MORNÉ BEZUIDENHOUT: Markets are rising but global economic woes are far from over
As the charts accompanying this article show, the V-shaped recovery is firmly in place and the catastrophic behaviour of world markets earlier in 2020 is a thing of the past.
The first chart is the All Countries World Index, a scorecard of shares from all over the world weighted by their size. The index is dominated heavily by US shares.
The precipitous plummet of share values in March has been all but nullified by a recovery to levels that have prevailed for the past two and a half years.
What has caused this recovery during a time when investors have never been so uncertain, when virus infections are clearly not under control, tensions between the US and China seem to be worsening and the world seems bereft of strong and sensible leadership? Not to mention the additional factor of increasingly mobile and angry civil protests across the globe.
Developed countries have thrown a ridiculous amount of money at the problems caused by the virus. US citizens with bank accounts were simply given a deposit straight into their accounts, unemployed US citizens were also gifted an extra unemployment benefit, UK citizens who had been laid off or asked to work less for less pay were protected by a “furlough” scheme where a large proportion of their salaries continues to be paid by the government, and many other developed countries adopted similar relief measures.
In SA, with a government without deep pockets and a debt problem threatening to spiral out of control, it’s a seemingly similar story. The all share index (including dividends) has also recovered to the higher level of the range in which it has been trading for the past three years or so. It will not surprise some readers to see the similarity between the two charts, as the JSE is totally dominated by foreign markets. As the saying goes, “When the US market sneezes, the JSE catches a cold.”
More than half of the JSE is not SA shares at all. The largest share, with a misleadingly Afrikaans-sounding name — Naspers — is actually a Chinese online gaming company, as more than 100% of the value of the share is in a Chinese firm called Tencent. The next largest share is British American Tobacco, which derives a paltry proportion of its revenue from SA. The vast majority of its profits come from selling cigarettes (and e-cigarettes) across the globe.
Add the gold and platinum companies, Sasol and a few others and the top 50% of the JSE is, in reality, developed market companies earning mostly dollars. So, the chart is a mirror of the developed countries chart but hides some dismal experiences in the so-called SA Inc companies, such as the banks and retailers that earn rand (and, in some cases, buy their products in dollars). The chart is completely dominated, first by Naspers and its Dutch subsidiary Prosus, and second by the other rand-hedged companies I have mentioned.
What is known as “market leadership” is just as evident in the US and other markets. The S&P 500 shows the share price performance of the largest 500 shares in the US, and the Nasdaq index shows the largest 100 technology companies since the beginning of 2020. Companies such as Facebook, Amazon, Apple, Google, Microsoft and Netflix are in both indices. As can be seen from the chart, the tech companies have been the winners through the Covid crisis. A smallish company at the start of 2020 called Zoom is now worth more than the seven largest US airlines combined.
Take away the positive effect of the tech companies, and the S&P 500 is still 6% below its peak. James Downie, chief investment officer at investment portfolio design company AssetBase International, points out some sobering facts. Covid infections are still climbing in the US; the effect of Covid in developing-emerging countries is starting to be felt only now; many countries are experiencing a second wave of infections or a continuation of an insufficiently suppressed first wave; the extra payments made to US citizens cease shortly and the UK furlough scheme comes to an end soon (both may be extended for political reasons); and the money thrown at the problem by developed countries will have to be paid back some day.
It then becomes evident that the economic woes of the world are not over. There will continue to be challenges to governments, companies with high debts, travel and hospitality industries and overburdened health care. These challenges will prevail well into 2021 and beyond.
However, there will be companies that thrive in such an environment: companies with entrenched market leadership by themselves or with few others; companies that generate cash, not profits; companies with the entrepreneurship to reinvent themselves to benefit from the circumstances; and companies with strong brands and loyal customers. So, expect these companies to trade at stretched prices for a while — their earnings will support the prices.
Investment advice has never been so critical. Investment planners worth their fees should be able to recommend asset managers who can identify these companies to make sure you achieve your investment goals.
• Bezuidenhout is director and investment planner at Netto Invest.
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