The JSE’s decade of disappointment – but Allan Gray sees opportunities

South Africa’s stock market has generated disappointing returns over the past decade but there are still pockets of opportunities with well-run companies being attractively valued. 

This is feedback from the Allan Gray Equity Fund manager Rory Kutisker-Jacobson, who said that many shares on the JSE are cheaper than they were a decade ago.

“Even though there have been very few places to hide, with 26 out of the top 40 stocks down in nominal terms over the first quarter of 2024, we are still finding opportunities,” said Kutisker-Jacobson. 

He said the opposite is true of many American listed companies, which have experienced a tremendous rally over the past decade. 

In 2023, the JSE All Share Index returned 9.3% in rand terms, while the Capped All Share Index returned 7.9%. 

Although positive, one could have achieved a similar return from cash while taking on considerably less risk, Kutisker-Jacobson said.  

To make matters worse, in the first three months of this year, markets have given roughly a quarter of this back, with the All Share down 2.2% and the Capped Index down 2.3%.

Kutisker-Jacobson explained that for every R100 invested in the ALSI at the end of December 2010, you would have approximately R360 today, including all dividends reinvested. 

This is not a bad return, with investors effectively tripling their invested capital. However, when accounting for the weakening rand, the JSE has generated relatively poor returns. 

In dollar terms, a $100 investment would only be worth about $126 at the end of March 2024, given that the rand has weakened from R6.62/US$ to R18.88/US$. 

Excluding dividends, the value of that investment would be negative in US dollars. 

In contrast, a $100 investment in the USA’s major index, the S&P 500, in December 2010 would be worth roughly $539 at the end of March 2024 – more than four times the return experienced on the JSE All Share.

Opportunities on the JSE

Kutisker-Jacobson said it is important for investors to note that the JSE has not been the only poorly-performing stock exchange over the past decade, with the S&P 500 being the exception to a decade of tepid returns. 

“Most emerging markets have fared poorly, and the JSE has performed largely in line with its peers,” he said. 

By way of example, $100 invested in the MSCI Emerging Markets Index would be worth approximately $131 at the end of March 2024. 

“Indeed, the past 13-plus years have been more a story of exceptional relative returns from US companies than anything else. The S&P 500’s returns have been roughly threefold greater than those of the UK’s FTSE All Share Index over this same period.” 

He explained that the second fact to remember is that starting prices matter.

At the end of December 2010, the All Share was trading at 17.2 times earnings, while the S&P 500 was trading at 14.7 times earnings. 

At the end of March 2024, the ALSI had derated to 13.1 times earnings, while the S&P 500 had re-rated to 21.6 times earnings. 

Underlying earnings growth has been superior in the US, but this change in sentiment has had a big impact on returns over time. The ALSI has gone from trading at a premium to trading at a material discount to the S&P 500. 

Thirdly, an increasingly large number of multinational companies happen to be listed on the JSE but derive more than 80% of their revenue and income from markets outside South Africa, Kutisker-Jacobson said. 

“They may be listed in South Africa, but their fortunes are not tied to the domestic economy. This is the case for British American Tobacco, Naspers and Prosus, AB InBev, Glencore and Mondi.” 

“While we cannot predict what returns to expect over the next 13-plus years, we can focus on the factors within our control – buying out-of-favour companies at below fair value,” Kutisker-Jacobson said.