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How much is history still a guide when looking at the JSE?

The impact of structural changes in South Africa.
There is a level of pessimism in the market that may be an 'opportunity for astute investors'. Image: Moneyweb

The performance of the JSE over the past 10 years has not only been disappointing – it has been unusual. As the graph below shows, the local market has underperformed the MSCI World Index for almost this entire period.

Source: Truffle Asset Management

This is, however, an anomaly.

“Historically, the South African stock market has been one of the best-performing stock markets in the world over time in US dollars,” says Saul Miller, portfolio manager at Truffle Asset Management. “In equal currency terms, the JSE has been one of the best markets if you look over 50 or 100 years.”

Using history as a guide, a normalisation would mean that returns from the JSE should be much better going forward.

“That’s what you would expect if you have mean reversion,” Miller says. “But we need to assess whether we’ve had some structural changes where perhaps we can’t expect that mean reversion and we can’t expect substantially better returns despite the underperformance that we’ve seen.”

When structural changes happen, the value of history diminishes, says Miller.

That is because you can no longer draw a straight line from the past into the future. And there are reasons to believe that structural changes in the South African market may be having these kinds of lasting impacts that investors need to consider.


The first question worth asking is whether South Africa has lost its corporate governance premium.

“South African management teams have often been regarded as on par with a lot of developed market management teams,” says Miller.

“Investing in South African businesses was almost like investing in a developed market company that was exposed to emerging markets.”

Foreign investors in particular have been willing to place higher valuations on local companies for this reason.

“But given the slew of corporate malfeasance incidents that we have seen of late, that seems to be changing,” says Miller. “Obviously the biggest offender would have been Steinhoff, where there was outright fraud, but we’ve had other companies that have been disappointing, like Sasol where there has been really poor execution, and other businesses where there has been poor allocation of capital.”

Read: Behind the latest cost blowout at Sasol’s ‘too big to fail’ Lake Charles project

Economic growth

The second issue is the weak-growth environment within South Africa. While the world economy has been expanding at nearly 3%, the local economy has only shown marginal growth.

The challenge this creates becomes even more apparent when one looks at the growth in South Africa’s GDP per capita against the global median.

Source: Truffle Asset Management

“In South Africa, it has basically been negative for five years,” says Miller. “It’s almost starting to look not like a cyclical event, but a bit more structural. If you look at where we rank relative to other countries, we are in the bottom 15%. That’s not the company we would want to keep. This kind of environment bodes incredibly poorly for turnover growth prospects for South African companies.”

Fixed investment

Investment in fixed assets in South Africa has also become a significant issue.

“We haven’t been investing enough in our fixed assets to even cover depreciation. We spend a lot less than other emerging markets.”

This might be seen as an opportunity. Given these low levels, an injection of investment should be able to accelerate growth quite quickly.

“The problem you have is that our debt levels are fairly high and continue to rise,” says Miller.

The government therefore lacks the money it needs to spend on fixed investment into the economy. Price increases for services such as water and electricity have also risen well ahead of inflation, putting increased pressure on company margins.


The question this raises for investors is how they should view the JSE if these structural changes are indeed taking hold. As Miller explains, it doesn’t mean that the market has become uninvestible, or that it will never again deliver returns. But it does mean that the opportunity needs to be viewed differently.

“I’m not saying South Africa is going to fall over a cliff, but what we do think is that given these numerous risks you should certainly be paying a lot less for South Africa-exposed companies than you historically paid,” he argues. “The positive thing I will say is that, given the pressure we have seen on domestic South African names, we have seen some shares come off so much that they are starting to price this in.”

Tim Acker, an equity analyst at Allan Gray, agrees.

“Valuations have come right down, and we are finding more opportunities in the South African market, even though the economic environment is very tough.”

He points out that it’s always important to gauge the level of optimism in any market.

“When the market is extremely optimistic, you want to be quite cautious,” Acker suggests. “When people are pessimistic, that’s the time you can take more risk and be a bit more aggressive.”

He points to the fact that almost none of the largest 40 stocks on the JSE have made new highs during 2019. This illustrates a level of pessimism that more astute investors should find interesting.

Source: RMB Morgan Stanley Research

“Just three to four years back, quite a lot of South African companies were making new highs,” Acker notes. “Investors were actually quite optimistic and willing to price companies to higher levels. But if we go back and look at periods like 2003 and 2009, when we had similar levels of pessimism and a lot of companies were quite depressed, the subsequent returns from those points were very attractive.

