SIMON BROWN: I’m chatting now with Pieter Hundersmarck, portfolio manager at Flagship Asset Management. Pieter, I appreciate the early morning time. [In] a note that you put out towards the end of last week you called ‘[China and] the dirty little secret of South African equities’, there are a couple of charts that really stand out. Of course the first one you put out there is that quite simply in rands the JSE All-Share has underperformed global markets. It has not been a great decade, notwithstanding we’ve done okay in the last couple of years, sort of post-pandemic.
PIETER HUNDERSMARCK: Yes. How are you, Simon? I think the question we set out to answer was really to sort of deconstruct where our returns are coming from, because we’ve seen in the last few years the JSE has popped its head up again and investors had very rough time in the five years prior to 2019/2020. So we thought let’s have a look and see where the returns over 10 years [have been] coming from, and the results are actually quite concerning from a diversity perspective.
Not only are the returns low, but they’re all really dependent on two areas, one being Naspers and one being resource stocks.
SIMON BROWN: Yes, resources. You make the point; over a decade not so much, but certainly over the last five years. And the market has done all right over the last five years; it’s been lifted by those resources. And then of course the other real biggie has been Naspers, and Naspers has had a fairly horror 2022, although [there was] a decent bounce in the last couple of weeks since the announcement of Prosus selling down Tencent, rebuying their own shares. But it’s been resources and it’s been Naspers driving our returns.
PIETER HUNDERSMARCK: It has. And I think the Naspers thing was to look at what those two have in common: the result is pretty clear – it’s China. So China accounts for between 40% and 50% of all resource consumption across copper, bauxite, aluminium and coal. Then obviously Naspers’s largest and really only, let’s say, discernible valuable investment at this point is Tencent, a large Chinese business. So then you take the second derivative of that, and you will say China’s been growing at 6.5% for the past 10 years; what does the world look like for the JSE when China’s not growing at that rate? What happens to Naspers, what happens to resources? [That] raises a big conundrum for asset allocators and investors to understand where their returns are coming from.
SIMON BROWN: Yes, that’s a great point. It basically says that over the last decade our JSE, which we think is independent and vibrant and everything else, has really been driven by China. That then means it comes back to the old story [that] it’s around diversification.
But I like the point that it’s around digging down and actually understanding what’s driving those returns – which is what you were doing – because it’s one thing to say let’s diversify, but, if you were buying a Top 40 equity ETF, you weren’t diversifying, you were buying China.
PIETER HUNDERSMARCK: Exactly. And I think that’s the key message of the article I was trying to get across, which is not that you can’t make money off the JSE if you time things correctly. I guess what I’m trying to say, though, is make sure you have a China view if you’re investing on the JSE, because it’s a big part of the Naspers/Prosus complex, it’s a big part of the resources consumption. Your listeners will know that it also affects our terms of trade, the currency and all of that.
So just make sure you understand that you’re making a very clear China bet when you invest just on the JSE.
Individual counters will have individual investment cases. We all know that. But just [on] the JSE in general you’re making a big China bet and investors need to be cognisant of that in my view. Obviously there are now great opportunities to diversify, so perhaps they could look a bit closer at those.
SIMON BROWN: China’s done great, and it’s the world’s second-biggest economy, growing at a good pace and everything. But it is maturing. Over the weekend, again, more Covid cases [were] coming up. Do they go back into hard lockdown? My sense is some China’s nice, but there’s a lot more planet out there as well.
PIETER HUNDERSMARCK: I couldn’t agree more, Simon. I think the Chinese economy has really been a big driver of global deflation for a while. As I said, it’s grown 6.5% for over 10 years. It’s likely that it won’t be able to reach those same numbers for the next 10. It’s off a bigger base, so maybe you don’t need as much growth, but growth is going to become harder to come by.
I think there are substantial opportunities for equity investors, at least in Europe and the US and Japan, [so] you don’t need to dig too deeply into China, or at least not make it the main driver of your portfolio returns.
SIMON BROWN: Yes. There’s lots of other opportunity. Japan catches my eye there, but we’ll save that for another conversation.
We’ll leave that there. Pieter Hundersmarck, portfolio manager at Flagship Asset Management, I appreciate the early morning insights.
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