Andrew McNulty
Thursday, 15 Dec 2011
Based on the rise of about 2% in the JSE all share index (Alsi) at the end of November, the JSE is among the world’s best-performing stock markets this year.
Based on the rise of about 2% in the JSE all share index (Alsi) at the end of November, the JSE is among the world’s best-performing stock markets this year.
That applies if markets are measured on their leading indices and in local currencies. Some emerging markets, such as those in Indonesia, the Philippines and Mexico, have performed similarly or better, but most of the developed and emerging markets have fallen.
The JSE’s overall index has a history of producing good absolute and relative returns. But what is the Alsi measuring? Its constituent companies are weighted by market capitalisation. The effect is a high weighting of international companies and exporters.
The 11 largest companies in the index account for about two-thirds of the Alsi’s value (ignoring free-float adjustments), and all of them are globally diversified or are mainly exporters, or both. They include large, quality companies such as BHP Billiton, SABMiller and Anglo American which are listed on larger exchanges and trade globally.
Further down the list are more global companies such as Old Mutual, Bidvest and Aspen. Depending on criteria applied, fewer than half the stocks in the Alsi40 are purely domestic companies that depend mainly on the local economy. The JSE’s high foreign exposure is an attraction for local investors, but it raises the question: how have the larger domestic stocks performed?
The 40 stocks in the accompanying table give a perspective on this. To qualify for inclusion, companies had to earn no more than 10% of their revenues from foreign businesses or exports. That excluded the miners, some financials (Old Mutual and Investec) and industrials such as Imperial, Steinhoff and Netcare.
Sasol was another. In the year to June, Sasol made only half its external turnover and two-thirds of operating profit in SA. Among the banking groups, Standard Bank was excluded. It made 18% of its 2010 total income outside SA.
Property and pyramid companies were omitted but could have been in. Some small caps (Eqstra and Hudaco) were included. Building and construction is an important industry in the local economy but none of the larger stocks in the sector made the list as they have large foreign activities .
The list could be refined but can serve for now as a proxy domestic stocks “index”. The share price performances, predictably, were mixed, ranging from ArcelorMittal’s 24% decline to a 49% gain by top performer Woolworths.
The overall result for the year so far was flat, similar to the Alsi, though that’s based on a simple average of price moves; the stocks are not weighted by market cap or liquidity. Almost half the shares in the table have risen this year by 5% or more and it’s no surprise that most of the best performers are in consumer or related sectors.
Retailers did particularly well. Aside from Woolworths, Mr Price was up 25%, Foschini 19% and Massmart 15%. Pick n Pay was down by about a quarter at the end of September but has recovered most of that. A rerating of the leading food producers’ shares also continued . Tiger Brands is up 26%, and AVI 24%.
Life Healthcare has risen 48% since listing on the JSE in June last year. It was also one of the top performers in the domestic stocks table, with a 37% gain this year. It reported strong growth for the year to September, with revenue up almost 12% and normalised earnings per share rising 28,7%.
Unlike its two main domestic rivals, Netcare and Mediclinic, which have made large foreign acquisitions, Life’s activities are almost entirely in SA. CE Michael Flemming said last month it will continue to focus on domestic growth, expansions and acquisitions. It’s also preparing for growth in emerging markets, particularly India.
Eqstra, the capital equipment company spun off by Imperial, is recovering but still trades at less than half its price of R15,50 at the listing in May 2008.
The weakest performers in the domestic stocks table were in basic industries (ArcelorMittal and Afrox), sectors struggling with overcapacity or slack demand (City Lodge, Sun International and PPC) or industries in transition (Telkom). Some of these have risen sharply from their lows during the year.
PPC’s price has begun to recover . Weak domestic demand for cement, competitive imports and local overcapacity contributed to a 22% slide in the group’s earnings for the year to September.
CE Paul Stuiver said that on historical trends and previous industry cycles, a long-term recovery in SA cement demand was long overdue and latest industry trends indicated further decline was unlikely. PPC is another company aiming to expand in Africa through investments and acquisitions. Management is targeting revenue from elsewhere in Africa at 30%-40% of the group total.
