Tech heavies still drive JSE
• Banking and retail stocks reflect investor concerns
The JSE’s rally to levels last seen before SA went into lockdown paints a skewed picture of what is really happening in SA Inc, as index heavyweights Naspers and Prosus continue to drive the local bourse higher while shares in locally focused companies reflect concerns about SA’s dire economic situation. Naspers and Prosus, which make up more than a quarter of the JSE’s total market capitalisation, have increased 44% and 61%, respectively, so far this year.
The JSE’s rally to levels last seen before SA went into lockdown paints a skewed picture of what is really happening in SA Inc, as index heavyweights Naspers and Prosus continue to drive the local bourse higher while shares in locally focused companies reflect concerns about a dire economic situation.
Naspers and Prosus, which make up more than a quarter of the JSE’s total market capitalisation, have increased 44% and 61%, respectively, so far this year. That is largely thanks to their 31% stake in internet giant Tencent, amid a rise in gaming since the coronavirus lockdowns began.
Support also came from the weaker rand.
The JSE top 40 has erased its 2020 losses and is up 1.42%, while the all share is down just 2.27%, after reaching its best level in over four months in intraday trade on Thursday.
“It is a few shares that have fuelled the market to the level where it is now, with the same thing happening in the US,” Gryphon Asset Management portfolio manager Casparus Treurnicht said. “What you really want to have in a bull market is for all the stocks to fuel the rally. When it’s only a few doing the heavy lifting that’s typically not a very good sign,”
Rand hedges have also provided a boost to the local bourse, with Richemont up 2% and British American Tobacco up 4% so far this year.
LOW EXPECTATIONS
Anchor Capital portfolio manager Stephan Engelbrecht said while Naspers and Prosus may struggle to sustain this rally, the expectations for domestic companies remain very low. “They haven’t really rallied by any significant amount,” he said.
Banking and retail stocks, which have both dropped by about 39% in 2020, have been hardest hit and continue to reflect investor concern about the SA economy amid expectations that GDP could contract by 7.2% in 2020.
Moves by central banks to cushion the effects of Covid-19 by pouring more money into the financial system have continued to support global equities, while analysts warn this shows a disconnect between the markets and the real economy.
“You can only put that down to stimulus,” said Engelbrecht.
“We are in uncharted territory when it comes to the amount of liquidity that is being pumped into the financial system. The question is will it filter into the real economy?
“For now, the liquidity measures that the central banks have put in place are definitely assisting stock markets, but the valuations are getting rich and difficult to justify,” he said.
Investors found comfort this week after one US Federal Reserve policymaker said the central bank could do more to support the economy as the US grapples with the effects of Covid-19, which could continue to fuel the market rally.
However, Treurnicht said the threat of a second wave of infections remains the biggest risk for markets as this will put a cap on the rally in equities.
“As economies around the world are reopening, we will see a recovery; the central banks are going to withdraw stimulus and economic fundamentals will take over again.”