The rise of Naspers and its implications for the JSE; and why the main show for emerging markets remains the US economy, not Shanghai or Greece.
One of the important features of the JSE over the past few years has been the extraordinary rise of Naspers (NPN). As a result of this, NPN has become a very large share of the JSE indexes (some 11% of the JSE ALSI and Top 40 Indexes) and an even larger share of the SA component of the MSCI Emerging Market Index (MSCI SA) where it carries a weight of over 19%.
MSCI SA excludes all the companies on the JSE with primary listings elsewhere, including therefore the heavyweights, Anglo American, BHP Billiton, Glencore, SABMiller, British American Tobacco and Richemont that have primary listings elsewhere, so adding to the NPN weight. MSCI SA accounts for nearly 8% of the emerging market benchmark, giving NPN a 1.5% share in MSCI EM. Tencent, the Chinese internet firm in which NPN has a 34% shareholding, that accounts aso accounting for almost all of NPN’s market value, is the third largest company included in MSCI EM with a weight of 2.57%. The share of NPN in Tencent will not have been counted twice in the free floats that determine index weights, making the combined weight of NPN and Tencent equivalent to over 4% of the MSCI EM larger than the weight accorded to Samsung. The diagram and table below show these weightings.
Clearly the share prices of NPN and Tencent are significant influences on the direction taken by the EM Index, while EM trends (and index trackers) will in turn influence the market value of Tencent and NPN. And so in turn, via the weight of NPN in the JSE, these forces directly influence the direction of the JSE Indexes and through flows of capital will also affect the exchange value of the rand. As we show below, not only has the rising NPN share price increased its weight in the Indexes the trade in NPN shares now accounts (clearly not co-incidentally ) for a large percentage of the value of all shares traded on the JSE. On some days the trade in NPN has accounted for well over twenty per cent of all the shares traded on the JSE (See below).
The JSE therefore has become to an important extent a play on NPN. And NPN is in turn (almost) a proxy for Ten Cent that is a play on Chinese mobile applications, including games and payment systems. Ten Cent describes itself as an Internet Service Portal. This NPN-Ten cent connection to the JSE accounts in part for the close links between the JSE and the EM Indexes, when both are measured in a common currency. It will be noticed that the EM Index and the JSE in USD dollars are now below their levels of January 2014 making them distinct underperformers compared to the S&P 500.
A recent force acting on global markets, especially EM markets, has been the extraordinary behaviour of the Shanghai equity market. The volatility in Shanghai listed shares as well as the direction of the Shanghai Composite Index, up then down since late 2014 is indicated below.
We show below that the EM Index and NPN largely ignored the extreme behaviour of the Shanghai Index until this past week when the markets and the rand seemed to have become somewhat “Shanghaied”, following that market sharply up and down. This turbulence on the Shanghai share market has clearly influenced the value of EMs, NPN and Tencent, as well as the rand, in recent days. On Wednesday (8 July), NPN in US dollars and Shanghai both lost about 6% of their value, while recovering as much on the Thursday.
It will take a greater sense of calm in Shanghai to reduce risks and attract funds into EMs and provide support for their currencies, including the rand. But more important still for EM economies and their listed companies over the longer term, will be a recovery in the global economic outlook. Any sustained recovery in the US economy should be welcomed by investors in EM. Any increase in short term interest rates in the US, from abnormally low levels, should therefore also be welcomed and regarded as confirmation of a US economic recovery under way; an economic recovery that is likely to extend to the global economy in due course. Events in Greece and Shanghai will remain distracting side shows to the main event, the state of the US economy.