The JSE All Share Index, when converted into US dollars at current rates of exchange consistently tracks the benchmark MSCI Emerging Market (EM) Index, making the JSE a very good proxy for the average EM equity market.
This relationship, as we have often pointed out, is not co-incidental. It is the very similar earnings performance of the average JSE-listed company compared to that of the average EM company that presumably explains the closeness of the fit. We show below how closely the two earnings per index share series compare.
In the figure below we compare the relative performance of the JSE (and by implication also the EM Index) and the S&P 500 in the common US dollar currency. As the chart shows, the price performance of the JSE was far superior between 2000 and 2010, about four times better, while since 2011 the S&P has gained about 60% relative to the JSE, all in US dollars.
There is however an important sub set of the JSE that we can describe as Global Consumer Plays (GCP) or as we have also described them, Industrial Hedges. These are JSE listed companies with a South African provenance, but with an exposure to the global economy and especially the global consumer, rather than to the SA household.
Hence they are Industrial Companies (Included in the Industrial sub index of the JSE) whose market value is hedged against the vagaries of the SA economy and the exchange value of the rand. We have created an Index of these companies using their South African shareholding rather than their market value to establish their weight in this Index. A few of these important companies included in our GCP Index are: SAB, Richemont and British American Tobacco have their primary listing offshore and hence do not qualify for the EM Indexes. Steinhoff is another member of the GCP Index soon to join them with a primary listing in Frankfurt. The other companies we include in the GCP Index with a primary listing o nthe JSE are Naspers, MTN. Aspen, and Netcare.
This group of companies has been tracking the S&P 500 very closely over the past few years, as we show below (both indices are measured in US dollars at prevailing rates of exchange). Again, this relationship is not co-incidental; it is predicated upon a very similar earnings profile. Thus, while the JSE as a whole may be regarded as a proxy for the EM Index, the sub-set of the JSE that makes up the GCP is a very good proxy for the S&P 500 – and for very good earnings reasons.
The JSE would appear to offer investors good exposure to the EM Index in the form of the JSE All Share Index and good exposure to the S&P 500 in the form of the Global Consumer Plays. The big issue for investors however will remain: should they favour EM stocks on the JSE or those that follow developed markets? They will not always track each other as they have done so closely this year.
Thank you for sharing this information about the JSE. I believe that as development increases in South Africa, investors should follow the EM stocks on the JSE as future development in the country will increase the number of shares available which could potentially increase the number of investors and thus increase the JSE index. Following that trend, investors are more likely to be rewarded from their investments.
The Johannesburg Stock Exchange is one of the best stock
markets in Africa. It is fantastic to see that the JSE holds Industrial Hedges
that are aimed more at foreign investors rather than the normal SA household.
Foreign investment is a major boost to the economy. Although some investors are
not sure if they would like to invest in the JSE or other developed markets. The
JSE has been improving as the years go by. There were some dips in the market
but this was due to the world recession. South Africa has a well-established
stock market and if they continue to improve the country will be in a better
position in a few years.