by Magnus Heystek of Brenthurst Wealth
In the five years or so leading up the Great Financial Crisis, which started not many months after the Springboks beat England 15-6 in the Stade de France in 2007, the JSE was, on a relative basis, one of the top-performing global stock markets worldwide, measured both in local currency terms as in US dollars.
The period 2002 to 2007 was a golden one for most JSE investors, both in rand and US dollar returns.
The financial crisis, which erupted with the collapse of US bank Lehman Brothers late in 2007, put a stop to the outperformance of bourses in emerging markets and, despite being the epicentre and the cause of the crisis, global money started flowing back into US cash, bonds and equities.
Reversal, quick and brutal
Since then, the reversal of the relative performance of developing markets versus emerging markets has been as brutal as it has been spectacular, especially since 2011 on the back of a swoon in the global commodity index.
The year 2011 was also not a great one for the Springboks, who lost 9-11 to Australia in the quarter finals of the Rugby World Cup (RWC). But even this below-par performance was miles ahead of the 2015 RWC, where the Boks, despite reaching the semi-finals, were merely a shadow of their former glory.
Since then, the Springboks have in quick succession lost a home series against the Irish for the first time and recorded first-time-ever losses against Wales and Argentina. November 19’s loss against Italy, while a boost for Azzurri rugby, plumbs a new low for our erstwhile RWC-winners.
I had to chuckle when our TV-experts – Naas Botha, Nick Mallett and Jean de Villiers – confidently bragged pre-game on SuperSport how the Boks would smash the men in blue by “20 points or more”. This was after they scraped a draw against the Barbarians and were smashed by the English last week. Hope springs eternal, it seems.
What happened on the field was one of the worst 80 minutes of Springbok rugby for many a year….
Gone are the days when the Springboks could rumble onto a rugby field anywhere in the world, except for maybe New Zealand, having a psychological advantage equivalent to ten points merely by wearing the green and gold.
The performance of the Springboks over the past five years and more bears an uncanny resemblance to the performance of this country’s stock exchange over the same period.
Rugby’s declining fortunes have been a combination of an outflow of our best talent as a result of government interference, the quota system in SA rugby as well as the lure of earning pounds and euros in the cash-rich leagues in Europe and the United Kingdom. Rugby has also boomed in other parts in the world, with rapid growth in the sport’s popularity in countries such as Argentina, Italy, Japan, Fiji and others.
Many young talented SA rugby players have opted to use ancestral family-links to obtain English, Irish and even Scottish citizenships in order to ply their trade in these countries, while others have stuck out the requisite five-year waiting period to apply for citizenship in a wide range of countries.
Most European, British, American and even Australian premier and national rugby teams now regularly feature South African-born and bred rugby players.
JSE looking like an out-of-form Bok team
How different is this from the rapidly-growing number of local companies opting to expand into foreign waters rather than deploying their growing mountains of cash in the local markets?
What is causing this decline in the fortunes of SA’s business sector and the fortunes of investors in companies listed on this exchange? A major contributing factor has been the decline in the commodity sector but, like rugby, many of our losses have been own-goals.
Just for starters, there are misguided government policies (think of the visa-debacle, new proposed liquor industry laws, broad-based black economic empowerment guidelines and mining rights uncertainty).
For a main course one can add state capture and endemic corruption (at municipal and state level).
The end result is business and consumer confidence at 30- and 15-year lows respectively, an outflow of capital with a stock market rapidly losing ground against its major competitors – both in the developing world over five, three and one years and, more recently, also against its peers in the emerging market space over a year, particularly since President Jacob Zuma sacked former finance minister Nhlanhla Nene in December 2015.
A downgrade by one or more major credit rating agencies in the next month or so, could just be the final push for the JSE into perennial second-league status, perhaps for a very long time.
Over five years the rand returns of the JSE compare very poorly with others. Even the strengthening of the rand over the past year did not break this losing streak:
|Rand returns of the JSE|
|Stock exchange||Five years||Three years||One year|
|MSCI Europe index||+127%||+54%||-6%|
|MSCI World Index||+172%||+54.9%||+4.4%|
Even the rest of emerging markets (MSCI Emerging markets index) left the local bourse in the dust, with a rand return of +6.8% over the same period.
I have written before on how the JSE All Share index has not beaten the local inflation rate over one, two and three years. And, with the price earnings ratio (PE) still at highly elevated levels around 24, don’t expect an upward rerating of PE levels to come to the rescue of local investors some time soon in the near future.
The macro environment for companies listed on the JSE remains toxic.
Foreigners have been major sellers of our stocks and bonds over the last 12 months, economic growth is anaemic, while the political tornadoes that gust from unexpected directions every now and then further destabilise already-fragile economic confidence.
This bear market, I feel, could last for several years before growth in company earnings catches up to PE ratios.
Stay invested in a JSE-linked index for the next couple of years? No thanks; not for me.