Does the JSE offer convincing value compared to the rest of the world?

When speaking to local investors, many of them are faced with the idea that it is possibly betraying to move securities away from the JSE to the offshore markets. In this series of publications, we will look into the JSE versus the rest of the world.

The Johannesburg Stock Exchange (JSE) has a market capitalisation of approximately 1,005 billion dollars. Although this is a remarkable amount, it is much less that the New York Stock Exchange (NYSE), coming in at approximately 25.3 trillion U.S. dollars.  When we look at this comparison, it is important to note that the JSE compared to global exchanges is a fairly small exchange.

One very important aspect to note is that we rarely ever see the JSE move in an opposite direction to global exchanges. When the NYSE goes down, the JSE is likely to come down with them. We’ve all heard the motto, “when the NYSE coughs, the JSE gets the flu”.

JSE All Share Index compared to the MSCI World Index

Let’s look at the JSE All Share Index and the MSCI World Index as an example. Although it is evident that the JSE All Share Index is inclined to move in a similar movement as the MSCI World Index (a broad global equity index that represents large and mid-cap equity performance across all 23 developed markets), it does not reflect this growth.

There is still a lengthy-term discrepancy between the two – in essence the MSCI World Index is growing at a much quicker rate compared to the JSE All Share Index. Ultimately, this means that the South African economy is not keeping up with the pace of the global economies that make up the MSCI World Index.

If we were to compare the S&P 500 (an index of the top 500 listed companies in the US by market capitalisation) and the JSE All Share Index, we can further see the JSE All share Index falling even further behind.

To illustrate this, we can look at the graph below from Bloomberg. This graph demonstrates just how radical this long-term divergence in growth is becoming.

According to Mexem, if SA does not fix the deep-rooted fundamental problems within South Africa, this long-term divergence movement will only continue.

Market movements in the past 10 years

Source: Bloomberg

Home Country Bias and Behavioural Finance

Alexa Abramovici, Head of Sales and Marketing at Mexem explains “we like to think we invest reasonably and rationally, however the field of behavioural finance has definitely proven there are social, emotional, and even cognitive factors that can affect our investing decisions”. Many South African investors are subject to home country bias. This is the tendency for an investor to prefer investing in companies from their own country. Many SA investors may have a much greater exposure to domestic stocks. According to Alexa, “Although investing in domestic stocks is still a must, investing excessively in domestic stocks can create an unbalanced portfolio with greater risk. Ultimately, home country bias can mean investors miss out on international investment opportunities”.

According to Mexem, there is more value in global securities and geographies that provide far more opportunities, industries and diversification than our local JSE market can offer us. Ryan Gordon, Mexem Africa CEO adds: “The JSE Top 40 index looks reasonable when measured in steadily-depreciating Rands, however measured in USD it looks miserable. The S&P has seen some astonishing growth specifically in tech which dominates the index, these extraordinary gains won’t be seen in our domestic markets”

After all, investing should not be a decision based on home country loyalty; investing should be a distribution of capital at a location where you have the potential for achieving a good return on your investment.

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