There’s an old saying in the market that price drives the narrative. In other words, a stock that is booming benefits from positive headlines and a general belief that the good times will carry on forever.
Conversely, a stock that is falling through the floor suddenly has very few people willing to back it. This market phenomenon is the cornerstone of value and contrarian investing styles, where the belief is that human emotion and the power of the internet in reinforcing popular views lead to amplified share price moves in both directions. Such moves tend to correct, creating opportunities.
In the past week, I ran a poll on X where I asked my followers to pick one of the following as their highest expected return (in rand) in 2025: the JSE top 40, S&P 500, Nasdaq-100 or bitcoin.
The results were fascinating. The S&P 500 got top spot with 32% votes in favour. Bitcoin was next at 28%, followed by the JSE top 40 at 26% and then the Nasdaq-100 with just 15% of the vote.
There’s clearly a concern about the frothiness of tech sector valuations, though there’s so much tech in the S&P 500 that perhaps one must be careful with that conclusion. More importantly, there’s far stronger sentiment around the JSE than I can recall seeing at any time in the past decade.
After a year in which the JSE did well (by its own standards), more people are willing to consider it as an investment. As is usually the case, the price has driven the narrative. The markets do seem to reach a point where scepticism wins the day, which could be why the Nasdaq-100 is bottom of the list despite its strong performance.
The key lesson here might be that a change in direction of a price is the strongest driver of the narrative. After languishing for years, some positivity in the JSE (and the country in general) has led to a change of heart for many investors.
But is this positive sentiment justified, or misplaced?
After a year in which the JSE did well (by its own standards), more people are willing to consider it as an investment
The year has started locally with the terrible news of huge potential job losses at ArcelorMittal. We’ve also seen Renergen trying to halt the precipitous decline in its share price, announcing that it has not entered business rescue proceedings — that tells you something about the rumours out there.
The US government has given Tencent a horrible start to the year, leading to a decline of roughly 10% in the Naspers and Prosus share prices. Though a couple of these names are speculative in nature and so volatility can be expected, it’s a rough start to 2025.
Conversely, a quick scan of US earnings headlines from the first week of January reveals generally positive updates. For example, Delta Air Lines CEO Ed Bastian expects 2025 to be its best year yet, with solid demand for premium travel add-ons by wealthy Americans.
The Taiwan Semiconductor Manufacturing Co is never far from a geopolitical storm, but the world’s biggest chipmaker just signed off on a year of record revenue as the AI boom continues — a trend that is central to the share price performance of many tech names in the market.
Risk and reward
Of course, there will be offshore companies that fail to meet expectations and therefore disappoint investors. There will be volatility and there will be downturns; these are the risks that must accompany the available returns. There will also be JSE-listed companies that release great numbers, benefiting from an improved local business environment. Nothing is ever entirely good or entirely bad.
The critical thing to remember is that entry price plays an important role in investment returns, one that is even more important in two situations: shorter holding periods and more extreme valuation dislocations — that is, very high or very low multiples relative to historical averages.
The JSE returns last year were significantly boosted by the low valuation base off which they were achieved. This effect has now played out, which means that further returns depend on underlying earnings growth.
In offshore markets, there are really risky valuations that get all the attention, but many are not out of touch with historical averages. With many of these offshore companies boasting leading market positions and great earning potential, I’ll continue to seek most of my equity exposure on the global stage.
It’s lovely to see the JSE doing well, but price is driving the narrative at the moment and the valuation base for 2025 is very different to 2024.
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