The JSE makes a comeback after 2024
Something unusual happened on the share markets over the past 16 months. The JSE has outperformed the S&P 500 Index by a large margin. Improving its rand value by 30.5% (including dividends reinvested) while the US S&P 500 Index valued, also in rands, has gained less, 17.7% up since January 2024.
Fig.1; The S&P 500 and the JSE All Share Index; Total Rand Returns (January 2024=100) Monthly.
Source. Bloomberg and Investec Wealth & Investment.
Fig.2 S&P and JSE Index Earnings per Share (2024.01=100) Month end
Source; Bloomberg and Investec Wealth and Investment
Comparisons after 2010 are odious for South Africa and the JSE
Yet over the past fifteen years the JSE has trailed the S&P by a very large margin. The rand value of the S&P 500 is up by as much 16.5 times since 2010. Compared to a 5.8 times gain for the JSE.
Fig.3; The value of R100 invested on the S&P 500 and the JSE All Share Index. (2010=100) Dividends reinvested.
Source. Bloomberg and Investec Wealth & Investment.
Fundamentals, that is increased earnings, improved economic performance, discounted by generally lower interest rates account for much of the rising value of the S&P Index. S&P Index Earnings per share in USD have grown by 4.1 times since 2010 while the Index has increased by 5.2 times with much of the re-rating realised after 2023. Converted to ZAR, S&P earnings have multiplied by 10 times since 2010 while JSE earnings per share have increased by much less, up 4.2 times since 2010.
Fig.4; The S&P 500 and the JSE All Share Index. Index earnings per Share. Rand Values Monthly (2010=100)
Source. Bloomberg and Investec Wealth & Investment.
Annual returns – very different- risks similar
Fig.5; Total Annual Returns in Rands 2010-2025. S&P 500 JSE All Share Index. Monthly (Average 18.7 Vs 11.9) (SD 10.7 vs 10)
Source. Bloomberg and Investec Wealth & Investment.
Fig 6; Total Annual Returns Rands 2020-2025 Monthly (Average 18.2 Vs 11.7)
Source. Bloomberg and Investec Wealth & Investment.
The S&P rerates in recent years
Fig.7; The S&P 500 Prices and Earnings (USD 2010=100)
Source. Bloomberg and Investec Wealth & Investment.
The JSE has derated
JSE earnings have by contrast grown faster than share values since 2010 – by 4.2 times compared to the Index that has risen by less- 3.4 times. A derating rather than a re-rating. The temporary earnings boom of 2022-23 linked to metal prices and global supply side constraints did little to boost the JSE.
Fig 8; JSE All Share Index. Index values and Earnings Rand Values (2010=100)
Source. Bloomberg and Investec Wealth & Investment.
Equity risk premiums – realised and expected. The unexpected has happened to an extraordinary degree over a fifteen-year period
The US 10 year Treasury Bond has provided an average annual return of 3.9% over the period 2010-2025 –thus providing equity investors with a close to an average 10% p.a. extra returns over bonds. Past performance suggests that an extra 4% p.a. from a well-diversified basket of equities would have been enough to justify the extra risk. The S&P 500 delivered much more than could have been expected, delivering an average 18.7% p.a. rand return since 2010 and 13.6% p.a. in USD. It surely cannot get much better than it has been for holders of US equities over the past 15 years.
By comparison, the equity risk premium for SA investors has averaged only 2.8% p.a. since 2010. The yield on an RSA bond since has been an average 9.1% p.a. ( the inflation rate was an average 5.1% p.a. providing an impressive real return of 4% p.a. for a low risk asset) while the total return on the JSE averaged 11.9% p.a.
Such exceptional returns as delivered by the S&P 500 over an extended period required a combination of unexpectedly good news. About the operating profits of the listed firm and about the risks attached to these profit flows, that are used to discount these expected flows. South Africa mostly disappointed investors on these metrics. An equity risk premium of 2.8% p.a. does not compensate for the extra risk. At least an extra 4% p.a. would have been expected.
JSE earnings growth accelerates, and risks recede since 2024
Yet recently, over the past 15 months, thanks largely to the increases in the price of gold, and the very strong growth in the earnings reported by the gold mining companies – JSE earnings have outpaced S&P earnings both in rands by about 25%. In addition, the risks attached to RSA bond yields had also declined thanks to the formation of the Government of National Unity (GNU) in mid-2024. Risks as measured by the spread between RSA dollar denominated bond and their US equivalents. And reduced the cost of capital for SA business, the returns they must exceed to add value for shareholders, regarded here as RSA long bond yields plus an equity risk premium of 4% p.a. The establishment of the GNU reduced SA risk- the budget dissonance has since raised it -while the risk premium and the cost of capital – has declined from its post Budget highs. (see below)
Fig.9; South Africa. Sovereign Risk Premium and the Cost of Capital. Daily Data 2024-2025.
Source. Bloomberg and Investec Wealth & Investment.
Since about 2013 SA risks and cost of capital have risen.
The sovereign risk premium attached to RSA bonds have mostly risen since 2013, driving up long bond yields and the cost of capital. Very slow GDP growth and the threat it poses to the tax base and fiscal stability have raised the SA risk premium and has meant higher required returns from SA bonds and equities and lower valuations. These required returns or hurdle rates for investors and firms rose from about 11% p.a. in 2013 to about 14.5% p.a. today. That is to about 6.5% p.a. higher than the cost of capital for the average US company, using the same 4% equity risk premium. The lack of expenditure on extra productive capacity by SA business, a GDP growth depressor, is easily explained by these baleful facts. (see below)
Fig. 10; SA and US costs of capital and their differences. (Bond Yields + 4% = cost of capital for the average corporate) Daily Data 2010-2025
Source. Bloomberg and Investec Wealth & Investment.
Fig.11; Sovereign risks and the five year carry- the expected movement in the USD/ZAR (% p.a) 2024-2025 Daily Data
Source. Bloomberg and Investec Wealth & Investment.
Fig. 12; Bond Yields; RSA five-year Yankee and US Treasury Bonds 2024-2025 Daily Data
Source. Bloomberg and Investec Wealth & Investment.
Fig 13;The ZAR Vs the USD and the EM Basket (Higher ratios indicate ZAR weakness) Daily data. 2025=100
Source. Bloomberg and Investec Wealth & Investment.
Fig 14; The ZAR in 2025; Daily Data; Lower Numbers indicate ZAR strength
Source. Bloomberg and Investec Wealth & Investment.
The Bottom Line
The JSE, as does the SA economy, desperately needs the stimulus of unexpected growth in listed company earnings and in aggregate real incomes, with less SA risk attached to them. Sustaining the GNU would reduce risks and interest rates. Better, the GNU could help deliver very surprisingly faster growth. That is do more for the economy than merely limit the mistakes the government would otherwise make, as is the prevailing presumption implicit in the very slow forecasts of growth in GDP. The economy has much scope for a growth surprise- off a very undemanding base.
An appendix- taking the story back to 2000- the SA economy and the JSE performed much better until 2010.
It wasn’t always so – the comparison starting with year 2000. The JSE has been very competitive with the S&P on valuations and earnings performance
Fig 15: S&P Vs JSE Total Returns (2000=100)
Source. Bloomberg and Investec Wealth & Investment.
Fig.16; S&P and JSE Index Earnings per Share Rand Values (2000=100)
Source. Bloomberg and Investec Wealth & Investment.
Fig.17: S&P and JSE Index Earnings per Share USD Values (2000=100)
Source. Bloomberg and Investec Wealth & Investment.