How the global consumer plays on the JSE have kept up well with the S&P 500.
A noticeable feature of global financial markets has been the strong recent performance of the S&P 500 Index, both in absolute and even more impressively in relative terms. As we show in the charts below, the S&P 500, the large company benchmark for the US equity market, continues to outperform both emerging markets (EM) and also the US smaller listed companies represented in the Russell 2500 Index.
The S&P 500 has gained approximately 15% against the MSCI EM benchmark since a year ago and is about 5% stronger vs the Russell.
We also show that, compared to a year ago, the SA component of the benchmark EM Index (MSCI SA) that excludes all the companies with a primary stock exchange listing elsewhere (SABMiller, British American Tobacco, Anglo American, BHP Billiton and the like) has done well compared to the average EM market, of which only about 8% will be made up of JSE listed companies. The JSE All Share Index, converted to US dollars, has lagged the S&P 500 by about 10% over the past 12 months.
There is however a class of shares listed on the JSE, that we describe as Global Consumer Plays (GCPs), that has kept up well with the S&P 500, on both the share price and earnings fronts, when measured in US dollars. These are companies listed on the JSE whose economic performance is largely independent of the state of the SA economy. As such they are not only rand hedges but, more important, are hedged against the performance of the SA economy and are almost fully exposed to the performance of the global economy. That is, both revenues and costs are incurred offshore.
We have calculated GCP Index of these companies whose share price movements have proved to be little influenced by either SA interest rates or the directions of commodity prices forces that are important for the SA economy plays or the resource companies that make up the bulk of the JSE by number of listed companies.
The components of this index – that account for about 40% of the full market value of the JSE – are, in alphabetic order, Aspen, British American Tobacco, Mediclinic, MTN, Naspers, Netcare, Richemont, SABMiller and Steinhoff, with the weights in our GCP Index determined by their proportion of SA shareholdings; that is by their Swix weights. We compare this combination of JSE-listed counters with the S&P 500 Index. As our charts show, this GCP Index has closely matched the performance of the S&P 500, both in US dollar share prices, as well as in index earnings per share. Note also how much better the GCP earnings held up through the Global Financial Crisis.
Since 2010 the respective index earnings per share have grown strongly and similarly. These excellent results have led to a significant rerating of the GCPs in recent years. Index values since 2010 grew significantly faster than index earnings per share, leading to a higher price/earnings multiple for the average GCP company. The GCP Index also enjoys a higher rating than the S&P 500.
Clearly this group of JSE listed companies, with full exposure to the global economy, are demandingly valued, that is they are expected to realise further strong growth in their earnings; indeed, faster or more consistently than the earnings expected of the average S&P 500 company. For the rand investor however, this group of companies can be regarded as defensive. The SA investor would be well hedged against the possible weakness of the SA economy and the rand. Furthermore, there is perhaps good reason, based on recent performance, to be of the view that this group of companies will continue to be valued (in US dollar terms) in line with that of the S&P 500 rather than the average EM company. A positive outlook on the S&P 500 could be translated into a roughly equal positive view for the GCP Index.
Moreover such investments are not subject to the limits imposed by foreign exchange control regulations.There is however one important caveat to be considered: there are only nine companies included in the GCP Index. Thus the investor holding the GCP Index would still be subject to a high degree of firm-specific risk.