“That doesn’t necessarily mean that the same is true today, but it is quite a comforting indicator,” Acker adds.

“You might say you’ll wait for the dust to clear – but in the past, if you did take that approach, once the dust has cleared some of the bargains are gone as well.”




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I suppose history is a guide.

Everybody is in agreement that without increasing power generation growth is not possible. And an increase wont be possible at all in the short to medium term.

Historically this has never been a problem. So how can the JSE match or exceed historic performance.

History is only a guide if the changes that occur do not affect the underlying structure of the economy and government in a permanently negative way. A boat will float even when the the engine or sail is broken or if it is unmanned. If you deliberately drill holes into the bottom you have changed the underlying structure in a permanently negative way. The boat will sink. The ANC have been drilling holes for twenty five years.

Good article. Am as concerned as the analysts mentioned here. But when the non-financial sector returns on assets as measured by StatsSA are lower than the money market rate one would need to reassess the SA economic performance not only from a growth view but from a profitability view.

This is why most of our Top 40 have most of their turnover elsewhere (outside SA borders or Rand borders). Many of those investments were made in haste I think to get profits and diversify.

Moreover when the government “fights” or does not support its own business sector then we lose not only growth, jobs but the ability to invest in the country. Capital chases profits not nice, people

SA now the third biggest net provider of FDI in the world! That shows how SA has destroyed the ability to make returns. The JSE performance will reflect that unless the foreign investment come off. So the JSE is now more a reflection of international business with a SA bais.

Hi Patrick, can you do an article comparing the JSE peformance MSCI Emerging market index instead of the World index? Returns of the JSE should show greater correlation to other EM markets.

THE JSE used to track (and even beat)the MSCI Emerging Markets over many decades, until about December 2015, when it started under-performing badly. MSCI also tends to compare SA with Australia and New Zealand, and here too, we compare badly.
As I tried to warn over many years and via many articles on MW, the changes have been structural, not cyclical. Investors who heeded this advice are today comfortable while those who ignored them–preferring instead to listen to the local fund managers–have a major problem. They have become very poor over the past 5 years.
I repeat again: it’s structural, not cyclical. Profits of JSE listed companies have collapsed (expressed as a percentage of GDP) over the past two years. Please ignore fund managers trying to entice you back into this market….

Hi Magnus, this is what I want the comparison between JSE and MSCI EM index to show. That on a rolling correlation we should see higher correlations before say December 2015 and weakening over time. From a risk perspective its better to swap local equities for EM equities.

It would be nice to get an analysis of how one would do by forgoing the tax deduction (which is actually partly a deferral to retirement) on an RA contribution in favour of a few illustrative offshore index fund investments under various assumptions. With prescribed assets potentially on the horizon – and many have suffered compounding real losses after charges on their Reg 28 funds over the past 5 years here – I believe there might be merit in directing at least part of one’s pension contributions offshore even after taking into account the tax impact. Alternatively, are there any Reg 28 funds that invest their 75% equities in as close to a pure play locally listed but offshore exposuiure portfolio as possible (i.e. not just into stocks with some diversification)?

The look through principle applies Regulation 28 limits to all investments.

Yes I agree with Fernando. To add – Emerging markets (EM) has underperformed developed markets (DM). We Generally track emerging Markets, but I think over the last few years we also lagged emerging markets so that should explain our gross underperformance relative to DM. Perhaps one should consider replacing the RSA equities part of your portfolio with EM equities (just an thought to be better diversified on EM allocation)

Mike, could you just explain what you meant with “SA now the third biggest net provider of FDI in the world”. I guess thats in relative terms (i.e. % of GPD – RSA companies investing capital offshore excluding portfolio investments)?

“Perhaps one should consider replacing the RSA equities part of your portfolio with EM equities (just an thought to be better diversified on EM allocation)”

This is exactly what I did.

Share prices are a value of expected future earnings . That is why JSE prices are low. Look at the earnings-down daily except for what comes out of the ground-so a real banana republic economy. Huge future risks are also priced in as are labour legislation, taxes, crime, eskom and a dreadfully incapable government.

