The South African Reserve Bank recently forecast growth in Gross Domestic Product (GDP) of 0% for South Africa in 2016. With such a dismal outlook on economic growth, what can we expect from the equity market this year?
The companies listed on the Johannesburg Securities Exchange have diverse revenue streams with only 43% of revenue coming from South Africa. Global growth, particularly China and Europe have a meaningful impact on the performance of SA listed companies.
When looking at the Top 40 companies in the JSE, which represent over 80% of the market, the offshore revenue is even more. In 2016, 73% of revenue of the top 40 shares on the JSE is estimated to come from outside of South Africa. As SA companies expand their businesses into offshore markets, this rise is only expected to continue.
As investors in the market are more forward thinking, there is little correlation between GDP and the returns in the JSE in that year. In 2011, with GDP of 3.2% the market fell -0.4%, while in 2012, with GDP of 2.2%, the market grew 23.7%. With the JSE up 5.8% in the first 8 months of this year, it’s anybody’s guess how the year will end.
What we can expect is that returns going forward will probably be more muted than the 14.7% we’ve achieved over the past 5 years. Skilled asset managers can still find pockets of value and opportunity in this market and so, as long-term investors, with these lower return expectations, a dedicated approach to picking the best investment managers who can expertly squeeze out any additional returns is more important than ever.