While the JSE All Share Index reaches new highs breaking 50 000, economists warn of an economic recession. Is it time to cash out?
While one would think that a stock market would be a reflection of a country’s economy, there is in fact no statistical correlation between stock market values and economic growth. A good comparison is China, which has shown unprecedented growth over the last twenty years, but investors in Chinese listed companies have had close to zero returns since 2001.
The way a company is managed and the ability of investors to trust management is often more important than economic growth. One of the main reasons for China’s lacklustre performance has been concerns over poor corporate governance by management, as well as the continued ownership by the Chinese government of large stakes in Chinese companies.
South African companies, in contrast, are favourably regarded. Our corporate governance and company management is the most highly rated among all emerging markets - investors like companies they understand and management they can trust. Since the bursting of the dot.com bubble in March 2000, the JSE All Share Index is up by a massive 298% in US dollars. In comparison the Morgan Stanley Composite World Index is up only 29% in US dollars.
The success of South Africa’s companies is a reflection of their outstanding calibre which not only continues to attract foreign investors but has also seen many of our companies succeed in the global markets.
Due to global expansion by companies like SAB Miller, BHP Billiton and Anglo American as well as companies like Richemont and British American Tobacco which operate solely in offshore markets, nearly half of the earnings generated by the JSE All Share Index come from offshore markets. This means many of our leading companies are more correlated to global growth than South Africa’s economy. Just by investing in these companies one is gaining exposure to global opportunities.
Many of our companies such as retailer Shoprite Checkers, telecommunication giant MTN and banks like Standard Bank have a very strong African presence and are benefiting from the extraordinary growth rates of sub-Saharan Africa. A rate which is growing at 6% a year compared to less than 2% for South Africa.
Given these growth rates it is understandable that companies listed in the Financial and Industrial Index (FINDI) are delivering average earnings that are double the rate of our economic growth and why the share prices of these companies have risen so dramatically.
The question now is: can this continue? Our valuations are high, in other words investors are paying a relatively high price for our companies despite their higher earnings. We are also enjoying an uninterrupted 5-year-plus bull run and at some point common sense suggests that the market will adjust back to more normal levels.
If you have a short-term investment horizon or are thinking about investing a lump sum in the market, you may want to park your funds in the Stanlib Income Fund and earn 6.5% virtually risk free. There may be a better buying opportunity once the market corrects.