A lot can happen in a normal year in markets, but the last 12 months have been anything but normal. Previously high-flying indices have fallen dramatically, along with Big Tech stocks and, recently, even most commodities and currencies.
Unless you’ve been living under a rock, this is all old news to you. Other than representing the dramatic one-year deratings in various countries’ stock exchange valuations against their 10-year rolling averages (chart below), I will not belabour the point.
The Top 40
Rather, I would like to zoom in on our most-quoted domestic large cap index, the FTSE/JSE Top 40 Index, and see how that has fared.
On a 12-month rolling basis (21 July 2021 to 21 July 2022), the Top 40’s price has risen 1.9% and, once we include its 12-month rolling dividend yield of 3.7%, its total return has been a rather sleepy 5.6% or so.
Firstly, this is underperforming inflation, which was reported to be 7.4% last week.
In normal circumstances, equity markets are fair places to protect your capital against inflation. These are certainly not normal circumstances …
Secondly, that Top 40 total return of 5.6% is in rands – and when we consider that the rand has weakened some 15% against the US dollar over this period, our market has actually fallen by around 9% in US dollar terms.
This starts to look more comparable with other global indices, for example, the S&P 500 Index, which has fallen 9.4% 12-month rolling (let’s not even consider the Nasdaq that is down 18.7% given the headwinds nailing Big Tech).
Finally, this single number does little to unpack the absolutely wild underlying drivers of this return …
On 21 July 2021, the Top 40’s price-earnings multiple was 17.3x. Twelve months later – driven by a massive 54% growth in earnings and a small rise in price – the Top 40’s price-earnings is now only 11.4x. This is a whopping discount of around 36% to the Top 40’s rolling 10-year average price-earnings of around 17.9x.
Illustrated as a waterfall chart, the breakdown in the Top 40’s recent 12-month returns looks as follows:
Everyone tends to focus on the price of indices, often missing the churn of earnings underlying them.
A 54% rise (‘recovery’ may be a better word here) in earnings is gigantic and was mostly driven by our resource stocks and Richemont (an oft-forgotten massive 16% of this index) having a bumper year.
How does this look going forward?
Honestly, no one has any idea – but banks are recovering and tend to do well with rising interest rates, and Richemont’s stunning sales update recently (despite its large Chinese exposure) bodes well. On the other hand, Naspers/Prosus continue to be black holes in terms of value destruction, and commodities and resources stocks have come under immense pressure as recession fears and Chinese lockdowns have hurt prospects.
A very mixed bag indeed.
Using analyst consensus numbers for FY23 earnings (E) from the Koyfin analytics platform, the Top 40’s FY 23E weighted average earnings per share (EPS) is expected to grow by a whopping 288% year on year.
This does include a base effect in Richemont’s forecast, but strip this distortion out and you still get 82% year-on-year expected forward EPS growth. Go even further and strip out Naspers’s own irrelevant earnings forecast and you arrive at a ‘core’ operational expectation that the Top 40’s FY 23E EPS will grow by a comfortable 11.9% year on year.
Interestingly, this places the stock market on a price-earnings-growth ratio of nearly 1.0x (=11.4/11.9). Seems quite fair to me, but analysts will be wrong, consensus is always lagging, and the world is changing quickly and dramatically these days.
Thus, who knows?
Still, with the Top 40 on an 11.4x PE at a 36% discount to its 10-year average PE, and with clearly positive forward earnings expectations, one thing is certain: the next 12 months on the JSE are likely to be quite wild too.