Despite rosy headlines lauding the JSE’s performance, a closer look reveals its stark underperformance compared to global markets like the Nasdaq and S&P 500. Over the past decade, the JSE has lagged behind, eroding the global purchasing power of local investors. Offshore investments have proven transformative, offering significantly better returns. This article critiques media coverage, delves into market trends, and underscores the critical importance of a diversified, globally-focused investment strategy.
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By Magnus Heystek*
IF one had to rely on certain local media headlines over the festive season to follow your investments , you would be forgiven for thinking that the Johannesburg Stock Exchange (JSE) was leading the pack as far as returns are concerned.
For example, on December 30 last year Netwerk24 lead with a headline translated as “JSE ends 9% higher in a record-breaking year.”
Business Day had a similar report.
Both media outlets made no reference whatsoever to the roaring bull market on the Nasdaq and S&P500 — the two largest stock markets in the world, by far.
The JSE today comprises less than 1% of global equity markets – even the Iran Stock Market is now bigger – while Wall Street and Nasdaq are together about 70% of total market capitalization.
Yet, both these media outlets — and many other local ones — still seem to think that the JSE is the only stock market in the world that their readers are interested or invested in. How wrong they are.
Pension funds can now invest up to 45% of their assets offshore, while I would suggest that most High-Net-Worth Individuals (HNWI’s) today have more money invested in global markets than in the local market. It has been estimated that South African investors now have more money invested offshore than foreigners have investments on the JSE. It’s been almost 10 years since the offshore investment allowance for individuals was increased from R4m to R10m, in addition to the R1m that investors could freely remit annually as a single discretionary allowance.
On application, larger amounts can also be moved abroad under the strict guidance of both SARB and SARS. I have been told that several extremely wealthy SA families have been allowed to remit more than R1bn offshore. Even local trusts can now take money offshore, which will, no doubt, lead to more sales pressure on the local exchange.
It’s hard to find exact numbers of how much has been invested offshore, but I recently attended a seminar where one of the speakers guesstimated that about R1,3 trillion has been invested offshore via these channels over the past 10 years. Trying to get a comment from the SA Reserve Bank on this issue is met with a stony silence.
For many investors, offshore investment has become the cornerstone of their long-term investment strategy, even before tax advantageous investments such as retirement annuities and tax-free investments are considered.
In our own practice, managing in excess of R25bn, about 70% of the clients’ assets are either offshore or in offshore asset swap funds. The balance of the investable money is mainly exposed to SA bonds and near-cash instruments, which have been great investments over many years.
Wall Street major driving factor behind global equity market
Movements on Wall Street and on the Nasdaq nowadays have a far greater influence than ever before on local portfolios than the movement of the JSE.
For the record, in 2024 the JSE did 9% in rand terms (before dividends) while the Nasdaq was up 29% and S&P 500 23% — setting new records along the way. The JSE even lagged well behind the MSCI World Index which was up 22%. The below table clearly illustrates how severe the underperformance of the JSE ALSI was against the 3 major indices. There is no way to spin these numbers, the JSE has not been creating wealth for its investors over the past 10 to 15 years.
The 10-Year Numbers
Even with the boost of a positive outcome after the formation of the Government of National Unity (GNU) last year, the JSE could not keep pace with the growth of the major three global indices. The JSE had a good run from end May to end September, which got cheerleaders of local investments twittering furiously, but since then the rally seems to have lost impetus.
Even more alarming is that this under-performance of the JSE relative to world markets (all three indices) has been ongoing for the past 10 years and probably for the past 15 years. Apart from certain media outlets such as Biznews, will one be hard pressed to find any in-depth reporting on this very long-term trend.
So let me repeat: not in one of those 10 years could the returns on the JSE match or beat the returns of the either the MSCI World index, the S&P 500 or the Nasdaq. And neither was this underperformance marginal, it was massive and has been a major blow to the growth of the international purchasing power of all who invest in it. Seemingly great returns in local currency are meaningless in a world where most goods and services are priced in hard currency terms.
Ask yourself why the price of a luxury motor car, your cell phone, computer equipment or even advanced medical treatments have become so expensive.
Quite simply, these — and many other goods – are priced in USD and in some cases Euros. Investing in dollars is not only smart but has been the right play for more than 50 years in South Africa. Invest only in rands and you WILL become poor in global terms. Spare a thought for local investors who have all their assets tied up in residential property and or money market instruments. They have become very poor in global terms.
Let’s compare this under-performance in a more graphic way, with the outcome in rands and cents.
R1m invested 10 years ago. What was the outcome?
Imagine you had R1m to invest 10 years ago. Your “local is lekker” investment advisor invested your money in the JSE, in an index fund.
Your “ local is not lekker anymore” investment advisor recommended that you take it offshore, either into a globally spread portfolio or, if your risk appetite was up to it, either the S&P 500 or the Nasdaq, which you access easily and cheaply via the Invesco (QQQ) ETF.
Here are the respective rand values as of yesterday:
JSE: R2 163 000.
MSCI World Index: R4 444 000.
S&P500: R5 614 000.
Nasdaq: R9 029 000.
Even if your risk appetite did not allow for an 100% exposure to the Nasdaq, a 50/50 spread between a global equity fund and the S&P500, would have returned more than double the rand value earned by sticking to the local market. For those investors who were not put off by the inherent volatility of the Nasdaq and committed fully, their returns have been truly life-changing. I have previously reported about one investor whose investment of R15m in an aggressive global portfolio 10 years ago is now worth R115m.
Couple this with the even worse performance (rands or USD, take your pick) of the residential property market over the same time, and it‘s not hard to conclude that the global purchasing power of many SA investors has been obliterated by the ANC’s mismanagement of the economy over the 30 years.
