I am often asked my opinion on the future direction of the JSE all share index (Alsi), to which I invariably reply that its best days are behind it and unless SA can once again experience some strong, sustained economic growth, it’s likely to stay that way. Though the US equity market is expensive, it has rewarded investors handsomely over the years and all other things being equal, that situation seems likely to prevail for the foreseeable future.
Since June 2014, when the Alsi was at 52,060, the market has largely gone sideways, punctuated on the upside by the “Ramaphoria-led” bounce in January 2018, and on the downside by the Covid-19 pandemic-induced sell-off in March 2020.
At its current level of 54,219, the Alsi remains in correction territory, 12% below its all-time high of 61 685 set on January 25 2018, and 5% down on this year. Over a medium-term investment time horizon, it has risen a rather derisory 7%. However, over the long-term period of 10 years, it has delivered an impressive 86% return.
Contrast this with the S&P 500, which is 6% below its all-time high recorded on September 2 this year, and up 3% year to date. Its five-year performance is stunning, up 72%, and on a 10-year view, it’s up 192%.
Little wonder that financial advisers have for some time been prompting clients to invest offshore and specifically in the US equity market. The usual suspects, the tech stocks, are the favoured destination and this strategy has done well for them.
Investment theory would suggest that it may now be time to switch out of the expensive S&P 500, now trading at about a 29 times price:earnings (p:e) ratio and into the much cheaper JSE Alsi, now on a 13 times p:e. But it’s not that simple.
As feeble as the JSE’s performance has been in recent years, even that performance has mainly been due to the overriding influence of rand-hedge stocks such as Naspers and its sibling Prosus. Naspers is 800% higher than in 2010 and 137% up on September 2015. Prosus listed a year ago but is already up 28%. Together, they account for roughly 23% of total JSE market capitalisation.
Excluding these rand hedges, the remaining “SA Inc” stocks, those which derive the bulk of their earnings from SA operations, have fared poorly in recent times. Obvious sectors are retailers and banks, most of whose market capitalisation has been annihilated in the past five years.
The likely trajectory of large SA Inc stocks remains poor, unless SA finally embarks upon genuine structural reform of the economy. And even then it will be a long haul to decent economic growth. The banks have made huge provisions for bad debts but we shall know in 2021 whether these will be sufficient. And while consumer spending has bounced back from the worst days of lockdown, the outlook remains poor. The recent release of greatly increased unemployment statistics underlines the seriousness of the economic malaise.
If the government largely keeps to the status quo, and in particular does not resolve the crippling impact of rolling power blackouts, SA will be caught in a low-growth trap for the foreseeable future, and this is likely to be reflected in a continuing poor performance from the JSE Alsi.
Yes, the S&P 500 does sit in historically expensive territory, and this may well persist while global interest rates remain extremely low and don’t offer a compelling alternative to equity investment.
Though tech stocks such as Amazon, Apple, and Alphabet have had a large reversal of fortune recently, and while collectively they account for more than 20% of the total market capitalisation of the S&P 500, there appears to be no shortage of interest in tech stocks, especially from individual US investors.
Unless a fundamental shift occurs in the SA economy that allows it to escape its current low-growth trajectory, SA investors are likely to still prefer to invest in the extremely expensive US equity market.
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