Following on last month’s article on the value of diversification, I would like to put some perspective on how the SA market looks when compared to world markets.
The Johannesburg stock exchange or JSE has roughly 400 companies listed on it. Of this number, almost 75% of the total market value is concentrated in the top 20 largest companies. What this tells us is that when our market index moves upwards or downwards, the move can be mainly attributed to large moves of these companies and not necessarily the market as a whole.
In May this year, our market index reached an all-time high of 42207. The market as a whole is at a new peak, but it is not accurate to say the entire market is now expensive. The Industrials sector, driven mainly by retailers is up 20% over the past year. The likes of Mr Price, Foschini, and Woolworths all hit their highest share prices ever at the start of 2013. This happened while the Resources sector actually hit the lowest level that we have seen in a decade. The resources sector as a whole is now trading at a 40% discount on a price to book basis as seen in the chart below. On the same measure, industrials are now at a 35% premium. Given these extreme discrepancies, if you’re not going to buy resources now, you probably never will.
Disparity in Price to Book valuations
Disparity in Price to Book valuations
So what does this mean for us now? Well, with the exception of parts of the resources sector, there are fewer opportunities to invest in undervalued companies in our local market. But as soon as you expand your view to a global one, more opportunities present themselves.
For RE:CM, it is not a strategic asset allocation decision that tells us to be more heavily weighted to global stocks, but rather a consequence of where the opportunities are found.
For the last ten years or so, the South African stock market has outperformed other large market indices by an astonishing number. In fact, if you invested money offshore in mid-2002, an equivalent investment in a local index fund would be worth around six times what the offshore investment achieved in nominal terms. The extreme outperformance is shown on the chart below.
JSE compared to other major indices over 15 years
JSE compared to other major indices over 15 years
Could we have known that upfront? Not likely. Is it prudent to think that only South African investments are appropriate in a well-diversified portfolio? Well let’s put that into perspective with the picture below:
SA vs the World
SA vs the World
What we would like to suggest is that rather than taking a decision on one country’s economy over another, look a bit deeper as to the extent of real investment opportunities at a discount in each and let that be the driver of your investment decision. This is the approach we follow in the RE:CM Global Flexible fund, and as it happens, this fund now has roughly 40% invested in offshore companies and 30% in companies listed in South Africa with cash on hand to increase either geographical weightings when the opportunities present themselves.
If the world is your oyster, why ignore it?
