SUB CATEGORIES Featured Story |  Straight Talk |  The Stage | 

Has the JSE run past fair value?

11 February 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Equities play a huge role in the long-term savings environment. Whether you invest directly in the Johannesburg Stock Exchange, make regular monthly contributions to one of the country’s 900-plus unit trusts funds or contribute to your company pension fun

The JSE All Share Index (ALSI) provided a total return of 19% last year. If you had invested in a basket of shares to exactly replicate the ALSI – and held on to your dividends – you’d be sitting on R118, 980 today. A dollar investor would’ve been even happier, because the ALSI was among the best performing equity markets anywhere, measured in that currency. So far, no problem! What analysts are concerned about is the potential negative impact of the traditional February / March reporting window. Companies with December year ends – including the big banks and a number of important resources counters – will soon be making their full-year 2010 earnings public. And that’s when the number crunchers do their stuff to determine whether the actual company performances are good enough to warrant today’s relatively high valuations.

The JSE is expensive, historically speaking

Absa Asset Management (ABAM) Private Clients, an adviser to high net worth individuals and a market-watcher with a strong focus on value opportunities, reckons that unless earnings surprise on the upside, the JSE has run about as far as it can. Their assertion is based on the market’s historic price-to-earnings (PE) ratio, which at 17 times is firmly entrenched in “expensive” territory. The PE ratio indicates how many years you would wait before paying the full purchase price of a share out of its earnings. So, for example if a share trades at R100/share – and the company earns R10/share for 2010 – the historic PE ratio is 10 times.

“The crunch comes late in February when major JSE players like Anglo American and BHP Billiton report their earnings,” says Craig Pheiffer, General Manager Investments of ABAM Private Clients. “At the moment, analysts are working with earnings estimates, but a few weeks from now their calculations will be based on actual numbers.” If these giants report higher than expected earnings they’ll impact the historic PE and one-year forward PE ratios for a number of recovering stocks and sectors! A clearer picture of value will emerge in the first couple of weeks of March 2011.

“If multiples for the likes of Anglo and Billiton stay at 17 or 18, analysts might continue to view these shares as expensive,” says Pheiffer. It would require a PE shift from the current high levels down to 12 or 13 times to get investors to recommit to these shares. Given the huge participation of some of the JSE Top 40 shares to the overall index it could take poor results from just one or two companies to shake the market to its core.

Is it time to dump stocks and head for safer ground?

Should investors be shying away from equities and heading for South Africa’s favourite “wait and see” investment – cash or near-cash funds? Pheiffer doesn’t think so: “Our view is that value is still to be found in the JSE, given proper sector and stock selection – however – we acknowledge that with the strong market gains in 2009 and 2010, value identification has become more of a challenge!”

Instead of succumbing to short-term market fluctuations investors should stick to their strategies and maintain an appropriate weighting to equities. ABAM offered the following data to support their equity view: The JSE has been good to investors over the last two years. In 2009, the ALSI achieved a total return of 32%, followed by 19% in 2010 for a compound annual market return of 25%. And last year, the JSE outperformed in US dollar terms such heavily supported emerging markets as China and Brazil!

Although I agree with their pro-equity stance I’d like to expand on their argument. Too many analysts rely on carefully selected time periods to support their ideas. The reality is that over three years beginning 2008 the JSE only returned 7.7% per annum compound, due to the dreadful -23% performance at the height of the sub-prime contagion. A better illustration of the power of equity investing is to consider the long-run market return which is closer to 17% over periods spanning 20-years or more.

Some points to ponder

One of the first things you learn when you get serious about investing is the past (last year’s results) has little bearing on the future (next year’s performance). Analysts’ expectations for current year performance are nothing more than an educated guess given their expectations for various outcomes including earnings, gross domestic product, commodity prices and exchange rates. And the JSE is often subject to massive capital movements which render these “best guesses” of future performance null and void.

“Currency factors and international influence on a highly liquid emerging market like the JSE are obviously important,” notes Pheiffer. “With an appreciating rand last year, offshore investments performed poorly. However, the weakening of the currency over January and early-February showed just why offshore investments or offshore currency exposure shouldn’t be ignored!” His parting shot to investors was to stay balanced – and not to turn their backs on the JSE just yet.

Editor’s thoughts: Each quarter the country’s Collective Investment Schemes industry publishes detailed statistics on the capital flows in the unit trust space. We can safely use these flows as a proxy for investor views on the various asset classes. Over time, local investors have emerged as extremely risk averse, sticking with money market and other fixed income opportunities over equities. They’re leaving a great deal of their long-term return potential on the table. Are you nervous about equity valuations as we head to the middle of Q1 2011? Add your comment below, or send it to

Comment on this post

Email Address*
Security Check *
Quick Polls


How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?


Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
fanews magazine
FAnews June 2024 Get the latest issue of FAnews

This month's headlines

Understanding prescription in claims for professional negligence
Climate change… the single biggest risk facing insurers
Insuring the unpredictable: 2024 global election risks
Financial advice crucial as clients’ Life policy premiums rise sharply
Guiding clients through the Two-Pot Retirement System
There is diversification, and true diversification – choose wisely
Decoding the shift in investment patterns
Subscribe now