South African investors have been caught up in a dramatic contrast in the first half of 2019: a stumbling economy, but a stock market that raced to its best start in 12 years.
Even as the economy endured its worst contraction in a decade in the first quarter, the Johannesburg Stock Exchange’s benchmark index was charting gains that have reached 10% by the end of June. That’s largely thanks to global demand for materials and to investors seeking havens in precious metals in uncertain times.
“The JSE and its performance is not a reflection of the state of the South African economy; it just reflects the nature of the stocks that are listed on the market, the majority of which predominantly sell in US dollars,’’ Olwethu Notshe, portfolio manager at Sentio Capital, said by phone. “The South African economy itself is not doing well and that is evident from the performance of SA Inc. stocks, like the banks and retailers.’’
An index of platinum companies has outshone all other sectors, surging more than 60% as miners enjoy bumper prices for the palladium and rhodium they extract alongside their main product. Gold miners are up 46%, reflecting bullion prices at six-year highs. More broadly, mining companies which account for a quarter of Johannesburg’s market value, have gained almost 30%, on pace for the best year since 2016.
With the South African currency vulnerable to the vagaries of global trade tensions and emerging-market volatility, many of the equities traded in Johannesburg offer an enticing zone of shelter for investors.
“Because the rand is a risk asset, if we get increased trade tensions and negative news, we will see rand softness, and with 70% of the JSE being rand hedges, we may see the stock market remain elevated,’’ Notshe said.
Market giant Naspers, which accounts for 19% of the main index, contributed the most points to the benchmark’s advance as it climbed 22%. The second half will see Naspers listing Prosus, the vehicle for its international assets, in Amsterdam. That will chip away at the skewed valuation of the media and internet group, which the market puts at less than its 31% stake in Tencent Holdings.
“The silver bullet that will resolve this is when they start to unbundle all the other unlisted assets in Prosus,” Notshe said. “For example, they can unbundle the classified business, since that has broken even already and the subsidiary can stand on its own.”
MTN Group, the fifth-biggest driver of the South African market’s gains, was buoyed by the May listing of its Nigerian business, a breakthrough in easing sometime fractious relations with regulators in the continent’s most-populous country. MTN has gained 25%, on course for its best year since 2013.
“The listing of MTN in Nigeria now means that Nigerian pension funds will own part of the company, so when the regulator hands out sanctions, they will be handing out those sanctions on their own pension fund members, and we think this will act as a deterrent to that, and will therefore be positive for MTN,” Notshe said.