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How Naspers share movements influence the JSE

Dec 05 2017 23:31

Cape Town - When analysing the Johannesburg Stock Exchange, one should pay especially close attention to Naspers, as any movement in its share price has a significant effect on the JSE, according to Overberg Asset Management.

In its weekly economic and market overview, OAM said Naspers' share makes up 25% of the JSE Top 40 Index and 21% of the All Share Index.

Since the start of the year the JSE All Share Index has gained by 18%. However, if Naspers is excluded the gain would have been just 9%.

Part of the reason is the sheer size of Naspers with a market capitalisation of just under R1.7trn, OAM said.

South Africa economic review

• Total new vehicle sales grew in November by 7.2% year-on-year marking the sixth consecutive month of expansion. On a year-on-year basis, export numbers faltered for a second straight month due to weather disruptions at Durban port and production changes by major manufacturers, causing a 13.7% decline on the year.

Commercial vehicle sales declined 9.0% on the year, although on a month-on-month basis increased by an encouraging 7.8%. The outlook for vehicle sales is improving, helped by strong export demand and a gradual recovery in domestic business and consumer confidence.

• The trade balance registered a surplus in October for the eighth consecutive month. The surplus widened slightly to R4.56bn from R4.48bn in September lifting the cumulative surplus for the year-to-date to R51.6bn.

This compares to a deficit of R9.9bn in the same period last year. On a year-on-year basis, imports gained in October by 8.4% while exports grew by 18.3%, boosted by a 50.8% increase in the value of mineral exports. A buoyant global economy is lifting export demand across the board.

The World Trade Organisation lifted its growth forecast for world merchandise trade volumes in 2017 to 3.6% from a previous 2.4%. This compares with 1.3% growth in 2016. The positive trend in South Africa’s trade balance signals a narrowing in the country’s current account deficit thereby reducing its reliance on capital inflows.

• Producer price inflation (PPI) eased to 5.0% year-on-year in October from 5.2% in September. The key drivers were electricity and water PPI, which fell sharply from 6.0% to 3.6% on the year due to a steep 7.1% month-on-month decline.

By contrast, the PPI for “coke, petroleum, chemical, rubber and plastic products” and “transport equipment” increased by an elevated 1.3% and 2.0% on the month. PPI is expected to remain below 6% for the foreseeable future although any shocks to the rand or oil prices could cause an upward spike, which in turn would prompt the Reserve Bank to hike interest rates.

• Growth in private sector credit extension (PSCE) unexpectedly slowed to 5.4% year-on-year in October from 5.5% in September below the consensus forecast of 5.7%. Credit extension to companies improved on a year-on-year basis from 7.1% to 7.2%, but fell 0.5% on the month. “Other loans and advances”, which includes unsecured loans to both companies and households, also improved on the year from 6.4% to 6.5%, but fell 0.7% on the month.

Mortgage advances eased from 4.4% to 4.3% on the year, but increased 0.4% on the month. The standout was instalment sales and leasing finance, which grew 0.8% on the month boosting growth on the year from 4.0% to 4.8%, driven by the recovery in new vehicle sales. While credit growth is subdued, there are early signs of recovery in the credit cycle in the instalment sales and leasing category.  

• Net foreign investor outflows registered a massive R15.32bn in the week to December 1, marking the biggest weekly outflow since May 2016 and the fourth largest on record. The catalyst was undoubtedly the credit rating downgrade by Standard & Poor’s.

On the week, foreign investors sold a net R8.73bn worth of bonds and R6.58bn of equities. However, for the month of November, net bond and equity flows were more muted at -R3.77bn and +R4bn, respectively. Net equity inflows have been gaining momentum, registering a positive R15.3bn in the combined months of October and November.

For the year-to-date, net equity inflows are still negative at -R57.93bn while net bond inflows remain positive at +R53.77bn.

• The ABSA manufacturing purchasing managers’ index (PMI) increased from 47.8 in October to 48.6 in November. Although still below the key 50-level, which signals contraction, the PMI is at its best level since May and well above the recent low of 42.9 in July. Among the PMI sub-indices, business activity increased sharply from 45.9 to 48.0.

However, the forward-looking new orders index slipped from 49.9 to 49.1 and the future conditions index eased from 51.2 to 50.0. Meanwhile the prices index surged from 73.2 to 80.7, indicating a build-up in inflationary pressure.

Despite mixed sub-index readings, the overall improvement suggests the manufacturing sector is gradually recovering from its recent slump.

