Tightly tied to China

Naspers’s link to a Chinese Internet giant is playing a disproportionate role in the JSE’S fortunes — and increasing risk

In hindsight, the decision by one SA daily newspaper to give over its entire front page to China’s President Xi Jinping’s address to the Chinese Communist Party congress in October might not have been quite as bizarre as it seemed on the day.

The scary reality is Xi has more influence over the wealth of millions of South Africans than almost any SA politician apart from Jacob Zuma. While Zuma is steadily chipping away at the country’s wealth through one disastrous deal after another, Xi just has to pull the switch on one contrived financial structure to wipe out a significant chunk of the value of millions of SA investors.

Fortunately, the chances are he won’t do so. One lead analyst says there is an infinitesimal chance he will — something like a black swan event. But the fact is he could, and there’s almost nothing South Africans could do to prevent it. It is cause for nerve-racking concern.

Xi’s power relates to a subject that has dominated Jse-related discussion for the past four years: Naspers and its 34.4% investment in Internet giant Tencent. It is the subject of legend, one that grows bigger by the day.

An initial US$34M bet is now worth more than R1.8 trillion.

Last week Tencent overtook Facebook in terms of market capitalisation, and it is now the world’s fifth-largest company. At the beginning of 2017, when its market cap was a heady $230bn, some enthusiasts began to get nervous and offloaded Naspers shares. But it continued to move steadily forward, gaining 127% to reach its current market cap of $523bn. In rand terms the increase was a more modest 79%, from just over R2,000/share to just under R4,000.

This great good fortune has played havoc with SA fund managers. Those lucky enough to have a reasonable exposure 12 months ago are now overweight and in danger of contravening national treasury or pension fund regulations that impose limits on the level of concentration in a unit trust or pension fund. Right now that problem might look better than having no exposure at all to Naspers.

PSG Asset Management chief investment officer Greg Hopkins has had to explain to clients why the PSG Equity

Fund, one of the top performers over the past 10 years, doesn’t hold

Naspers. The fund has achieved what seems to be a not-too-shabby 9% year-to-date return, but the top 40, thanks largely to Naspers, boasts a 25% return.

In an industry obsessed with benchmarking it’s been impossible to look good this year without Naspers, which is headed by CEO Bob van Dijk. The Sunday Times Top 100 Companies ranking revealed that four other companies beat the Naspers share-price performance, but none of them is nearly as large.

Spare a thought for the poor Public Investment Corp (PIC), the largest single investor in Naspers N shares. Its 14% stake is worth a staggering R230bn, more than enough to sort out SA Airways for a few years and equivalent to about 12% of the PIC’S total assets under management. It is, by a long shot, the most valuable prize in the PIC’S goodie bag.

It is a mixed blessing and, like most Naspers shareholders, PIC CEO Dan Matjila must have some sleepless nights worrying about his fund’s now-huge reliance on Tencent. A hit to Naspers would cause considerable pain (some estimate as much as 10% value loss) to millions of employees and investors in the private sector as well as to millions of public sector employees.

Being full weight in Naspers is high risk . . . bad things can happen to any company Brian Kantor

The JSE, in consultation with the investment community, is constantly reviewing indices to ensure no single share or group of shares is dominant, but it isn’t always able to keep up with market developments.

The two main indices designed for benchmarking are the all share index (Alsi) and the shareholder weighted index (Swix). The Alsi is a straightforward capitalisation-weighted index. The Swix strips out share registers not maintained in SA by Strate. This means dual-listed heavyweights such as BHP Billiton and Anglo American have muted representation in the Swix. And there’s the capped version of both indices, which cap companies at a maximum of 10% exposure in each index.

Naspers now accounts for 20.6% of the Alsi and, because it is not listed anywhere else, 25% of the Swix. But Mark Randall, manager of indices & valuations at the JSE, says the indices are not the real problem — they merely reflect reality. The problem is that Naspers’s market