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.
Geoff Blount, the managing director of BayHill Capital, says the performance of Naspers and SABMiller has masked the severe bear market the rest of the local equity market is in.
Local shares, as measured by the FTSE/JSE All Share Index (Alsi), are showing a return of 12.78 percent a year over the three-year period to the end of March, but over the past year have returned only 3.17 percent.
Blount says that 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 percent, 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 percent over the period.
Blount says the two shares collectively make up about 25 percent of the index. They were up 26 percent over the 12 months to the end of February and rose more than 38 percent 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.
Blount 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.
Blount says Bayhill Capital found that, over three years to the end of February 2016, Naspers and SABMiller rose 156 percent, dramatically boosting the Alsi’s return over this period.
For the three-year period to the end of February, the Alsi was up 36 percent, but if you stripped out the performance of the two high- flyers, the Alsi would have shown a very modest 14-percent return, or an average annual return of about 4.5 percent.
Elaborating on this theme, Rafiq Taylor, a portfolio manager at Sanlam Multi Managers, says 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 Africa and in foreign currencies), Taylor says.
He says 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 pockets of the market are expensive, while others are not, he says.
Taylor argues for staying invested in local equities, because, over time, the market rewards those who stay invested through both good times and bad, he says.
Taylor analysed the 50 worst equity market falls in South Africa since 1928 and measured the drawdowns: the falls in the market from a peak to the very lowest level before it turned up again.
He found that 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.
Taylor says the average magnitude of the 50 drawdowns was a drop of 16.5 percent.
After a market drop of this size, you need a gain of 23.7 percent to get back to where you were before the market fell, he says. But the analysis revealed that staying invested for the following 12 months gives an average return of 25.8 percent, which is better than the breakeven return required.