• The RMB/BER business confidence index eased to 34 in the fourth quarter (Q4) from 35 in Q3, which although an improvement on the seven and a half-year low of 29 reached in Q2, is still at depressed levels.

While sentiment deteriorated further in the retail, manufacturing and construction sectors, it improved slightly in the vehicle sector and wholesale trade sector. According to the BER survey businesses are adopting a wait and see approach ahead of the ANC elective conference, which concludes on the 20th December.

A positive outcome to the conference would impact sentiment positively over the short-term while a longer-lasting impact would depend on market-friendly structural reforms.

RMB chief economist Ettienne le Roux notes that: “The government has a narrow window of opportunity to put in place an action plan to change the country’s longer-term growth path for good. We need bold and unpopular solutions for the jam South Africa is in.”

The week ahead

• Third quarter GDP: Due on Tuesday, December 5. Better than expected consumer spending and robust agricultural production has kept third quarter (Q3) GDP growth at the 2% mark, above the 1.7% growth analysts expected.

• South African Chamber of Commerce and Industry (Sacci) business confidence index: Due Wednesday,  December 6. The Sacci business confidence index (BCI) has been on a downward trend since November 2011, but has shown signs of bottoming out after hitting a more than 30-year-low of 89.6 in August.

Business and industry sentiment is starting to look past the current period of acute political and policy uncertainty.

Technical analysis

• To return to its medium-term appreciating trend of the past 18 months, the rand needs to break through key resistance at R14.00/$ and R13.50/$, which if broken would target further gains to R12.50/$.

• The US dollar index has tried but failed to break through a major 30-year resistance line suggesting the three-year bull run in the dollar may be over.

• The British pound has broken above key resistance at £1.30/$ promoting further near-term currency gains to a target range of £1.35-1.40/$.

• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.

• The US 10-year Treasury yield has failed to break below key resistance at 2.0%, raising the probability that the multi-year bull trend in US bonds is over.

• The benchmark R186 2025 SA Gilt yield has broken above key support at 9.0%, indicating the potential for a rapid upward move to the 10.5% target level. A break back below the new resistance level of 9.0% is required to remove the danger of a further upward spike in bond yields.

• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.  

• The Brent oil price has broken above key resistance at $50 and likely to remain in a trading range of $50 to $60 over the foreseeable future. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $6 000 per ton.

• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.

• The break in the JSE All Share index above key resistance levels at 56 000 and 60 000 signal the early stages of a new bull market.

Bottom line

• The Naspers share price has rocketed by over 90% since the start of the year. Price gains have been 24% over the past three months, boosted by strong financial results from Naspers and from Tencent, which alone makes up over 100% of Naspers’ market capitalisation.

• Analysts have upgraded Tencent’s earnings forecasts yet again based on significant revenue growth across all divisions. Analysts have also upgraded their valuations of Naspers’ remaining e-commerce assets. The capital expenditure in these e-commerce assets of the past few years is starting to bear fruit. An increasing number of these businesses have begun to monetise their business models.

• The outlook for Tencent remains positive. It has grown to such a point that its sheer size and dominance have become a reinforcing competitive advantage. Scottish Mortgage, the largest investment trust listed on the London Stock Exchange with a market capitalisation of over £6bn, has Tencent as its third largest holding, comprising 6.8% of the portfolio.

The managers of Scottish Mortgage highlight that the digital arena is dominated by just six companies, including Alibaba, Baidu and Tencent in China and Alphabet, Amazon and Facebook in the US. The investment managers of Scottish Mortgage: “Continue to believe that the competitive positions of these digital network businesses will be further cemented by the power of their massive data sets and new advances in computing.”

• Although the share price has surged 90% since the start of the year, Naspers has never been so cheap in terms of its discount to net asset value (NAV). Its listed holdings add up to over R5 400 per share, which means the share price is trading at a massive 32% discount to NAV.

• Despite the glowing outlook for Naspers and the compelling value offered by the shares prudential investment guidelines advise against allocating the JSE’s full 25% weighting in lower risk portfolios.

• While a lower than market weighting to Naspers raises the risk of underperforming the JSE All Share Index, the priority in lower risk portfolios is to avoid losses which result from excessive portfolio concentration. Like all shares, even Naspers has risks attached. 

For the full report, including a look at international markets, click here.

* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.

* Fin24 is part of 24.com, a division of Media24, which is a subsidiary of Naspers.

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