By Adrian Meager
A Handful of Shares Drove the Market Higher in 2017
2017 proved to be very eventful year for the South African economy. We witnessed a cabinet reshuffle, the downgrading of our local and foreign credit rating, a technical recession, business confidence at multiyear lows, unemployment at a 13-year high, questionable economic policies, the election of Cyril Ramaphosa as ANC president, Viceroy’s speculative reports and the list goes on…
Although most of these events appeared to be negative, we saw the local stock exchange record a gain of 20.95% for 2017. So, where have these returns been generated, given that the local economy is in such a precarious position right now? The answer lies in a few companies that generate most of their earnings offshore and make up a substantial portion of the JSE All Share Index (ALSI).
The JSE ALSI is a very concentrated index and even though there are 167 shares that make up the index, the top 10 shares make up more than half (c.55%) of the entire index by value. Out of those 10 shares, only two companies (Standard Bank and FirstRand), can be classified as companies that have the majority of their exposure to the South African economy. This starts to give us a better understanding of why the ALSI performed so well last year, while the South African economy grew less than 0.6%.
If we consider the respective index weightings of these shares at the start of the year and the returns they generated in 2017, we will notice that more than three quarters of the ALSI’s 20.95% gain can be attributed to the top five shares in the index: Naspers, Richemont, BHP Billiton, Anglo American and Standard Bank. No wonder investors are questioning their individual portfolio returns when they see the index having performed so well. But the index as a whole has not performed that well and it is this handful of shares that drove the JSE ALSI to record highs in 2017. If you remove the impact of Naspers’ performance from the ALSI’s returns, we see a different picture, with returns significantly lower at c9.2% for 2017.
Although most of our clients have been exposed to Naspers, Richemont, MTN Group, Sasol, FirstRand, and British American Tobacco for the last few years and have enjoyed the gains generated by these quality companies, we are acutely aware of the concentration risk they now present to the index, and as such we are not prepared to take on this risk at present, by taking an overweight position.
At Warwick Asset Management, we not only have a duty to our clients to outperform our benchmark, but more importantly, we also have a duty to manage risk. Unfortunately, risk is something clients often forget when they see the market climbing higher, but it is not something we cannot overlook. Risk management forms an integral part of our overall investment process as we continue to search for investment opportunities that we feel will provide attractive risk-adjusted return for our clients.