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Going forward, prospects for the JSE appear increasingly gloomy to many investors, resulting in growing appetites for alternative offshore exposure.
Many believe that the JSE is at unrealistically high levels; they argue that its performance has long ceased to reflect trends in the domestic economy, and they anticipate a correction. They’re also wary of extraordinarily negative political developments domestically.
We spoke to Stanlib fund manager, Paul Hansen, about these and other issues.
Do you share the growing negativity, premised especially that there is a significant disconnect between current domestic equity valuations on the one side, and economic and political realities on the other?
There is a case to be appropriately exposed to both onshore and offshore. But no, I’m not bearish about either the domestic market or international markets. On the contrary, I’m quite bullish about the outlook for the JSE. I think that we’re close to a break on the upside.
Can you explain?
The situation now reminds me of when I returned to SA in 1992 after nine years in the US. Many said to me: “You’re crazy – the country is finished. We want to go offshore, and you’ve come back!” Until about three years ago we had a magnificent run in which the market pretty much doubled.
Since then it has more or less moved sideways, but, in my view, gathering steam for the next run. Our market is set to do pretty well over the next 12 months.
What about SA’s junk status?
Sure, we’ve been downgraded to junk, but my colleague, Kevin Lings, reminded me that we were predominantly rated junk through 40 years of apartheid and weren’t even permitted to borrow from the International Monetary Fund (IMF).
More immediately, emerging markets have moved into a better space and we’ve benefitted directly from it. This has been reflected in the rand strengthening. Our market in US dollar terms tends to follow the MSCI Global Emerging Markets (EM) Index closely.
Also consider that stock markets in Brazil and South Korea are at record levels in spite of corruption and the recent impeachment of their presidents, and we’re in a similar position.
The JSE and All Share Index (Alsi) 40 Total Return indices (including dividends) are currently at all-time highs. The JSE Alsi and JSE Top40 indices are not far behind.
The emerging-market environment also helped the 10-year SA government bond yield to fall to 8.6% last month from a high of 9.2% in early April.
What kinds of domestic funds would you consider?
In the Stanlib stable I’d look to the All Share Index Fund and the Alsi 40 Index Fund. I’d favour them in a bull market, though certainly not in a bear market. The reason that I like them in a bull market is that they are full-weight for the likes of Naspers*, British American Tobacco (BAT), Anglo American and Richemont.
Naspers in particular has returned between 30% and 35% alone this year. It constitutes about 20% of the Alsi 40 Index. But you also want to be out of those funds before the end of the bull market.
What about those investors who are tilted to the offshore option?
At present I’d go for a global developed market fund with a possible tilt towards Japan, and I’d go for a global EM market fund.
Potentially, Europe is the most interesting. Economic growth there last year was slightly better than the US and it’s still gathering steam. The euro relative to the dollar is at its strongest this year. And this all points to a significantly stronger stock market and a stronger currency. Moreover, Europe is still a long way from its record highs.
Two months ago the MSCI Europe Index was at the same price that it was 20 years ago!
What about the London Stock Exchange and Brexit?
Hard to call, though perceptions seem to be more negative than positive in commentary terms. And indeed, it could be tough for Britain. The flip side is that 70% of the FTSE 100 is global companies and is much more hedged than, say, our local market. Few of them are seriously operative in the UK.
What about the US, especially given the increasingly embattled Trump administration?
Contrary to what many others believe, I think that the US equity market is only slightly overvalued. It can lift another 20% to 40% before the bull market ends.
According to my sources there, it’s very slightly overvalued. Over 80% of S&P 500 companies have reported earnings for the first quarter and more companies beat the forecasts by a larger percentage than is usual.
US market analyst Elaine Garzarelli expects US GDP growth to rebound from the mild 0.7% growth in the first quarter to 3.4%, buoyed by consumer spending. She still likes the technology, healthcare, financials, consumer discretionary, industrials, materials and real estate sectors.
All are overweight the S&P 500. Energy is at benchmark. Healthcare has returned +9.2%, consumer discretionary +10.4% and energy -10.2%. So far this year IT has returned +14.8% versus the +6.9% for the S&P 500 Index.
*finweek is publication of Media24, a subsidiary of Naspers.
This article originally appeared in the 8 June edition of finweek. Buy and download the magazine here.