So despite what AG says-SAM says invest elsewhere-plenty of decent emerging markets with a much friendlier business environment. SA economy less than 1% of the world-even the US reporters didnt know who the President is-we are totally irrelevant -after all little Polands economy is 50% more than ours -so invest elsewhere with growth, governance and decency

As far as the JSE is concerned, I see a very bright light in the tunnel. Looks like a trains’ headlight bearing down on me.

No worries Joe about “oncoming train in tunnel”. WHAT MAKES YOU THINK there’s still going to be working railways left over in SA?

You’re safe…no trains to duck out for 😉 The uncoming light is an ANC or EFF person walking with a candle, trying to find the truth why the continent is dark.

It is quite interesting that almost every nation underperforms the MSCI World index. Every nation outside of the USA that is. The performance of the MSCI World index is determined by the SP500 to a great extent. Therefore, we have to ask ourselves what is driving growth in the USA when there is an economic contraction in the rest of the world?

The Trump tax cuts, the free money sponsored by the Federal Reserve through quantitative easing and low interest rates and the accommodative legal environment that allows share-buybacks, powers the SP500 to new heights. Under these circumstances, the relatively high interest rates locally act as an “importer” of deflationary pressure. The combination of QE and lower interest rates in developed markets drive their currencies weaker. This is no coincidence. This is the intended strategy.

South Africa is a victim of the international currency war because the mismanagement of our economic affairs by the ANC government leaves our Reserve Bank with no alternative but to keep interest-rates relatively high in an effort to attract foreign financing.

In essence, the ANC imports deflation, unemployment, a declining tax base and social instability from the developed world while the ANC exports employment opportunities, a stable economy, a solid tax base as well as social stability to the developed world.

The international game of economics and politics and the unintended consequences of their actions are way above the level of understanding of the tripartite alliance.

Perhaps the analysts can explain how the economy can grow with unstable & double digit hike electricity environment.

It’s akin to “How can a sick patient’s health revert to the mean if he’s running out of oxygen?”

Can’t see when econ growth will come from 🙁

Eskom has reached a ceiling concerning generation (and the historic power-generation trendline points to reducing generation capacity). Accepted, more homes/businesses converted to PV-solar the last few years…but is the extra capacity enough for industry?

Biggest concern is steady (increasing?) exodus of skilled professionals, artisans & business people from SA (along with their capital). NO COUNTRY can grow when skills leave en masse. (…while population is exploding among youth/majority, so think crime is currently out of control?? Net yet! Wait…)

We can quote crime/safety, lack of job opportunities, high tax, as reasons to leave….but the LOOMING HEALTHCARE CRISIS, courtesy of NHI, will be the final nail ensuring that as soon the upper & middle income class (all taxpayers)’s personal health is at increasing threat due to drop in life-expectancy….emigration will pick up dramatically. Forget getting a fair price for your residence.

(…unless if you remain in SA & instead follow “how to” You Tube tutorials to operate on oneself…)

I’ve said long ago, SA is in “long term structural decline” post colonial days, reverting back to mean-average relating to what is presented on rest of continent. Now it gets more often mentioned in media, as people start to see the light.

Surprised that nobody mentions:

(i) SA stock market bears little or no relation to the SA economy or SA companies, especially if you use the uncapped ALSI. Naspers, Billiton and Richemont alone accounts for 40% of the index. Not one of the issues discussed above has got any thing to do with these companies, they make there money outside of SA and the actual operational management teams are not SA based.

(ii) Lower weight of high beta, high risk mining shares in index. I do not have the data at hand but I think it is fair to say that mining companies – especially gold and plats contribution to the index have declined significantly over time. Finance 101 teaches us that higher risk investments requires higher returns. So lower contribution from risky miners to index should lead to lower returns over time.

One need to be very carefull with mean reversion and indices, because 90% of the time you are not comparing apples with apples. 10 years ago Naspers was probably less than 5% of the index, today it is 20%, while Murrays and Aveng where top 20 companies ten year ago they are not even in the index anymore. Why should there be mean reversion if the underlying composition of the basket is not even remotely the same?

Great article, as are the responses here – gives me hope for some sort of future for our exchange.
I also think that we should not underestimate the collapse in options from the sale of SAB and the credibility that went with it. The end of the Gold Standard and Diamond sightings also removed a lot of our economic attraction. All our big hitters are no longer in play and it’s had a big impact on the JSE
The new challenge will be Naspers moving off…will be interesting to see what sort of hole that leaves.
Certainly not boring living and investing here!

End of comments.





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