By Paul Huthchinson, Sales Manager
The Johannesburg Stock Exchange (JSE) was founded by Benjamin Woollan in 1887 to provide a marketplace for the shares of South Africa’s mining and financial companies that were established following the discovery of the Witwatersrand goldfields in 1886. The JSE has grown to rank as the 19th largest stock exchange in the world by market capitalisation, and is the largest exchange on the African continent.
While South Africa’s equity market now makes up less than 1% of the world’s market capitalisation, our gross domestic product (GDP) comprises less than 0.5% of the world’s GDP. This unusual ratio is a result of early adoption of the market exchange mechanism to raise external financial capital in pursuit of business activity. It was not until more recently that similar financial markets have been established in other emerging markets, including Russia, India and China. China has risen rapidly from inconsequential size to take second place in the world ranking (from a total market cap of US$418 billion in 2003, it grew 1,479% to US$6 trillion by late 2016).
- DRD Gold Limited listed on the exchange in 1895, making it the oldest company that remains listed.
- In 1897 South African Breweries listed on the exchange. Clearly mining is thirsty work – so much so that there is even a global non-sanctioned industry-related social event for those in the mining industry called Mining4beer.
- PPC Limited was listed in 1910, Sappi in 1937, Barloworld Limited in 1941 and Tiger Brands in 1944.
- Naspers and Richemont, the two largest shares in the FTSE/JSE All Share Index (the index), together make up a quarter of the market by capitalisation. Add BHP Billiton Limited and the trio comprise one-third of the market.
- It often seems that the strength of our equity market is dependent on the revenue of computer and mobile games (Honour of Kings and League of Legends) via Naspers, and the sale of luxury goods via Richemont!
- The cumulative weight of the top ten shares is 55% of the index, making for a highly concentrated market.
- More than 30% of the shares on the JSE are owned by foreigners and more than 70% of the revenue earned by the top 40 companies listed on the JSE is from foreign sources.
Over 130 years the South African equity market has changed from a narrow, but booming market to an open, concentrated and cyclical market. Consequently, it is vital to understand the nature of shares listed on the JSE from a different perspective, namely:
- Offshore-focussed rand hedges versus domestic ‘SA Inc.’ companies
Rand hedges are those companies that will generally benefit from a weakening in the rand exchange rate, either because most of their income is derived from operations overseas or they are a major exporter of goods or services whose prices are set internationally in hard currencies e.g. the US dollar. Conversely, domestic ‘SA Inc.’ companies are those where the revenue earned in rands is mainly from local activities.
- Defensive versus cyclical companies
Defensive companies are those that have or are expected to provide a constant dividend and stable earnings regardless of the state of the business cycle. Cyclical companies’ fortunes are highly correlated to the state of the economies in which they operate.
The following table summarises our analysis of the companies listed on the JSE today. Since many companies straddle blocks we have allocated them to the most relevant block based on our qualitative assessment.
Chart 1: Positioning companies listed on the JSE today
Source: Bloomberg, Investec Asset Management; FTSE/JSE All Share Index has been used as a base index as at 30.04.18.
- 131 (of 165) companies are more cyclical than defensive, evidencing the cyclical nature of our market;
- While the offshore/domestic split at 57%:43% is more equal by weighted contribution to the index, less than half the number of companies are predominately rand hedges – this implies that on average, the rand hedge stocks are significantly larger companies;
- Defensive rand hedges in turn are few by number (only five companies) but material by market capitalisation;
- As expected, given that this segment includes the three largest stocks by market cap (Naspers, Richemont and BHP), cyclical rand hedges make up just over 50% of the market by weighted contribution.
What should South African investors do?
Given that the JSE is an open, concentrated and cyclical market, South African investors need to:
- Acknowledge that while domestic factors are important, it is crucial that investors and their portfolio managers have a strong global perspective when investing in the local market. This requires the asset manager to have the experience and resources to analyse both local and global factors.
- Be aware of company-specific risk. This requires the asset manager to have the experience and resources to undertake proprietary fundamental company research.
- Include global defensive assets with a low correlation to local assets. This requires the asset manager to have the experience and resources to analyse multiple asset classes and consider the complementarity of offshore holdings.
The Investec Equity Fund may be an optimal long-term investment solution
We believe that investors seeking capital growth through long-term exposure to the South African equity market should consider the Investec Equity Fund.
The cornerstone of the Investec Equity Fund’s investment philosophy and process is identifying reasonably-valued shares where expectations of future profits are being revised upwards (positive earnings revisions) as these present the best opportunities to outperform the market. Conversely, the fund seeks to avoid shares where consensus profit expectations are being lowered (negative revisions) and where valuations are excessive.
Considering the cyclical nature of our local equity market, it is also crucial to monitor and manage the fund’s exposure to macroeconomic variables such as the rand, interest rates and economic growth. This blend of sophisticated screening and rigorous bottom-up, fundamental research has delivered an attractive long-term track record.
Table 1: Long-term track record of outperformance of the Investec Equity Fund
|1 YEAR||3 YEARS P.A.||5 YEARS P.A.||10 YEARS P.A.||SINCE
|Investec Equity A Inc||7.2%||3.3%||12.3%||9.1%||16.2%|
|(ASISA) South African EQ General||6.0%||2.0%||8.7%||8.3%||14.5%|
|Active return (sector)||1.2%||1.4%||3.6%||0.8%||1.7%|
Past performance is not a reliable indicator of future results, losses may occur. *Inception date: 02.04.00, A class. Source: Morningstar, as at 30.04.18. Returns are calculated on a NAV-to-NAV basis, net of A class fees, with gross income reinvested. Market indices are gross of fees. **Benchmark: 87.5% FTSE/JSE Capped Shareholder Weighted All Share Index TR ZAR (SWIX CAPI) + 12.5% MSCI AC World NR (ACWI) (87.5% ALSI + 12.5% MSCI ACWI pre 01.11.17 and ALSI pre 15.07.16). Highest and lowest 12-month rolling performance since inception* is 65.8% and -34.8% respectively. TER: 1.80%, transaction cost 0.60%, Performance fee in TER 0.81%. The total expense ratio (TER) does not include transaction costs. A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TERs.
All information is as at 30.04.18 unless stated otherwise. All information provided is product related, and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long-term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the Manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at www.investecassetmanagement.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. Investec Asset Management (Pty) Ltd (“Investec”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA).