When investing in companies with offshore aspirations…

Schalk Louw is a portfolio manager at PSG Wealth. (Picture: Supplied)
Schalk Louw is a portfolio manager at PSG Wealth. (Picture: Supplied)

A few years ago, my sister asked me to be master of ceremonies (MC) at her wedding.

Her fiancé (now husband) is Dutch, and she had been settled in Amsterdam for a number of years.

However, they decided to have their wedding in South Africa.

Shortly before the big day, my sister asked me to just slightly adjust my sense of humour for my role as MC.

The Dutch, she explained, take personal jokes, well, personally, and my she was concerned that my South African humour would offend some of the Dutch guests. They prefer humour wrapped in compliments.

At the reception, I had the South African guests to my left and the Dutch to my right.

At times the right side of the room roared with laughter, while at times, the left side did.

To make a long story short, the wedding was a huge success and the MC, of course, rocked the show.

Border crossing, of course, doesn’t only apply to humour. It can also be seen in the workings of international companies.

The easiest way to explain this, is to simply refer to recent Sens announcements regarding both local and offshore listed companies:

  • “Trading conditions in the rest of Africa remain relentless as the results attest” – Shoprite trading update on 30 July 2019.
  • “Retail trading conditions in Australia remain challenging” – Woolworths trading update, 11 July 2019.
  • “In light of the depressed retail trading environment currently being experienced in the UK, Office (the Group’s UK subsidiary) has entered into discussions with the relevant lenders regarding potential debt restructuring options – Truworths’ reply to Sky News report, 2 July 2019.
  • “The operating performance was impacted by the lower contribution from Hirslanden, offset by an improved performance in the second half of the financial year from Mediclinic Southern Africa and Mediclinic Middle East” – MediClinic results, 23 May 2019.

I don’t want you to think that I am singling out these four companies. This trend is clearly visible with many South African companies, whether we refer to MTN’s issues in Nigeria, Sasol’s issues in the US or Brait’s issues in Britain.

The moment companies start to look for greener pastures their “jokes” become more complicated and the risk of “offending” someone becomes greater – because what works in one country doesn’t necessarily work in another.

The complexity of crossing borders

All things considered, it’s understandable why companies look for opportunities offshore, especially when we take a look at the difficult environment our economy finds itself in – not to mention our local currency’s  performance over the past few years.

Companies feel compelled to find success for their shareholders in a more stable environment.

But this decision does not mean that South African companies, and the way they are managed, makes them any weaker compared to their offshore counterparts.

Let’s look at the performance of S&P 500 companies. Remember that the S&P 500 is an American stock exchange that consists of the 500 largest US-listed companies based on market capitalisation.

According to those companies’ second quarter financial results (until 30 June 2019), you will see that up until 29 July, the average earnings growth for the S&P 500 companies (which combines actual results of companies who have already reported with expected results of companies who still have to report) amounted to -2.6% for the quarter. (See graph below.)

Of these companies, those who generated more than 50% of their sales in the US enjoyed an average earnings growth of +3.2% over the same period. The most interesting aspect of analysing this data lies in the fact that S&P 500 companies that generated more than 50% of their sales outside of the US reported an average negative earnings growth figure of -13.6% in the second quarter of 2019.

I am well aware of the fact that this data is extremely short-term based, and that one swallow does not a summer make.

But what I want to point out to investors, is that it is no joke to try and run a successful unit across different borders. What may work in one country, won’t necessarily work in another.

So make sure that you keep your finger on the pulse of exactly what’s happening with the management of your personal share portfolio.

S&P 500 earnings growth for the second quarter 2019


Source: FactSet

Schalk Louw is a portfolio manager at PSG Wealth.

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