JSE may not be at a peak yet

At a time of a red-hot market, foreign investors have shunned SA. But this could soon turn

The JSE touched record highs of 58,163 points last week. This is remarkable not only because it comes despite the dark clouds over the political economy, but also because of deep aversion from foreign investors.

To some extent, it’s a case of a rising tide lifting all boats: overseas, the US S&P 500 index is at a high, as is the MSCI world index.

And the MSCI emerging market index is 5% short of a high. But that doesn’t explain the JSE’S giddy rise.

While it’s true that foreign investors are scrambling into emerging equity markets on a scale not seen since 2010, their enthusiasm does not extend to SA equity. In the first nine months of 2017, total net equity sales by foreigners hit R49.6bn. This means SA is on track to eclipse the R56.6bn record set in 2008 at the height of the global financial crisis.

Foreigners bought more than they sold in only one month this year — July. But, even then, the R10.6bn in net equity purchases were mostly driven by Naspers, which accounted for R9.8bn of that.

Just how badly SA is losing out on the ardour for emerging markets is evident in the September report from US asset management group Blackrock. According to the company, emerging market exchange traded products (mostly exchange traded funds) attracted record inflows of Us$36bn — a huge R478bn — in the first nine months of the year. Three of SA’S Brics partners — China, Brazil and India — attracted the lion’s share of that. However, there was little appetite for SA’S equities market.

It wasn’t exactly a surprise. Foreigners will have noticed that the World Bank has downgraded its 2017 GDP growth forecast for SA from an already feeble 1.1% to 0.7%. And that’s before noise about the country’s political turmoil and rock-bottom business and consumer confidence is factored in.

In fact, political uncertainty alone is responsible for the rand being R1-R2 weaker against the US dollar than it would otherwise be, says Investec group economist Annabel Bishop.

SA is also facing a rating downgrade to junk status by Standard & Poor’s in early December.

“SA’S rating downgrade is absolutely going to happen, but is already priced into the market,” says Ricco Friedrich of Denker Capital.

It’s a common view. “The SA equity market is pricing in a 150 basis points risk premium compared with the average emerging market,” says Hannes van den Berg, a fund manager at Investec Asset Management.

So how is it that the JSE is hitting record highs in such a gloomy context?

Aside from bullish global sentiment, the main reason why the all share index has hit a new high is the number of JSE top 40 companies that earn most of their profits offshore.

Since July, Naspers has risen 30% and Richemont 15%. This has added about R320bn to Naspers’s market cap and R90bn to that of Richemont.

The steep rise in internationally focused stocks cloaks the fact that shares whose ➦