HOW CAN THE JSE BE UP NEARLY 20% WHEN THE ECONOMY IS HARDLY GROWING?

MARKETS

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LOCAL NEWS

Moody’s hinted that it will downgrade South Africa’s credit rating. Moody’s, S&P and Fitch are the world’s most important ratings agencies for governments and large companies. Debt is considered “junk” if it is rated below investment grade by 2 or more of these agencies. South African government debt issued in foreign currencies is already junk. However, just over 90% of our government’s debt is issued locally and that is still rated “investment grade” by Moody’s and S&P, but junk by Fitch. If Moody’s downgrades SA’s rand denominated debt it will be considered junk and we will no longer be a part of the important World Government Bond Index. This will further damage investor confidence and probably raise the government’s borrowing costs. Not what we need right now as Mr Gigaba needs to raise billions more debt to finance our budget deficit.  (Moody’s, BusinessTech, The Louwdown)

Retail sales have gone up by 5.5% compared to last year, which seems surprising given the dismal outlook for SA’s economy. ClucasGray, an asset management firm, points out that food pricing inflation is decreasing now that farmers have recovered from the worst drought on record and that lower relative food prices are giving shoppers extra money to spend. The firm believes that we may be entering a more normal consumer cycle. Let's hope so.

The chart clearly shows the relationship between rising retail sales and falling food inflation. Food inflation (blue line) is flipped over so that a line going up shows falling inflation.  (ClucasGray)

The chart clearly shows the relationship between rising retail sales and falling food inflation. Food inflation (blue line) is flipped over so that a line going up shows falling inflation.  (ClucasGray)

Presidential hopeful, Cyril Ramaphosa, caused a bit of a stir when he announced his preferred leadership team at a rally in Limpopo on Sunday. Mr Ramaphosa said that he wanted Naledi Pandor (Science and Technology Minister) as deputy president, Senzo Mchunu (former KZN Premier) as secretary general, Gwede Mantashe (current SG) as national chairperson and Paul Mashatile (Gauteng chairperson) as deputy national chairperson. The move was unpopular because of its break with ANC protocol and was called an “own goal” by the Citizen and “Cyril’s Big Blunder” by the Star. Ms Pandor is a surprise inclusion and is interesting because she is as yet untouched by political scandal. (Star, Citizen, Daily Maverick, Pic Huffington Post).

Last week Friday the State Security Agency issued a cease and desist letter to publishers of “The President’s Keepers” by Jacques Pauw (the same journalist that exposed the apartheid-era Vlakplaas death squads). The book effectively sold out overnight and by Saturday afternoon I’d seen the first full copy circulating… via WhatsApp. The President’s Keepers  has become a global best seller on Amazon and is the fastest selling book in South Africa since record keeping began in 2004. In case you’ve been living underground for the past 10 days, Mr Pauw makes explosive claims about President Zuma’s tax affairs and bogus spies who earned millions. Clearly trying to suppress bad news is the worst way to stop it spreading. (BizNews, Times Live)

COMMENTARY

HOW CAN THE JSE BE UP NEARLY 20% WHEN THE ECONOMY IS HARDLY GROWING?

On Monday the JSE All Share Index broke through the record level of 60,000 points for the first time, at which point it was up 18.4% for 2017. So far this is the the biggest annual  gain since 2012 when the index closed up 22.71%. At almost the same time a group of leading economists in Beeld’s monthly consensus forecasts said they expected South Africa to grow by just 0.67% this year and 1.24% next year.

Whoa... what’s an index and what do we mean by “the JSE” (skip this paragraph if you know how many shares are in the ALSI)

An index is simply the average of the prices of a group of stocks that gives an indication of how well the exchange on which those shares trade is doing. When people talk about ‘the JSE’ (formerly the Johannesburg Stock Exchange) going up or down they usually mean the performance of the JSE All Share Index (the one we use above). There are nearly 400 shares listed on the JSE and despite its name, the All Share Index only tracks the performance of 150 of them. There are other indices such as the Top40 and sub-indices like the Small and MidCap indices. In the last two examples, “cap” refers to “market capitalisation”, which is simply the size of the companies.

So...what is going on

Even though it's located in the heart of Sandton, the JSE isn’t really a South African stock exchange, in fact over 70% of the revenue earned by the companies in the Top40 index comes from offshore. To complicate things further, albeit that  the Top40 is made up of giants like Anglo America, Sasol, Discovery and MTN, nearly a quarter of the value of the index comes from just one stock… Naspers.

Huh!

Yes, the company that was founded by Afrikaner nationalists in 1915 as “De Nationale Pers” and which has included H.F. Verwoerd and P.W. Botha as director is now a global tech darling. The secret is Naspers’ 35% stake in Chinese social media and gaming giant, Tencent (literally, “soaring information”). Tencent’s share price actually makes Naspers’, stake worth over 100% of the entire company. This means that in theory investors assign absolutely no value to South African household names like Supersport and DSTV. It's all about Chinese tech and the only way for foreigners to do that is by buying Naspers.

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What else?

All of this revenue coming from overseas means that if the rand tanks, the value of these companies measured in rands must go up. That’s why the JSE has done so well since the rand weakened after the budget speech. It’s also important to note that around 40% of the shares on the JSE are owned by foreigners. This means that a huge amount of the value of the JSE is decided by people who aren’t reading about the Guptas every day.

Putting it all together…

The performance of the JSE this year has been almost entirely due to the very largest companies that make most of their money overseas and whose share prices go up when the rand falls. Naspers is up 75.8%, Richemont 43.6%, British American Tobacco 18.6% and Anglo America 43.7%. On the other hand the index of small companies, which are much more likely to actually make their money in South Africa, is down  is down 2.8%, while the index of medium sized companies is down 2.2%.

Where to from here...

Firstly, South Africa clearly has a track record of producing innovative global champions. This national ability hasn’t evaporated overnight, so there is no reason to think that we can’t continue to do so into the future. Secondly, as a South African investor you can gain exposure to the global economy simply by investing in our local stock market.

Good luck out there!

Dr Andrew Louw CFA & Gina Bleyenheuft CA(SA)

(MoneyWeb, Moody’s, BizNews, Bureau for Economic Research, Business Day, National Treasury, Intrepid Capital, Wikipedia, The Louwdown, share price data correct as of Monday 6-Nov-17)


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