South Africa’s stock market, long dominated by powerful mining companies, is acquiring greater depth and breadth as flourishing sectors such as retail, tourism and hospitality, and financial services attract a new wave of domestic and international investment.
Previous negative perceptions of the JSE (Johannesburg Securities Exchange) have been associated with the market’s dominant mining stocks and their associated challenges of commodity pricing, managing industrial relations and legislative interference.
However, other sectors are now re-balancing that former dependence.
Retail and financial services are the fastest growing sectors of the economy and mining, coupled with manufacturing, is now the lowest. Even tourism and hospitality is now a higher contributor to GDP than mining.
South Africa is proving a new focus of attention as the composition of companies on the JSE has resulted in superior investment returns in US dollar terms. Since 1960, the JSE has averaged c. 13% in dollar terms, even after accounting for an annual 5% depreciation of the local rand currency relative to the dollar.
Admittedly, while the rate of currency depreciation seems low, it is accompanied by high volatility. These market returns reflect the preponderance of high fundamental returns and strong cash flow growth in the local economy. South Africa is just 1.57% of global market capitalisation (consisting of 19 liquid exchanges), yet it has a return on equity of around three percentage points above the global average of a little over 11%.
From a macro perspective, high fundamental returns are considered symptomatic of the dominance of corporate South Africa’s monopoly of new resources typically responsible for economic growth: capital investment, labour, and technology. But they are also testament to the exemplary microeconomics of capital allocation by the managements of South African companies.
In other words, South African businesses are not wasteful monopolies. High quality companies tend to be very defensive during periods of uncertainty, and also outperform the local bourse a stunning 88% of the time during such spells.
South Africa has been a top performing stock market (number 1, 2 or 3) over most time frames in the last 110 years.
We anticipate this will continue to be the case given how South African businesses like SAB Miller have successfully expanded into the rest of the continent and the world, while generating strong fundamental returns.
Hlelo Giyose is founder and CIO of South Africa’s First Avenue Investment Management, which is a member of the Group of Boutique Asset Managers (GBAM). The firm is set to offer European investors access to South African equities through a new Ucits fund in the second half of 2015.