JSE’s decade of disappointment set to continue – Ninety One


The JSE is set to continue its disappointing performance from the past decade well into the future as foreign investors take a dim view of the country’s economic performance and political uncertainty.  

This is feedback from portfolio manager at Ninety One, John Biccard, who said that while stocks on the JSE are attractively valued, they are cheap for very good reasons. 

He explained that South African equities have been weighed down by state capture, load-shedding, rising sovereign debt, failing infrastructure and heightened crime levels. 

Biccard said this has resulted in a lot of bad news being priced into local stocks, making them attractively valued. 

None of these issues are likely to be resolved quickly and are only compounded by the rising uncertainty surrounding the country’s national election at the end of May. 

The ANC is set to lose its majority for the first time since 1994, with the great unknown being what kind of coalition will govern the country following the election. 

This spike in political uncertainty comes at the end of a “lost decade” for South African stocks, with lots of bad news priced into their valuations. 

The JSE All Share Index has returned just 2% in US dollars per annum over the last 10 years – a far cry from the S&P 500’s 12% annual return. 

“These numbers reinforce the mantra of US ‘exceptionalism’ versus South Africa as a failed state,” Biccard said. 

“With respect to the valuation of South African shares, it is clear that the market expects the next 10 years to be at least as bad as the last.”

Local equities currently trade at the largest valuation discount ever relative to both the MSCI Emerging Markets Index and the MSCI World Index. 

Biccard said this is with respect to all the valuation metrics that matter – price-to-earnings ratio (P/E), dividend yield, EV/EBITDA and price-to-book.

John Biccard, portfolio manager of the Ninety One Value Fund

Positioning is also at an extremely negative level, with foreign investors voting with their feet and selling R710 billion rands worth of South African equities over the last seven years. 

Local investors have joined the exodus following the National Treasury’s decision to allow pension funds to invest up to 45% offshore. 

The average Regulation 28-compliant fund now holds just 39% in South African equities versus nearly 70% 18 years ago.

The net effect is that you can buy a diversified portfolio of South African banks, retailers, and industrial stocks today on a P/E of 9 times with at least a 6% dividend yield.

Biccard said it is key to look for what could be the catalyst to unlock this value, with the Ninety One Value Fund, which he manages, increasing its holding in local equities since May last year. 

Consequently, the entire domestic equity positioning in the Ninety One Value Fund (outside of 35% offshore and 10% in gold shares) is invested in “SA Inc”.

The most significant catalyst would be a reduced level of load-shedding, which in turn would result in higher GDP growth in South Africa, lower inflation and increased corporate earnings, amplified by reduced diesel costs. 

“The facts on load-shedding over the last 6 months indicate that we are on this path,” Biccard said. 

The next hurdle is 29 May. Markets don’t like uncertainty, and the current narrative is, “Talk to me after the election.”

Valuation and positioning indicate that the market is not optimistic with respect to the outcome of the election, and Ninety One’s view is that the extreme levels of both mean that the market is 80% sure of a bad outcome. 


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