A striking aspect of the domestic stocks table is the high p:e ratings of many of this year’s stronger performers. The average p:e for the list is 15,5, above the Alsi average of 12,9. Retailers and other consumer stocks trade on historical p:es of 16-20, or higher. That indicates little margin for disappointment in earnings growth . Some of this year’s laggards may offer better value .
That applies if markets are measured on their leading indices and in local currencies. Some emerging markets, such as those in Indonesia, the Philippines and Mexico, have performed similarly or better, but most of the developed and emerging markets have fallen.
The JSE’s overall index has a history of producing good absolute and relative returns. But what is the Alsi measuring? Its constituent companies are weighted by market capitalisation. The effect is a high weighting of international companies and exporters.
The 11 largest companies in the index account for about two-thirds of the Alsi’s value (ignoring free-float adjustments), and all of them are globally diversified or are mainly exporters, or both. They include large, quality companies such as BHP Billiton, SABMiller and Anglo American which are listed on larger exchanges and trade globally.
Further down the list are more global companies such as Old Mutual, Bidvest and Aspen. Depending on criteria applied, fewer than half the stocks in the Alsi40 are purely domestic companies that depend mainly on the local economy. The JSE’s high foreign exposure is an attraction for local investors, but it raises the question: how have the larger domestic stocks performed?
The 40 stocks in the accompanying table give a perspective on this. To qualify for inclusion, companies had to earn no more than 10% of their revenues from foreign businesses or exports. That excluded the miners, some financials (Old Mutual and Investec) and industrials such as Imperial, Steinhoff and Netcare.
Sasol was another. In the year to June, Sasol made only half its external turnover and two-thirds of operating profit in SA. Among the banking groups, Standard Bank was excluded. It made 18% of its 2010 total income outside SA.
Property and pyramid companies were omitted but could have been in. Some small caps (Eqstra and Hudaco) were included. Building and construction is an important industry in the local economy but none of the larger stocks in the sector made the list as they have large foreign activities .
The list could be refined but can serve for now as a proxy domestic stocks “index”. The share price performances, predictably, were mixed, ranging from ArcelorMittal’s 24% decline to a 49% gain by top performer Woolworths.
The overall result for the year so far was flat, similar to the Alsi, though that’s based on a simple average of price moves; the stocks are not weighted by market cap or liquidity. Almost half the shares in the table have risen this year by 5% or more and it’s no surprise that most of the best performers are in consumer or related sectors.
Retailers did particularly well. Aside from Woolworths, Mr Price was up 25%, Foschini 19% and Massmart 15%. Pick n Pay was down by about a quarter at the end of September but has recovered most of that. A rerating of the leading food producers’ shares also continued . Tiger Brands is up 26%, and AVI 24%.
Life Healthcare has risen 48% since listing on the JSE in June last year. It was also one of the top performers in the domestic stocks table, with a 37% gain this year. It reported strong growth for the year to September, with revenue up almost 12% and normalised earnings per share rising 28,7%.
Unlike its two main domestic rivals, Netcare and Mediclinic, which have made large foreign acquisitions, Life’s activities are almost entirely in SA. CE Michael Flemming said last month it will continue to focus on domestic growth, expansions and acquisitions. It’s also preparing for growth in emerging markets, particularly India.
Eqstra, the capital equipment company spun off by Imperial, is recovering but still trades at less than half its price of R15,50 at the listing in May 2008.
The weakest performers in the domestic stocks table were in basic industries (ArcelorMittal and Afrox), sectors struggling with overcapacity or slack demand (City Lodge, Sun International and PPC) or industries in transition (Telkom). Some of these have risen sharply from their lows during the year.
PPC’s price has begun to recover . Weak domestic demand for cement, competitive imports and local overcapacity contributed to a 22% slide in the group’s earnings for the year to September.
CE Paul Stuiver said that on historical trends and previous industry cycles, a long-term recovery in SA cement demand was long overdue and latest industry trends indicated further decline was unlikely. PPC is another company aiming to expand in Africa through investments and acquisitions. Management is targeting revenue from elsewhere in Africa at 30%-40% of the group total.
A striking aspect of the domestic stocks table is the high p:e ratings of many of this year’s stronger performers. The average p:e for the list is 15,5, above the Alsi average of 12,9. Retailers and other consumer stocks trade on historical p:es of 16-20, or higher. That indicates little margin for disappointment in earnings growth . Some of this year’s laggards may offer better value .
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