Battered JSE braced for another tough year
● While global markets have staged a fightback over the past week, it has not been enough to escape the worst annual performance for stocks since the global recession a decade ago.
The JSE all share index declined more than 13% in 2018 as investors fretted over higher US interest rates, trade tensions between the world’s two largest economies — the US and China — and slower global growth.
In 2008, the year US investment bank Lehman Brothers collapsed amid a credit squeeze that snowballed into recession, the Alsi plunged 27%.
Over the past four years, the JSE has delivered a “paltry” 4.4% return — no more than 1% a year, said Sasfin Wealth deputy chair David Shapiro.
Some of the biggest disappointments for the year have been Aspen Pharmacare, Naspers, British American Tobacco (BAT) and Group Five, which all had challenges.
The performance of the JSE in 2018 reflected a difficult environment, marked by low growth, regulatory changes and policy uncertainty.
Aspen’s share price plunged more than 51% in a year when investors highlighted its aggressive acquisition strategy as cause for concern.
At one point, the Durban-based pharmaceutical company was expected to be a potential target of short-seller Viceroy Research.
On Aspen’s stock performance, Casparus Treurnicht, portfolio manager at Gryphon Asset Management, said: “This is a classic repeat of an acquisition spree that caught investors out for the hundredth time.”
Treurnicht also cited Woolworths, Famous Brands and Mediclinic as examples of companies whose expansion strategies went awry.
In September, Aspen announced the sale of its infant formula business to French company Lactalis for R12.9bn, sending its share price crashing 35% in a week.
Naspers shares are down 12% for the year as the company, heavily exposed to the Chinese market through its Tencent stake, has borne the brunt of the trade war between the US and China.
The global internet and entertainment group also took a hit when Tencent came under pressure due to gaming restrictions by the Chinese government.
Given that Naspers is the second-largest stock on the JSE, the fall in its shares was felt by the entire index.
Sharp decline
BAT suffered a big drop due to proposed US Food and Drug Administration regulations that would significantly hamper its profitability, said Paul Fouché, Unum Capital portfolio manager.
The biggest disappointment of the year was the construction sector, which has seen a sharp decline, Shapiro said. “The saddest story of all was the demise of the construction sector.”
The lack of government and private sector spending on infrastructure, along with contractual difficulties, resulted in a share price plunge of 98% for Group Five and 94% for Aveng, two of SA’s biggest construction companies.
SA’s economy also did not do well in 2018, contributing to the lacklustre performance of the local bourse.
Financial sector stocks such as banks and insurers that drive a large portion of the JSE and rely on a growing local economy to power earnings, had stagnant earnings or came under pressure, leading to further market de-ratings.
Lester Davids, an analyst at Unum Capital, said: “Investors are also grappling with policy uncertainty, which works to deter capital allocation decisions.
“The most uncertainty is around the issue of land expropriation without compensation. Until we have certainty from the government, investors — individual and institutional — won’t be fully committed to deploying capital locally.”
Davids said the impact of the US-China trade war, for example, can already be seen in the economic data, with a big impact on China.
This has pushed down commodity prices, which puts pressure on resources shares, which have a large weighting on the Alsi.
On the positive side, mining companies performed well in 2018.
Good management and positive results led to share growth of 53% for Anglo American Platinum, according to Shapiro.
The mining company has bucked the industry trend and turned its fortunes around, delivering an impressive performance at its Mogalakwena mine in Limpopo, where production rose 19% in the first half of 2018.
AngloGold Ashanti was also a top performer, with its shares rising 40%, while Anglo American saw a 22% increase in its shares and BHP’s went up 18%.
“[AngloGold Ashanti] has been the beneficiary of a weaker rand, improved operating performance, as well as a move towards the safe havens such as gold, which is benefiting from the various factors which have weighed on the global economy,” Shapiro said.
Looking to 2019, analysts agree that performance on the JSE is unlikely to be noteworthy as any improvements will be to make back the losses of 2018.
Once the general elections in May are over, capital flows are likely to improve as investors adjust to the new policy regime of the electoral victors.
Shapiro said the stock to watch next year was Allied Electronics Corp Ltd (Altron), whose shares rocketed 47% in 2018.
The company provides solutions in fintech, health technology, safety and security, and learning and development. Founder Bill Venter retired this year.