Money and Markets

Bruce Whitfield: Think MTN’s collapse and Steinhoff have no impact on you? Think again

Business Insider SA

Bruce Whitfield
  • Unemployed? Poorly paid? Think markets don’t matter? Think again.
  • Think government will bail you out in your old age? Think again.
  • Think MTN’s collapse and Tencent’s regulatory problems have no impact on you. Think again.

Twenty years ago, I like most people in South Africa would not have given two hoots about the destruction of value at MTN on Thursday, the December collapse of Steinhoff or the implosion of African Bank Investments Limited.

Markets were other people’s problem. I had no money to invest, why should I care whether Japan wasn’t growing, or China was about to become the growth engine of the globe? That ignorance has proved costly.

Fortunately, time is a great teacher. But as the French composer Hector Berlioz once cautioned: “It also kills its pupils.”

My mission now is to help others learn what I didn’t, earlier.

I was a late-learner on the importance and power of financial markets, understanding that while far too many people regard them with suspicion and event contempt, they have proven to be the most effective mechanism for long term wealth generation humanity has yet developed.

It’s important to understand, for example, why interest rate fluctuations in the US affect global economies and how that can drive the price of key commodities like oil and have a direct impact on the price you pay for petrol.

It’s critical also to understand that your financial future is dependent on the integrity, the skills and the acumen of the people who run the world’s biggest companies 

Far too many people think stock markets don’t impact them.

A Chinese government restriction on who can use games produced by one of the worlds’ fastest growing internet gaming companies impacts its profitability and growth prospects and ultimately, as a South African pensioner one day, your ability to retire comfortably or not.

South Africa’s most valuable company Naspers owns about a third of Tencent, a company facing restrictions on how it does business in China. That decision matters and has a direct impact on you.

Or they only notice the impact when things go wrong.

Petrol prices shoot up. Inflation rates spike and interest rates rise. Only then, do most people care what happens on markets and their experience is generally a negative one.

When I challenge people about why they have so little interest in markets. Most will tell me they are irrelevant in their lives.

Just because you don’t own a share portfolio, doesn’t mean you can afford to ignore what is happening in the world of money. Stock markets are an elitist construct designed to exploit the poor for the benefit of the rich, you might say. Spare me. Sure, they are exploited and a whole range of quick-thinking snake-oil salesmen can abuse the system, and that’s why events like The Great Depression of 1929 and the Global Financial Crisis of 2008 happen.

Markets self-correct to shake out the rot. It hurts, but they reset. And over generations have proven to be effective creators of serious wealth.

When 96-year old legal secretary Sylvia Bloom died earlier this year, it emerged she’d left behind a $8 million fortune.

She’d begun work in 1947 working as a legal secretary and for 67 years quietly went about her job. It was the days when secretaries ran their bosses' lives and she would emulate her boss's investment strategy with much smaller amounts of her own.

She lived modestly and worked longer than most people imagine possible and died wealthy. Not much point in that you might say, but her discipline is the lesson here. She could have retired a decade ago and lived on cruise ships in the Caribbean had she wanted to. Few people retire with any choice other than how little they plan to live on.

Stock markets do matter and they matter to you. If you are one of the millions of people in South Africa contributing to a retirement fund or investing in a retirement annuity, unit trust or exchange traded fund, they matter.

If you are someone hellbent on ignoring markets in the belief that some benevolent government will provide you with a state grant one day, they matter to you. Markets matter to everyone.

If you work in the public sector and think you are protected by the fact that you have a defined benefit fund, a fund that guarantees you a fixed monthly pay-out regardless of what happens in markets, you are deluding yourself.

Market movements determine the amount of money that fund has to distribute and provide it with the ability or not to pay inflation related increases over long periods of time. Most people in the private sector are in defined contribution funds. That’s where you choose how much money you invest every month and your financial outcome depends on what happens to the market.

You are mad to think markets are not your problem - take MTN for example:

MTN is the latest in a growing list of shocks which have seen valuations collapse in a heap. At one point on Thursday morning it had lost nearly a quarter of its value as the Nigerian central bank accused it of illegally repatriating dividends from that country with the help of four banks including Standard Bank owned Stanbic.

Analysts described it as a shakedown. A previous investigation in Nigeria had cleared the firm of wrong-doing. Now the central bank which, if it is right, was asleep at the wheel for nearly a decade allowing money to leave.

It smells fishy. But that doesn’t really matter. Your investment in the company is worth less today than it was on Wednesday and that is your problem.

MTN will negotiate with the central bank and may even go to the courts to enforce its rights and that will take years. In the meantime do you ask your fund manager to divest from the company or do you just blindly hope things will recover? Will MTN stay invested in Nigeria? It reached a settlement with that country’s government when it was revealed that it had broken the law around the registration of SIM cards. Now this. What next? Management at that company has some big calls to make.

Did you celebrate when collusive construction companies were fined heavily for their role in manipulating contracts to build 2010 World Cup infrastructure?

No doubt that was the right thing to do. South Africa cannot allow for cowboy builders to rip the ring out of the fiscus. The impact on your wealth though has been devastating. If your pension owned construction shares in the hype-fuelled build frenzy, then you are poorer today because of that.

By 2010 the combined value of Aveng, Group 5 and Basil Read was an enormous R31bn. Today they are worth just R350m. Sure “the companies” got punished, but that contributed to the destruction of some of your long-term wealth.

That quantum of the losses in those companies is similar in percentage terms to the value destruction in Steinhoff.

No doubt investigations will show its price collapse was brought on by a combination of greed, arrogance and outright fraud. Executives may go to jail eventually. As a taxpayer you may see justice, but you will simply be paying twice. Once in terms of the losses in your investments and second in keeping them in jail.

It’s hard to believe that Steinhoff, now worth less than 10% of its value at its peak was once the sixth biggest company on the JSE. Today it is worth just R12 billion up from its low of R4 billion as it stared into the corporate abyss.

Former Steinhoff CFO Brian la Grange admitted this week that the share-price of his former company was unlikely to ever recover to the heady heights to which it soared close to R300 billion before capitulating to almost nothing.

Sure, their reputations are in tatters. But it’s you who has lost money, because you can bet your pension fund had shares in Steinhoff.

African Bank Investments investors got nothing for their shares in the bank which fell foul of regulators as it extended credit and failed to properly manage collections.

It ruined the reputation of Leon Kirkinnis the founder and former CEO, but hit you far harder in that the portion of your investment in that group will never be recovered.

In conclusion, stock markets and the companies that trade on them matter to you.

You need to pay attention to them. You need to understand the characters and the way they do business and if you are worried about a company in which your pension fund is invested, you need to motivate and agitate with the trustees of your pension fund to make sure you don’t get screwed over. Again.

Still think markets are not your problem? Go back to the beginning and read again. Until you figure it out. It’s Groundhog Day until you do.

Bruce Whitfield is a multi-platform award winning financial journalist and broadcaster.

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