to invest in South Africa. Looking purely at the JSE All-Share Index, their concern is justified. One of the intrinsic measurements of financial markets is volatility, which simply put, is the amount by which the price of a security varies over a given period of time. When large rises or falls occur, it raises investor concerns. We have seen with values declining for a number of respected companies, while the All Share Index remained relatively unchanged.

For the short-term investor this volatility may be concerning, but for the long-term investor, this can be viewed as an opportunity to buy what may previously have been considered expensive shares. Bear in mind too, that heightened volatility is often associated with high market returns in fearful markets, such as we have experienced coming out of the Covid era, and the more recent impacts of the Ukraine/Russia war.

The largest opportunities may well be in the retail investor space, and environmental, social and governance (ESG) playgrounds. The former has been trending globally since 2020, boosted by fiscal stimulus during the Covid pandemic and supported by social media platforms such as Reddit and Discord. Although this is largely a developed market phenomenon, the retail investor has grown in prominence in South Africa, despite the dampening effect of lower disposable incomes and rising costs of basic goods and services.

Asset managers are continuing to tap deeper into the retail investment landscape, given the rate at which developments in technology are allowing retail clients to expand their services, securing previously untapped loyalties and establishing trust. With trust playing a key role for retail investors, communication is key to ensuring that any value-destructive volatility and uncertainty among investors is minimised. Communication is crucial to ensure visibility and transparency, especially for companies that are highlighting their ESG strategies and results.

The ESG world is full of traps for uneducated investors and in the early days especially, companies used “greenwashing” to exaggerate environmental benefits of their products or practices. More recently however, a new term emerged, namely “greenhushing”, where companies intentionally do not release details of their ESG targets, due to lawsuits filed against those that under-delivered on overly ambitious advertised campaigns. The integrity of regulatory regimes that measure sustainability, is also under review, amid concerns about governance and potential conflicts of interest.

ESG, however, will remain topical, particularly climate change strategies, and South Africa should see greater investment flows into organisations that clearly communicate their strategies and implementation thereof, more so those that are transitioning to alternative energy sources.

There is a growing awareness of the long-term returns within the ESG ecosystem, as investors direct their choices to those that can prove they are mitigating and reducing negative planetary impacts. Even amongst South African pension funds, some 52% are indicating a strong willingness to increase their investments in such ‘green’ efforts. Mining is another sector that is planning to procure clean power from independent power producers, which will go some way to improve the attractiveness of investing in one of South Africa’s traditionally big GDP contributors.

Risk-off will likely continue to dominate investment views in the short term, but the influencers of change are going to be organisations that are seen to be dependable, organised, transparent and engaging. Aprio Investor Relations will help to deliver a clear message to those seeking to increase their investment value, better align the market value of their company with  its intrinsic value and, thereafter, sustain that message with a focused and effective communications strategy.

For more information about our investor relations offering, contact Julian Gwillim at Aprio Investor Relations on julian@aprio.co.za