Dual-listed companies buoy JSE
Despite South Africa’s bleak economic growth, weakening currency and the trend against investing in emerging markets, the JSE continues to reach record highs.
Stock markets within emerging economies — nations with social or business activity in the process of rapid growth and industrialisation — have in fact been steadily knocked back since December 2012, following the United States Federal Reserve’s announcement that its plan was no longer to keep short-term interest rates at near-zero until at least 2015, but rather until the unemployment rate fell below 6.5% or projected inflation rose above 2.5%.
Emerging markets have taken a further hit since Federal Reserve chairman Ben Bernanke started dropping hints in June that quantitative easing would come to a close.
While global markets have grown about 10% this year, boosted by signs of recovery in the US, emerging markets have fallen by much the same margin. According to Bloomberg, investors have pulled $44-billion from emerging-market bond and stock funds since the end of May.
As recorded by the World Federation of Exchanges, the market capitalisation of exchanges in emerging markets is generally down in dollar terms as well as in their local currencies. These include Mexico, India, Turkey, Brazil and Russia.
The JSE’s market capitalisation is down when measured in dollars — from $895-billion in January to $826-billion in July and $887-billion at the end of August — but up when measured in rand, from R8-trillion in January to R8.2-trillion in July and the recently reported R9.1-trillion as at August 30 2013.
Exchange hits record high
Compared with its market capitalisation at the same time last year, the JSE’s market’s value in rand terms has in fact jumped 20% over the past 12 months.
The exchange has continued to hit record highs this year, peaking at 43 349.15 on August 27, in spite of a gloomy domestic economic atmosphere as the unemployment rate rose, gross domestic product growth slowed and the rand remained weak.
The difference comes down to the fact that the JSE is not an emerging market stock exchange, but an international one, said David Shapiro, market watcher at Sasfin.
Essentially, the market is being held up by rand hedges: companies which are listed in South Africa, but earn their money largely offshore, and thus the depreciating rand multiplies earnings, making these companies more attractive for investors.
Ian Cruickshanks, an independent analyst, agrees that the JSE is not part of the emerging markets story because of the very steep rand depreciation coupled with the fact that a number of the exchange’s larger listed companies are viewed in dollar terms.
When translated back into rand earnings, it increases the attraction of the South African-listed companies.
Large multinationals have enough weighting on the JSE to move the market and have succeeded in doing so in recent months.
The JSE was first driven to 42 000 in August because of the weaker rand, which benefited rand hedges like BHP Billiton, Naspers, MTN, British American Tobacco and Richemont.
Over the past 12 months, the rand slumped from 8.17 to the dollar to 10.49.
At the same time, according to Shapiro, Naspers was up 56% (although it has a major shareholding in Chinese company Tencent Holdings and Chinese stocks have been down generally), Richemont was up 46% and SABMiIller up 25%.
Although these and other companies pushing the needle upward operate in emerging markets, Shapiro said there was still big demand in such markets (particularly China) on the consumption side.
Of the biggest companies listed on the JSE, the first one which makes most of its money in the country is Standard Bank, which comes in ninth when looking at the top-20 stocks, Shapiro said. This puts the JSE in a league of its own when compared with other emerging market bourses.
“The South African stock market is much more developed with a greater history … and is more representative of its economy than other emerging market exchanges, which do not have dual-listed companies to the extent that the JSE does,” said Cruickshanks. Other emerging exchanges are far more domestically characterised, he said.
Sudden revival in resource stocks
Atop this, a sudden revival in resource stocks, spurred by a turn-around in commodity prices has pushed the Bourse even higher, as aforementioned stocks hold onto their gains.
Gold reached its lowest level since 2009 in July this year, but has since climbed from $1 200 an ounce to $1 400.
Platinum, likewise, has rebounded from $1 300 an ounce in July to $1 530 this week. Subsequently, mining companies have experienced huge recoveries, serving to push the JSE upward.
