News & Insights

Two things we discussed in previous newsletters are still happening in our market, namely:

• the political climate and even the state of the economy are not necessarily reflected in the performance of the stock market; and
• using the South African Top 40 Index as a measure of the broader performance of the South African stock market can be very misleading.

You may find it hard to believe, but the South African Top 40 Index is up 20% year to date and the broader All Share Index is up 16%. You may be forgiven for thinking that this does not reflect what you read in the papers every day regarding the situation in South Africa, with political turmoil; farm murders; state capture; rampant corruption; a not so impressive mid-term budget; and a 27% unemployment rate.

Under these circumstances you are not the only one thinking the stock market performance is too good to be true. The market commentators have been calling for a material correction in the stock market ever since it reached 49 000 points!

You may also expect your investments to reflect the 20% – or at least 16% – return for the year, but that is unlikely. Why? Because our Top 40 shares are dominated by three heavyweights, namely Naspers (up 71% ); British American Tobacco (up 17%); and Richemont (up 44%). So if you are a sensible investor, your exposure to these 3 shares should have been way below their weighting in the Index, especially because they were not cheap to start with.

And, with reference to our first point about the political situation and the state of our economy, the performance of these  three shares have very little to do with what happens in South Africa –  apart from the fact that they happen to be listed on our stock exchange.

You have probably often heard investment advisors warning clients about the unpredictability of share performance over the shorter term. And you have probably also heard them say the shares that outperformed over the last year or two will underperform over the next year or two. What they are trying to tell you is that you have to be patient when you invest in shares. Here are some examples of how unpredictable share performance can be:

Naspers: If you bought these shares one year ago, in August 2016, you would have paid R2468 per share. This was a 591% price increase since January 2012 and everybody regarded the shares as very expensive. Four months later, in December 2016, the share dropped by 22% to a low of R1926 to a chorus of “We told you so”. Currently, the share is trading at R2970, an increase of 54% for the year to date. If you have held onto this share for just over five years, you are now up 734%. You might say but this is only one in a thousand shares and you would be right, but the fact remains that if you believed in the fundamentals of the share and did not try to time the swings and roundabouts you have been well rewarded.

Woolworths: If you bought this share in January 2012, you paid R39 for it. In December 2012 it traded at R71 per share, an increase of 82%. In December 2014, two years later, it was still trading at R72 per share. Then it went up 43% to R103 in December 2015. Currently, it is trading at R60 a share which is 42% down from 2015 and 15% down over the last four-and-a-half years. So Woolworths gave you a 54% capital return over five-and-a-half years – almost 10% per year – plus a dividend of 5% per year. The question now, is whether it will go up by 40% again over the next twelve months?
Old Mutual: If you bought this share in December 2012, you paid R14,40 for it. A year later you got R33 for it; an increase of 129%. In December 2014 you still got R33 per share, but in December 2015 you could sell your share for R45 – a 36% profit from a year before and a 213% profit over three years. And that is excluding dividends. Currently, you will get R35 per share, which represents a loss of 22% over twenty months. Once again, you have to ask yourself what the price of this share may be twelve months from now? Your return over five-and-a-half years is still 143% (26% per year) plus dividends of around 3,5% per year.