The economy (and the JSE) was already stuttering the turn of the century some 25 years ago, but this was mainly due to an exceptional (and once off) commodity boom driven by China’s relentless appetite for the commodities we have in abundance. For a short time, from 2002 to 2007, the economy boomed, the rand strengthened from R13 to R6,50 against the rand, enabling the ANC the conceal its mismanagement of Africa’s largest economy.
The economy even showed remarkable resilience after the Great Financial Crash of 2008, courtesy of a construction boom in preparation for the 2010 Soccer World Cup (SWC), but once this was out of the way, and no further external influences came to the rescue, the slow rot set in from about 2012 onwards. The JSE’s underperformance has a strong correlation with the series of downgrades by global credit ratings agencies from about 2013.
Marketing machines
After the toppling of Jacob Zuma as president of both the country and the ANC in 2018, came the promise of a new dawn: Ramaphoria it was called, remember?
The marketing machines of the various large asset managers got into overdrive: “JSE to be the best market over the next 5 years,” proclaimed Zane Wilson, equity manager from Old Mutual, in a front page article on Business Day in February 2019.
The JSE turned out to be one of the worst markets globally over the following five years.
Let’s see how this confident forecast turned out. Since then the OM Investors fund is up 40%,the MSCI World Index up by 167%, the S&P500 up 217% while the Nasdaq has grown 317%. No further comment required.
I wrote an email to the editor of BD sometime last year, at around the end of the 5 year term, suggesting a follow-up article on this bold prediction by OM, in fairness to its readers. The silence was deafening.
I have stopped counting how many equally bullish forecasts I have read over the past years, all predicting a massive rebound of the JSE using historical ratios such as low PEs, attractive book values and other valuation metrics, which in previous times might have had more predictive value. But we don’t live in a normal society in SA anymore, so how can one expect normal returns going forward.
In 2023 David Knee, MD of foreign owned M&G investments (formerly Prudential), wrote an equally bullish forecast, again forecasting outrageous future returns for the JSE when compared to the rest of the world. As quoted in Business Day (6th September 2023), he forecast that SA equities and bonds will handsomely outperform the rest of the world. Elsewhere he was quoted as saying “SA listed property will be the best asset class in the world over the next five years.”
While he was close to the mark as far as bonds has been concerned – and this has never been denied – the subsequent returns of 17% on the JSE again failed to match the returns of the MSCI World Index (+26%), S&P500 (+32%) and the Nasdaq, which was up 36% to date.
At the beginning of 2023 Johan Els, chief economist of the Old Mutual, predicted a ZAR/USD exchange rate of R15, at the end of that year. Needless to say, it ended the year at R19,25.
Undeterred Els made another equally bold forecast published by Business Day in June 2024: “The rand set to strengthen to below R14 by year-end.”.
Again, this forecast was widely repeated on other media outlets including Currency, the new venture headed by ex-Financial Mail editor Rob Rose.
Let’s see if Rose has an independent mind and follows up on this wayward forecast, which, incidentally, went further and suggested that SA investors bring their money back from abroad to benefit from this predicted resurgence in the rand and share prices. Thus far, there are no signs of this happening as yet. Even the much vaunted influx of foreign buying on the JSE has also failed to materialise. While bonds have attracted significant inflows, foreigners remained net sellers of equities on the JSE in 2024.
According to figures supplied by asset manager Custodian, the cumulative outflow from the SA equity market since 2019 now exceeds R1,7 trillion.
Why do I remain unconvinced about the performance outlook for the JSE, especially when compared to what is currently happening on Wall Street and the Nasdaq?
A careful analysis of the underlying constituents of the Top 40 on the JSE, for instance, reveal a handful of dual listed global companies (which I can buy offshore, in any case) and a scattering of mainly banks and retailers. Both these classes of companies are heavily exposed to an over-taxed, over-indebted middle-class clientele in South Africa.
The gold mining industry is gone (which normally was driving industrial innovation and production in other parts of the economy over many decades), while there is no major commodity boom on the horizon, largely due to the slow-moving implosion of the Chinese economy, SA’s largest trading partner.
Value trap
I am inclined to believe that domestic equities on the JSE, barring short term flare ups as we saw in the three months after the general election in 2024, are in a classic value trap, as some fund managers have warned. Cheap shares stay cheap for a reason. And the reason in my opinion is the mismanagement of the economy, municipalities, ports, railways and harbours by the ANC. Unless the situation improves dramatically, in my view the JSE will remain cheap and also a perennial underperformer against global markets.
The same is equally true of the residential property market, with perhaps the exception of the Western Cape. So much value has been destroyed as a result of the slowly imploding municipalities. I will deal with this in a follow up article in the near future.
I understand that local asset managers have been battling to attract flows into their funds. But what is disconcerting is there seems to be no media scrutiny of these outrageous claims and forecasts, all which haven’t materialized. I cannot believe that the financial media doesn’t have the courage to investigate and report on these sometimes outrageous investment forecasts. There is also no solace in the fact that it‘s not only the JSE suffering from this current phase of global financial markets, dubbed TINA by the Financial Times recently.
TINA it seems stands for There Is No Alternative to the roaring bull market on Wall Street. British asset managers are also suffering from a massive flow of capital into the US Markets, leading to similar periods of gnashing of teeth amongst UK fund managers.
The over-concentration of US stocks in global indices is at record levels. Almost all major stock markets outside of the US have been suffering similar outflows.
How long can this outperformance last?
No one really knows, and until a new trend emerges it will remain a case of TINA: There Is No Alternative.
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*Magnus Heystek is an investment strategist at Brenthurst Wealth. Follow him on X on @magnusheystek.