Shapiro said, however, that it should be put into perspective: “Goldfields, for example, is still down more than 48%, although it is not as bad as its worst levels. With Impala, we are seeing a massive recovery, but it is still down 30% from last year.”
Shapiro said that the commodity turnaround, which has also boosted the Australian Stock Exchange, might not have legs.
According to Cannon Asset Managers, there is danger lurking in the market, driven by a handful of expensive stocks which appear to be getting more expensive.
They are considered by Cannon to be extremely high risk as these shares are trading at values way in excess of their long-term average.
“We believe that this is bubble territory similar to what we saw before the dot-com crash in the early 2000s. Furthermore, foreigners are looking for yield and are investing in stocks that they know, namely some of these large industrial companies,” one private client portfolio manager at Cannon explained.
Geoff Blount, the chief executive of Cannon Asset Managers, warned in a report that the disconnect between the JSE and the local and global economy “should be sounding alarm bells to investors”.
“Most of the stocks that did well last year are, no doubt, extremely high quality firms but — and here’s the issue — they are very expensive high quality firms.
“The JSE rallied 34% over the past year and a half,” Blount said. “SABMiller and Richemont alone contributed almost 7% of the 26.8% return. If you owned all the other shares in the market, but not these two, you would have earned a return of 20%. It also shows that 20 stocks contributed 22.4% of last year’s total market performance, and a staggering 15.4% came from large-cap industrials.”
Peter Attard Montalto, the executive director and emerging markets economist at Nomura International, said the market’s resilience was simply because platinum, in rand terms, was near an all-time high.
He said locals were buying equities instead of bonds, given the part of the economic cycle the market was in, earnings were okay and foreigners were, in fact, staying put and not pulling their money out even as the fed taper approaches.
JSE data for the week ended August 30 2013 shows foreign trading on the equity market tallied at R12.8-billion in purchases and R13.6-billion in sales. Compared with a year before, purchases were up R4.9-billion and sales were up R3.9-billion.
Local investors like pension funds have nowhere to go, Shapiro said, explaining that such funds are limited by law to invest a maximum of 25% offshore and the rest domestically.
It may not look like it now, but South Africa’s exchange is not impervious to what happens in the rest of the developing world. As Cruickshanks put it: “If there is an emerging market meltdown, we will feel the heat.”
Shapiro agreed, noting that the JSE would feel the impact on commodities in particular, affected by demand from economies like China.
In a different league
An analysis of the market capitalisation of various stock exchanges versus the gross domestic product (GDP) of the countries in which they operate indicates that the JSE may well be the most internationalised exchange in the world.
The JSE’s market capitalisation at August 30 was valued at $886-billion, substantially more than double the country’s 2012 GDP of $384-billion as last recorded by the World Bank.
It appears to be an entirely different animal when compared with other emerging market stock exchanges, even developed ones.
According to July market capitalisation data from the World Federation of Exchanges, the size of stock markets in other emerging economies appears to be small when compared with their own economic growth, as quantified by World Bank data for 2012.
Mexico’s exchange, at $508-billion, is a fraction of the size of its GDP of $1.17-trillion.
India’s Bombay Stock Exchange and National Stock Exchange of India, when combined, tally little more than $2-trillion, only slightly more than its GDP of $1.84-trillion.
Turkey’s Borsa Istanbul, is valued at $232-billion, compared with a GDP of $789-billion.
The Moscow stock exchange is worth $708-billion, while its economy is worth a hefty $2-trillion.
Thailand’s stock exchange was valued at $399-billion in July, coming closer to its 2012 GDP of $365-billion.
The Indonesian stock exchange was worth $446-billion, while its GDP was $878-billion.
While the JSE cannot compete with the market capitalisation of developed economy stock exchanges, the ratio to its GDP still remains comparatively large.
The United States exchanges, namely the Nasdaq OMX and NYSE Euronext, have a combined market capitalisation of almost $22-trillion, much higher than the US GDP of $15.6-trillion.
And the London Stock Exchange was worth $3.89-trillion, while Britain’s GDP is an estimated $2.43-trillion.