Stock market indices are an interesting invention. In some ways, they’re very arbitrary – why do we have the JSE Top 40 and not, say, the Top 50? Why is the Dividend plus Index made up of 30 companies? Despite their arbitrariness, they are important indicators, and their composition and changes therein can spell big things for companies’ share prices and investors’ choices. For example, the JSE has announced that the composition of the Top 40 is changing – Truworths is out and Reinet is in.
This probably means that a lot of index trackers and suchlike will be selling the retailer and picking up Johann Rupert’s investment company. It’s also a sign of the economic cycle – retailers are struggling as consumers economise, while the weak rand is fuelling the value of companies like Reinet, which has a lot of offshore investment holdings. All of which is to say that, while buying index tracking ETFs is a solid investment strategy, it is not without its risks and vulnerabilities to market whims and economic cycles. – FD
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ALEC HOGG: We have Nerina Visser from Nedbank Capital in the studio and what a pleasure it is – from the Green Bank, wearing purple and black.
NERINA VISSER: Well, I can’t wear green every single day. I try to bring my green, smiling, and sunny personality with me always. How’s that?
ALEC HOGG: And so you did. Once again, hear we are with somebody finding an upside in a national disaster for the rest of the country. Of course, that’s only sport. They say it’s not a matter of life and death. It’s much more important than that. As far as your colleague is concerned, it’s one Herman Bosman…it wasn’t a direct colleague, but he’s landed a cool job, hasn’t he – to run RMBH and RMI?
NERINA VISSER: Yes, and I think it’s great for RMH as well – or RMI on the insurance side. I think certainly, the insurance industry can do with somebody of his calibre and quality. I think they have bedded down the merger between the whole Metropolitan, Momentum, and of course, the insurance companies within the Rand Merchant Bank Group as well. I think they’ve bedded that down well, and I think he’s been handed a good wicket to actually…maybe we shouldn’t go into the cricket, as well… I think there are great opportunities for him. The short term insurance industry is suffering in South Africa – they definitely are. We saw MMI’s numbers out yesterday and RMI today. I almost want to say that within the financial services industry, short term insurance is almost your most discretionary spend – if I can put it that way. You don’t really have all that much of a choice in terms of bank charges. You can go for the cheapest possible option, but you have to have your bank stuff. On the life assurance side, it’s through pension funds etcetera. It’s also a forced purchase, to a large extent. Short term insurance is something that people often cut first, so when the consumer is under stress – as we find in South Africa – it is an area in which, they are battling to increase premiums.
ALEC HOGG: Well, Herman did work for the group before, so it’s also reflective of that organisation, where they bring back where they can – their old friends.
NERINA VISSER: Corporate memory is so valuable: to actually bring that back into the fold with obviously, some fresh perspective and new experiences from outside the group, but then to bring that back into the organisation.
ALEC HOGG: We’re going to talk about results in a moment, but you had a look at the index reviews.
NERINA VISSER: Yes, it was quite important, I think. The quarterly index reviews of the JSE, of course… There are a whole lot of indices that are reviewed on a quarterly basis. The announcement was made last night, so not many changes on the headline indices. The top 40 is the only one with a change, where we actually see Reinet coming into the…that investment company of Johann Rupert: that investment company coming into the top 40, replacing Truworths… It’s a sign of where we are in the cycle – where retailers remain under pressure in South Africa. Obviously the currency weakness and in particular, the currency weakness relative to the Pound and to the Euro, is obviously assisting that share price of Reinet over and above the good fundamentals there might be behind the company, but also purely on a price appreciation basis. Thus, Reinet will be replacing Truworths, but then we have the Dividend plus Index, which is only reviewed twice a year – in March and in September. The last time I was here, we were talking about some of the companies that are in the Dividend plus Index.
ALEC HOGG: The JD Group.
NERINA VISSER: The JD Group, in particular. You’ll be happy to hear that JD Group and Lewis are being dropped from the index, but for very interesting reasons. They’re both dropped because they are no longer part of the mid cap index, and the Dividend Plus is selected from the top 100 companies on the JSE – so the top 40 and the mid cap – and because they are no longer in the mid cap index, they’re automatically disqualified. A company like Abel for example, which I think also had a lot of attention – this is still included in the Dividend plus Index.
ALEC HOGG: When is it next going to pay a dividend?
NERINA VISSER: I think this is the important thing here. The Dividend plus Index is based on the forecast of analysts in terms of dividend expectations, so it’s a forward-looking one-year dividend yield, and on that basis, it is still considered one of the top 30 dividend payers.
ALEC HOGG: Which analysts?
NERINA VISSER: I think that’s an important question. I think people don’t necessarily realise that that JSE specifically uses BFA McGregor in terms of their forecast, and I’m not sure that is the most comprehensive sample of consensus forecasts. Bloomberg’s I think, is probably the most comprehensive. I-Net bridge is obviously also very big in terms of the domestic market, but the relationship the JSE has, is with BAF McGregor and that’s based on their forecast. There are some big changes in the Dividend plus Index, never more than five of the 30 shares changed hand, but there are five changes happening. One that I’d also specifically like to point out is Oceana coming into the index – coming at a weight of over three percent. That’s a big chunk of money that needs to go into Oceana. I would therefore expect some price support and some upward push in the Oceana share price over the next week or so. This is effective on Monday, the 24th of March, so the ETF’s – the Index Tracker Funds – have to rebalance on that Thursday afternoon, the 20th of March just before the long weekend. Yes, Oceana is certainly one that I think is worth some watching.
GUGULETHU MFUPHI: You always mention that one needs to do their homework when it comes to index tracking.
NERINA VISSER: Absolutely.
GUGULETHU MFUPHI: Let’s touch on Standard Bank’s results…some difficult numbers, as Alec mentioned earlier on, but it still seems as though the company is trying to perform adequately.
NERINA VISSER: Absolutely. I think, similar to the short term insurance market, it’s not an easy market for the banks to operate in and yet, I want to compliment our big retail banks because I’ve seen some very strong results from all of them – stronger I think, certainly – than many markets expected. Maybe in particular, when it comes to impairments and bad debt charges etcetera, I think the market went through a phase where it was too bearing on our retail banks, and I think it shows that there are some prudent lending practices. We clearly see that in terms of the credit extension numbers, which are coming out but yes, this is a good sustainability story. It’s much better maybe, than what the immediate short-term results might indicate.
