SIMON BROWN: I’m chatting now with Pieter Hundersmarck, portfolio supervisor at Flagship Asset Management. Pieter, I recognize the early morning time. [In] a note that you simply put out in direction of the top of final week you known as ‘[China and] the dirty little secret of South African equities’, there are a few charts that actually stand out. Of course the primary one you place out there may be that fairly merely in rands the JSE All-Share has underperformed world markets. It has not been a terrific decade, however we’ve finished okay within the final couple of years, kind of post-pandemic.
PIETER HUNDERSMARCK: Yes. How are you, Simon? I feel the query we got down to reply was actually to kind of deconstruct the place our returns are coming from, as a result of we’ve seen in the previous few years the JSE has popped its head up once more and traders had very tough time within the 5 years previous to 2019/2020. So we thought let’s take a look and see the place the returns over 10 years [have been] coming from, and the outcomes are literally fairly regarding from a variety perspective.
Not solely are the returns low, however they’re all actually depending on two areas, one being Naspers and one being useful resource shares.
SIMON BROWN: Yes, sources. You make the purpose; over a decade not a lot, however definitely over the final 5 years. And the market has finished all proper over the final 5 years; it’s been lifted by these sources. And then after all the opposite actual biggie has been Naspers, and Naspers has had a reasonably horror 2022, though [there was] a good bounce within the final couple of weeks for the reason that announcement of Prosus promoting down Tencent, rebuying their very own shares. But it’s been sources and it’s been Naspers driving our returns.
PIETER HUNDERSMARCK: It has. And I feel the Naspers factor was to have a look at what these two have in widespread: the result’s fairly clear – it’s China. So China accounts for between 40% and 50% of all useful resource consumption throughout copper, bauxite, aluminium and coal. Then clearly Naspers’s largest and actually solely, let’s say, discernible invaluable funding at this level is Tencent, a big Chinese enterprise. So then you definitely take the second by-product of that, and you’ll say China’s been rising at 6.5% for the past 10 years; what does the world appear to be for the JSE when China’s not rising at that fee? What occurs to Naspers, what occurs to sources? [That] raises a giant conundrum for asset allocators and traders to know the place their returns are coming from.
SIMON BROWN: Yes, that’s a terrific level. It mainly says that over the final decade our JSE, which we predict is unbiased and vibrant and all the things else, has actually been driven by China. That then means it comes again to the outdated story [that] it’s round diversification.
But I like the purpose that it’s round digging down and really understanding what’s driving these returns – which is what you have been doing – as a result of it’s one factor to say let’s diversify, however, if you happen to have been shopping for a Top 40 fairness ETF, you weren’t diversifying, you have been shopping for China.
PIETER HUNDERSMARCK: Exactly. And I feel that’s the important thing message of the article I used to be attempting to get throughout, which isn’t that you could’t earn a living off the JSE if you happen to time issues appropriately. I assume what I’m attempting to say, although, is ensure you have a China view if you happen to’re investing on the JSE, as a result of it’s a giant a part of the Naspers/Prosus advanced, it’s a giant a part of the sources consumption. Your listeners will know that it additionally impacts our phrases of commerce, the foreign money and all of that.
So simply ensure you perceive that you simply’re making a really clear China wager while you make investments simply on the JSE.
Individual counters can have particular person funding instances. We all know that. But simply [on] the JSE normally you’re making a giant China wager and traders must be cognisant of that for my part. Obviously there are actually nice alternatives to diversify, so maybe they may look a bit nearer at these.
SIMON BROWN: China’s finished nice, and it’s the world’s second-biggest financial system, rising at tempo and all the things. But it’s maturing. Over the weekend, once more, extra Covid instances [were] arising. Do they return into arduous lockdown? My sense is a few China’s good, however there’s much more planet on the market as nicely.
PIETER HUNDERSMARCK: I couldn’t agree extra, Simon. I feel the Chinese financial system has actually been a giant driver of worldwide deflation for some time. As I stated, it’s grown 6.5% for over 10 years. It’s seemingly that it received’t be capable of attain those self same numbers for the subsequent 10. It’s off an even bigger base, so possibly you don’t want as a lot development, however development goes to change into more durable to come back by.
I feel there are substantial alternatives for fairness traders, a minimum of in Europe and the US and Japan, [so] you don’t must dig too deeply into China, or a minimum of not make it the principle driver of your portfolio returns.
SIMON BROWN: Yes. There’s plenty of different alternative. Japan catches my eye there, however we’ll save that for one more dialog.
We’ll depart that there. Pieter Hundersmarck, portfolio supervisor at Flagship Asset Management, I recognize the early morning insights.
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