The JSE is proving the SA doom-mongers wrong, outperforming its developed-nation counterparts in dollars and countering the narrative that local investors should get their money offshore as soon as possible.
The all share index has delivered a commendable 13.1% in dollar terms thanks to strong commodity prices, which have benefited heavyweight resource counters such as Anglo American and BHP. A resilient rand, the only big emerging-market currency to have strengthened against the dollar this year, has also protected the bourse’s hard currency performance.
While the JSE all share index has not performed as well as obscure markets such as Kazakhstan and Estonia, where the local bourses have returned 21.87% and 22.22% in dollars, respectively, it has done far better than the single-digit returns from the US, the UK and Europe. It has also strongly outperformed its emerging-market peers such as Turkey, Brazil and China, where equity markets have delivered negative returns in dollars so far this year.
“The reason the JSE is up so strongly year to date is primarily due to the strength of the resource sector,” says Neville Chester, senior portfolio manager at Coronation. “This has resulted in the big diversified mining shares performing extremely well, as has the platinum group metals sector.
“Depending on which index you follow, the resource sector makes up at least a third to well over 40% of the main market indices. Hence, when they do well they drag up the overall index.”
The JSE resources index is up more than 19% year to date in rand and almost 20% in dollars thanks to an unexpectedly strong worldwide recovery from the Covid-19 pandemic, helped in large part by the rapid rollout of vaccines and unprecedented economic stimulus measures. That has helped push up the prices of commodities such as copper, iron ore, coal and platinum as investors priced in a more robust economic recovery than was initially expected.
Hannes van den Berg, co-head of SA equity and multi-asset funds at Ninety One, says the boost from commodity prices is also helping to improve SA’s economic fundamentals, thereby countering local investors’ “negative bias”.
“The story that went missing in the midst of the Covid-19 crisis was the injection SA got from strong commodity prices and the contribution that made from a tax perspective,” he says.
“The contribution that mining companies have made to the fiscus has enabled SA to run lower budget deficits, which has thrown the country a lifeline because it means less debt issuance since tax collections were better than expected.”
The SA Revenue Service (Sars) collected R38bn more in tax in the fiscal year to end-March 2021, beating budget estimates for the first time in five years. That could help narrow the consolidated budget deficit for the 2020/2021 fiscal year to less than the projected 14% of GDP.
Van den Berg says high commodity prices and improving revenue collection, coupled with a resilient rand, challenge the “negative bias of wanting to get everything out of the country”.
Ninety One reduced the offshore exposure of its equity fund to about 25% in July 2020 and may lower that further in favour of SA shares provided global economic growth continues to improve, because this will support emerging markets such as SA.
“As long as the structural growth recovery story remains intact, inflation does not spike out of control and commodity prices stay strong, then on a 12- to 24-month basis we will consider buying more SA shares,” says Van den Berg.
“But you don’t want to be in the index in general. You want to be able to allocate capital to those specific pockets of the index or particular stocks that are giving you a lot of upside and we think will continue to give you upside from here.”
Ninety One’s equity portfolio has just shy of 40% invested in resources, with a further 36% allocated to what Van den Berg calls “SA Inc stocks” — banks, retailers and shares such as MTN, vehicle seller Motus and Sappi.
Ninety One prefers clothing retailers such as TFG and Truworths over food retailers because it believes they have a better “earnings recovery profile” than general grocery retail, which was not as hard hit during the pandemic as people were still able to spend on basic food consumption.
“We still think domestic shares look attractively priced,” says Van den Berg.
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