With half the year behind us, it’s clear the shine has come off the recovery hopes for the South African consumer market. And before you jump out your chair, draped in a South African flag and ready to fight like Dricus by pointing out that the JSE top 40 has significantly outperformed the S&P 500 and Nasdaq-100 this year (especially in rand), it’s worth considering what you’ll actually find in a top 40 ETF.
Sure, you would be up nearly 19% year to date in such an ETF, but you can thank a handful of stocks for that performance. Naspers and Prosus (up 34% and 37% respectively) contribute nearly 19% of the index on a combined basis. Their valuations owe everything to China and global e-commerce platforms and nothing to the South African market. Gold Fields and AngloGold Ashanti (up 65% and 87% respectively) are both among the ETF’s top 10 constituents, benefiting from the gold rally and contributing more than 10% combined. Add British American Tobacco (up 33%) and its defensive global business and just five stocks account for a third of the index. These five stocks have all had a fantastic first half of the year thanks to factors unrelated to South Africa.
The performance of the JSE top 40 ETF this year has more to do with luck than design
And let’s face it — Naspers and Prosus could be seen as one, so it’s really four companies responsible for a third of the index. If we continue with that train of thought and start grouping the gold companies as well, it becomes clear that the performance of the JSE top 40 ETF this year has more to do with luck than design.
To add to this argument, we could dig into the rest of the index and the extent to which locally listed corporates either derive their value from global commodity prices or offshore earnings. And once you factor in that offshore earnings would be valued at a premium to earnings in riskier markets such as South Africa, the truth is that the top 40 is a very poor proxy for what’s happening on the ground in our country.
So, which data points can we use? Economic indicators are only as useful as the quality of data that goes into them, but some do a great job of telling the South African story — especially with a long-term lens. And, of course, share prices of South Africa-focused companies are very helpful indeed.
Despite the exuberance in the local market among investors last year, the FNB/BER consumer confidence index didn’t make it into positive territory once in 2024. It hasn’t been positive since before the pandemic, with the Ramaphoria period in 2018 marking the first major upswing in momentum since the post-Soccer World Cup deterioration during the Zuma years. Put differently, since the Jabulani was last kicked into a net on our shores, there has been only one significant shift in confidence from negative to positive in our country. I think we can all agree that Ramaphoria hasn’t quite worked out as planned, either.
Thrashing the Italians 45-0 with some clever tactics won’t tell you much about the situation facing South African consumers. But the equally severe thrashing of our retail stocks just might, with Mr Price and Woolworths down 28% and 20% respectively this year. How about Truworths and TFG, down 29% and 21%? Even Dis-Chem and Clicks haven’t been safe, down 12% and 4%. Pepkor has shown some relative value as a defensive retailer, down only 5%, while Shoprite is down 8%. South African consumer stocks have been a bloodbath, reflecting a substantial negative move in sentiment.
Nedbank is another useful data point, down 17%. It’s a solid proxy for South Africa because it has the tamest nonrand strategy of the four traditional banks on our market. It isn’t exposed to Africa to nearly the same extent as Absa and Standard Bank, and it doesn’t have a financial services offering as diversified as FirstRand’s.
The point here is that the South African market is still a difficult place in macro terms. The people making money either took the approach of buying relatively diversified exposure with a JSE top 40 ETF, or made great stock-picking decisions among the local names. The strategy that absolutely hasn’t worked is indiscriminate buying of South African stocks — particularly retailers. Some of those names are looking to rally from current levels, but catalysts are thin on the ground.
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