South African equities set to end the month at a new all-time high
South African stocks are on track to close the month at a new all-time high, after trading in a sideways range for over two years. The benchmark JSE/FTSE Top40 index is trading above 50,000, a few hundred points higher than the all-time high recorded in April 2015.
The broad market has suffered over the past few years amidst credit rating downgrades, political concerns, and lacklustre economic growth. Foreign investors have been net sellers of South African equities nearly every month since 2015. Most local funds are restricted from taking money offshore, however, local retail investors have continued to take money offshore.
The options for local investors to move money offshore have grown over the past few years. Besides physically moving savings into foreign investments accounts, investors can gain exposure to financial instruments with foreign exposure using products like mutual funds, ETFs and CFDs. CFD trading, in particular, have been rising in popularity in recent years, since they allow investors to gain leveraged exposure to foreign indices, commodities, and currencies without physically transferring cash overseas.
The South African economy continues to suffer from low growth and officially entered a recession in the first quarter of 2017. However, JSE listed companies now earn over 60% of their profits offshore which means the performance of the index is not necessarily a reflection of the performance of South Africa's corporates. This shift is a result of SA companies investing in economies with higher and more stable growth while holding back on investment in their South African operations.
South Africa’s benchmark index is heavily weighted to five companies: Naspers, Richemont, BHP Billiton, Anglo American and Sasol, all of which earn the majority of their profits outside of South Africa.
Naspers, the largest constituent of the Top40 index, accounts for a large part of the index rise. The stock is up over 90% since the beginning of 50% in 2017 alone. The share has benefited from its $128 Billion investment in China based Tencent holdings.
Most of these companies fall within the Industrial Sector, and so along with the Top40 index, the Industrial index is also at a new all-time high.
Companies with businesses focused within South Africa, on the other hand, have fared poorly over the past three years. The small and mid-cap indices, which represent companies with a local focus are both well below their all-time highs. The resource index remains more than 50% below its 2007 high, while the financial index is 12% below its 2015 high.
Many of the companies with exposure to the country's consumers, companies that drove the bull markets from 2003 until 2007 and from 2009 until 2015, have struggled over the past three years. Mr Price, a market leader for many years is now trading well below its highs, along with the other clothing retailers Truworths, Woolworths, and Foschini. SA's real estate stocks are heavily exposed to the retail sector and therefore feeling the pain too. The mining sector is also in the doldrums, as are the companies that provide support services to the sector.
Until the political situation stabilises and South Africa's economy shows signs of growth, there is little reason to see the divergence slowing. South Africa's indices may well continue to move higher, while the majority of listed companies struggle to deliver returns for shareholders.
