SA equities: are they really expensive?

Adrian Clayton

For four years, the domestic stock market has been moving sideways, testing even the most bullish local investors. This has also raised questions on whether the JSE is expensive or cheap.

Northstar Asset Management managing director, Adrian Clayton, outlines some approaches to provide an indication, while also looking at expected returns.

“There is no simple framework for predicting market returns, this is not a perfect science and consequently, our approach does not aim at pin-point precision,” says Clayton. “It also is triangular in that we look at various inputs to reach sensible conclusions.”

At its simplest level, the JSE AllShare Index (Alsi) can be assessed in terms of its price-earnings (PE) rating against other emerging markets (MSCI Emerging Market Index) and against the broader global market, including developed and emerging bourses (MSCI All Country World Index).

“Our market is trading above its long-term relative median price to earnings multiple. However, the relative P-E has dropped significantly since its peak in 2016,” says Clayton.

“Removing Naspers [19% of the JSE All-Share Index] and Steinhoff changes the picture somewhat, doing this results in the JSE Alsi P-E being in line with MSCI All Country Index and a 7.5% discount to the median MSCI Emerging Markets Index relative rating.”

Of course, the problem with the above approach is that the local market might be reasonably priced against others, but all markets could simultaneously be expensive. Normalising anomalies in the P-E of the MSCI going back to 2005 shows that the MSCI World Index has averaged a P-E of about 17.2 times, lower than the 19 times it is presently trading at.

“Emerging markets have had a P-E average since 2005 of 13.6 times versus 14.5 times now,” Clayton says. “This simple work indicates higher than normal market valuations and thus caution needs to be adopted.”