Shares on the JSE have been performing poorly for the past three years, not even keeping pace with inflation, but this has been concealed by the extraordinary performance of just two shares, according to an asset manager. 

The performance of Naspers and SABMiller has masked the severe bear market the rest of the local market is in. 

Local shares, as measured by the FTSE/JSE All Share Index (Alsi), are showing a return of 12.78% a year over the three-year period to the end of March, but over the past year have returned only 3.17%. 

A month before the end of the quarter, at the end of February, the Alsi was showing a loss over 12 months of 3.9%, but if you strip out from the Alsi’s performance the returns made by SABMiller and Naspers, the rest of the aggregated market was actually down nearly 11% over the period. 

The two shares collectively make up about 25% of the index. They were up 26% over the 12 months to the end of February and rose more than 38% in the last four months of 2015 alone. 

As these two shares make up a sizeable portion of the value of all the shares in the market and have a heavy weighting in the Alsi, they have concealed the underlying trend in the Alsi, he says. 

Naspers and SABMiller are special cases, with Naspers gaining from its holding in Tencent, China’s largest internet portal, and SABMiller being the subject of a R1.4-trillion takeover bid by the world’s biggest brewer, Anheuser-Busch InBev. 

Over three years to the end of February 2016, Naspers and SABMiller rose 156%, dramatically boosting the Alsi’s return over this period. 

For the three-year period to the end of February, the Alsi was up 36%, but if you stripped out the performance of the two high-flyers, the Alsi would have shown a very modest 14% return, or an average annual return of about 4.5%. 

The local market appears expensive when companies’ share prices are considered relative to the expected profit the company will make, expressed as earnings per share. 

This is measured by the price to earnings (PE) ratio, which ended the quarter to March at above 20, which is high compared with the JSE’s long-term average PE of about 12. 

However, the current rating of the market is distorted by significantly overpriced rand-hedge industrial companies (companies that make a significant part of their profits outside of South African and in foreign currencies). 

If you exclude these companies, such as Naspers, British American Tobacco, SABMiller, Richemont and MTN, the PE ratio of the Alsi drops to about 11.5. 

This shows that pockests of the market are expensive while others are not. 

Stay invested in local equities, because, over time, the market rewards those who stay invested through both good times and bad, he says. 

Most of the drawdowns averaged eight months in length and were followed by a recovery averaging nine months. Importantly, the recovery left investors better off than they were before the downturn. 


Laura du Preez – Weekend Argus