Even as the rand remained stable, global stocks underperformed SA equity by a large margin.
The first quarter of 2021 through 31 March has ended with strong returns across the board with the FTSE/JSE Top 40 Index adding almost 12%. (Note that all dividend payments are excluded in this article).
This was a great start to the year for investors. Local stock market returns were driven, in most part, by the FTSE/JSE Resi 10 Index (gauging the ten largest resource stocks), as it added almost 16%.
The FTSE/JSE Indi 25 Index (tracking the 25 largest industrial shares) gained 11.7%, helped in large part by Naspers*, which added almost 17%. Of note is that Prosus (housing the Tencent stake) added only just over 2%, while Hong Kong-listed Tencent rose 6.5%.
Here we see two interesting trends. Firstly, Naspers closed some of the valuation gap between Prosus and Tencent. Secondly, and even more interesting, is when Prosus was unbundled from Naspers in October 2019, investors in Naspers had the choice of retaining their shares or taking the JSE- and Amsterdam-listed Prosus shares.
Most investors I spoke to opted for Prosus, figuring with it being offshore they would do better. This year it has not. Since the listing, Prosus gained around 64%, while Naspers rose almost 73%. A modest win, but a win, nonetheless. This example of a local stock beating an offshore peer has also happened with the S&P 500, adding only 5.5% so far in 2021. It was solidly beaten by the local Top 40.
The tech-heavy Nasdaq had an even tougher opening quarter, rising only 1.6% after spending much of March in negative territory since the beginning of the year.
I have written a lot about this reversal of fortunes. The easy thinking is that offshore equity will do better than local equity and that offshore tech will do even better than offshore general equity. The problem here is that the last decade has seen monster returns for offshore equity and even more so for the tech-laden Nasdaq. There is no way this massive outperformance can continue forever. Sooner or later, we’ll see a return to the mean, and for that to happen, the offshore and tech stocks will have to start, at some point, delivering modest returns in the low single digits.
Is this maybe the start? One quarter is hardly a long enough data set to confirm my theory, but it does not surprise me, and I expect to see this continue for much of this decade.
Digging further into the sub-indices on the JSE, the banks (through the FTSE/JSE Fini 15 Index) managed only a 1.5% return and they remain cheap. The question is what will spur them higher? The economy remains under pressure and the Monetary Policy Committee now expects first-quarter GDP to contract by 0.2%. This gives little relief to the banks.
This is especially the case with the SmallCap Index, as we have lots of quality companies that have been neglected for years. Decent results have seen some of these small cap stocks run hard with, for example, PPC up over 400% since its November 2020 lows.
Property remains in the doldrums, but it did manage a 4.5% gain in the first quarter. There is value here, especially in logistics and to a degree in some retail. But those renting out office space must figure out how work from home will play out once South Africans are vaccinated.
Of note, the rand was literally only a few cents weaker over the quarter. Gold lost 10% after an excellent 2020, doing what it does as it moved higher on the uncertainty from the pandemic. But as the world rolls out vaccines the role for gold diminishes and I would expect further weakness in this space.
*finweek is a publication of Media24, a subsidiary of Naspers.