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Does the JSE offer compelling value?

Many people grapple with the idea that it is perhaps unpatriotic to move investments away from the JSE to markets offshore.

One of the most attractive aspects of the JSE for international investors is the fact that the rand is a relatively liquid currency. This means that foreign investors can invest in the JSE with relative ease compared to many other emerging markets. Consequently, many of the buyers and sellers on our local market are not local investors but rather foreigners.

The JSE has a market capitalisation of approximately US$950 billion, which, while an impressive number, is much smaller than the New York Stock Exchange (NYSE), which has an approximate market capitalisation of US$23 trillion. The JSE then is a relatively minor exchange when compared to the top exchanges globally and it is important to always consider the rise and fall of the JSE within the context of global markets. As the saying goes, when the NYSE coughs, the JSE gets the flu.

We seldom, if ever, see the JSE move in an opposite direction to international markets.

When markets are down globally, the chances are that the JSE will also be down. The influence of global investors has much to do with this movement. International sentiment plays a large role in investment in the JSE and the view of global investors does impact the outlook of the JSE.

As I write this, the JSE All Share Index is sitting at just under 57 000 points; not long ago the JSE hit a high of just over 59 000 points. This high point was on the back of a dovish US Federal Reserve and positive signs of a good trade deal between the US and China. Presidents Donald Trump and Xi Jinping showing that they were willing to talk and deliver a trade deal created the prospect of renewed synchronised growth. When talks broke down markets around the world weakened and nosedived, with the JSE dropping to nearly 56 000 points. This shows just how vulnerable the JSE is to international events beyond its control.

While it is true that the JSE All Share Index tends to move in the same direction as the MSCI World Index (a global equities index that roughly equates to the market performance of 23 developed countries), it does not mirror this growth. There is long-term divergence – essentially the MSCI World Index is growing at a faster rate than the JSE All Share, and this means that the SA economy is not keeping up with the economies that make up the MSCI World Index.

If you were the include a comparison to the S&P 500 (an index of the top 500 listed companies in the US by market capitalisation), the JSE All Share is falling even further behind. The graph below from Bloomberg shows just how drastic this long-term divergence in growth is becoming.

Since 2014 the JSE All Share Index has lost more than 60 points to the MSCI World Index, and a staggering 100 points to the S&P 500. The further you push back the normalisation point, the greater the difference becomes. Moving the normalisation point to 2012 shows a difference of 154 points between the All Share and the MSCI World, while the S&P 500 is a full 225 points above the All Share.

The point here is that if we do not fix the deep structural problems within South Africa, this long-term divergence trend will only continue.

Market movements in the past 10 years

Source: Bloomberg

Behavioural finance places great emphasis on the impact that bias has on investing. Recency bias –  investing your money with financial institutions that you have recently heard of in the news or from a friend – has been a tool of savvy marketers for years. Home country bias is a risk that many in South Africa can fall victim to. This is the consumption of only local media and making decisions without considering that possibilities overseas.

Many people grapple with the idea that it is perhaps unpatriotic to move investments away from the JSE to markets offshore. Investing should not be a patriotic duty; investing is an allocation of capital at a location where you have the potential for gaining a good return for the risk you take on. Emerging markets have the potential to offer great returns, but the risk that the return might not materialise as expected is also there. Considering the long-term divergent growth between the JSE and the S&P 500, is it perhaps a good idea to look at offshore options?

Right now, the JSE is cheap, and it does have the potential to give good returns if we as a country can fix our problems and match the global synchronised growth. It is not my view that this is reason enough for you to bet your house on it. Investing is not an exact science and we do not possess crystal balls, so unfortunately we do not know how long it will take to get the fundamentals in South Africa back on track and in a good place again.

As an investor, you need to look at the current opportunities available to you and make the best decision possible under the circumstances. There remains value in selected global stocks and geographies that provide far more opportunities, industries, and diversification than our local market can offer. We feel this is enough reason to continue to favour global stocks over South African ones.

It is always advisable to contact an investment professional for an investment solution suited to your needs. For more about the Brenthurst offering and team, visit the Brenthurst Wealth website.

Brenthurst Wealth is hosting three investment seminars in Stellenbosch, Cape Town and Pretoria in June. Speakers Magnus Heystek, Mike Schüssler and Glyn Owen will review the investment landscape and provide their insights. Bookings can be made here: Brenthurst Seminars.

The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.

ADVISOR PROFILE

Andre Basson

Brenthurst Wealth Management (Pty) Ltd

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