Mail & Guardian

JSE: Howzit my China!

If it weren’t for Beijing, the local bourse would be very flat indeed

- Lisa Steyn

The fortunes of the JSE are significan­tly more dependent on the number of youngsters playing video games in China than on the value of mineral resources extracted from South African soil — or any other local activity for that matter.

The JSE Top 40, its most popular index, attributes most of its growth to Naspers.

According to Sasfin’s David Shapiro, the Top 40 recorded a capital loss of 1.5% over the past year. Naspers accounted for 3.4% and Richemont, which sees China as a key market for its luxury goods, accounted for 2.2%.

As a result of its 34% stake in Tencent, the biggest gaming company in the world, Naspers’s stocks continue to grow as they track the Tencent share price. The company has recorded a capital gain of 27% since the beginning of the year.

The compositio­n of the Top 40 is partly why Naspers should be the main driver of its performanc­e, said Shapiro. “If you look at the compositio­n of the indexes, they are misleading. The Top 40 is based on a local float, which ranks the stocks according to what local shareholde­rs own.”

This creates distortion­s. For example, in the Top 40, Anglo American ranks fourth in terms of weighting because of its high local share ownership. But when compared with all companies listed on the stock exchange, it is the 13th largest in terms of market capitalisa­tion.

British American Tobacco has a small weighting and resources behemoth Glencore does not even appear. Nor does AB InBev, even though SABMiller used to appear on the Top 40 with a weighting of 13%.

“I argue against the way the indexes are made up here. It’s parochial and inward-looking,” said Shapiro. “Be that as it may, the consequenc­e of that, Naspers is the market and accounts for about 20% of the Top 40. So we are more reliant on little kids in China playing games than we are on the platinum price.”

Mark Randall, the manager of indices and valuations at the JSE, said the Top 40 is designed for the South African investor and aims to reflect the 40 companies that are held in the largest value in aggregate in the local market. (See “Local shares determine Top 40”.)

For quite some time, the JSE All Share Index has been characteri­sed by its high level of internatio­nalisation. A number of major multinatio­nal companies that make most of their money outside South Africa are listed on the exchange, and so the performanc­e of the JSE is more often driven by global developmen­ts than by domestic ones.

Even with the growth of Naspers (up by 21% over the past year), Richemont (up by 25%) and British American Tobacco (up by 15%) on the exchange as a whole, a disconnect between the performanc­e of the JSE and other exchanges is showing: those elsewhere are experienci­ng growth, but the JSE has been flat.

According to Shapiro, as of June 27, the one-year return for the American S&P 500 was 21%, 33% for the American Nasdaq, 31% for the Euro Stoxx 50, 25% for the British FTSE, 35% for the Japanese Nikkei 225, 19% for the Australian ASX 200 and 32% for the Chinese Hang Seng.

“If the JSE is so internatio­nalised, why have the S&P and others outperform­ed it by such a huge margin?” Shapiro asked.

“Anglo is down 14%, Billiton is down 11%, MTN is down 19%, and Sasol is down 7%. If it weren’t for the other offshore stock it would be worse. I’m deeply concerned.”

“If you’d put $100 in S&P five years ago it would be worth $182. If you had put $100 in the JSE Top 40 it would now be worth $101,” said Shapiro. “If the JSE is so internatio­nal, why has the S&P outperform­ed it by such a huge amount?”

Political events are partly to blame, he said, noting how the recent release of the new mining charter has hurt local mining stocks. But more important, he said, is that the big players on the exchange are from old industries. “The JSE is very old, it’s old economy stocks, even if they are internatio­nal. Naspers is the only modern stock.”

The S&P has a bunch of tech stocks in its Top 10, such as Apple, Google parent company Alphabet, Microsoft, Amazon and Facebook.

Shapiro said that if people had gone into those stocks five years ago they would have made a good return — $100 in Alphabet would be worth $336 today. “These companies are earning, therein lies the answer.”

Market commentato­r and Vestact director Sasha Naryshkine concurred. “Big tech stocks in the US have been up, some in excess of 30% year to date. Tencent follows that price trajectory and so Naspers has done the same. Meanwhile, mining shares have done worse.

“The Public Investment Corporatio­n [a quasi-public investment company] and institutio­nal funds are natural buyers. The prices haven’t really budged, even though foreigners have been net sellers.

“What you are seeing now is a confidence crisis,” said Naryshkine.

Retailers have iffy numbers and local industrial Bidvest has seen stock prices remain at similar levels since it unbundled from Bid Corp last year. This, Naryshkine said, was one proxy for the South African economy.

Bid Corp, which has food assets around the world, has experience­d share price growth of 20% over the same period.

Political events are partly to blame.

But more important is that the big players are from old industries

 ??  ?? Distorted: The JSE Top 40 paints a skewed picture because it is based on what local shareholde­rs own and has been described as ‘parochial’ and ‘inward looking’. Photo: Gustav Butlex
Distorted: The JSE Top 40 paints a skewed picture because it is based on what local shareholde­rs own and has been described as ‘parochial’ and ‘inward looking’. Photo: Gustav Butlex

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