So how is it that the return of the SA market is matching that of the US market? We don’t have any of the stocks that the US market has that have experienced the COVID-19 crisis as a tailwind. Netflix, Amazon and Apple all saw positive changes in their fortunes, (online sales at the apex of the crisis were growing at 26.3% while bricks and mortar were contracting at -17.7%) as COVID-19 gripped the world and forced it into an adoption of tech at a pace which has never been seen before. As a result, share prices were driven to new highs, pushing the level of the US’s mostly widely followed index, the S&P 500, to all-time highs.The reality is that the South African equity market has become much less influenced by the heartbeat of South Africa and way more aligned to what’s happening in the rest of the world. The following are key reasons for this phenomenon:
- International shares that just happen to be listed on the JSE. There are many of these – British American Tobacco, Anheuser Busch and Richemont are obvious examples. We would argue that Naspers and Prosus fit into this bucket too, with their fortunes inextricably linked to their largest asset, Tencent.
- So-called rand hedge counters. They derive their value from predominantly non-South African sources, and examples of these would be Impala Platinum, whose valuation is driven more by the Rand Platinum Group Metals price than the heartbeat of South Africa.
- Some South African companies that have invested abroad. If you disaggregate the vale drivers of these companies, you will find that they are not driven entirely by South Africa. There are some interesting examples in this bucket. A company like the Foschini Group (TFG), which most South Africans would think of as purely South African exposed, with their well-known South African brands such as Foschini and Sportscene. It is important to note that TFG has close to 30% of its revenue derived from outside South Africa, in the UK and Australia mainly.
South Africa is in a precarious economic position and was so before the COVID-19 crisis hit. Although the COVID-19 crisis dragged us closer to the economic abyss, the broader market has performed well since the day of the national lockdown was declared. The chart below shows the drivers of those returns. The SA Inc. component of our market, a proprietary market cap weighted index of companies whose value is mainly driven by the “heartbeat” of South Africa, has performed poorly, regaining only 18% since the March lows. However, if we graph a market-cap weighted basket of international stocks that happen to be listed in South Africa (which have generated a 54% return in ZAR since the lows) and then add to them the rand hedge component, the basket’s return increases to 60%. The weighting of these components in the All share has offset the far more muted recovery of the SA Inc. component and helped the All Share to exactly the same percentage recovery (in Rand terms) as the much-celebrated S&P500 Index.South Africa has its well-documented problems and there is a huge amount of uncertainty around how these problems will be solved. However, we are fortunate that the SA equity market has good geographical diversity and that even with the negative outlook for the “heartbeat” of South Africa, there have been and will continue to be, opportunities in the rest of the market. Glacier Research would like to thank Brian Thomas for his contribution to this week’s Funds on Friday. Brian Thomas, Portfolio Manager at Laurium Capital