After the Bell: Is the JSE All Share trading at a record high an act of cynicism?

What does it mean that the JSE All Share is trading at a record high? I mean, it sounds good. It is good. It’s much better, I find, in general terms, for a stock market index to be trading at a record high than a record low. That would be bad.

Not to be too much of a bear, but this particular record does invite investors to curb their enthusiasm. There are three reasons to look at this record slightly askance.

First, the essential reason for the record is more international than domestic. Stock markets around the world are running at the moment with the expectation that global interest rates will start coming down pretty soon. The FTSE 100 hit a record in May and the S&P 500 set a record last month. Both, and others around the world, are trading pretty close to their peak.

Second, if you are thinking comparatively rather than absolutely, then the JSE is still seriously lagging. The easiest way to measure this is to compare the JSE All Share index to the MSCI ACWI, which is the investment bank Morgan Stanley’s All Country World Index. Over 10 years, it’s about 90% up, compared to the All Share, which is 61% up. That’s looking at a dollar-based index compared to a rand-based index. If you compare the MSCI ACWI with the MSCI South Africa index over 10 years, the result is approaching horrendous: the SA index is down by 22%.

Technically, if you live in SA, that doesn’t matter much; your life is denominated in rands, not dollars. Except, actually, it isn’t. Product prices, from steel to coffee beans, are increasingly denominated in dollars, so without necessarily realising it, South Africans do live largely in a dollar-based economy, as does everyone else around the world. The uncomfortable realisation that comes from that is, longer term, record or no record, we are going backwards. But it does show you how important it is, generally speaking, to invest broadly so you don’t get caught up in what they call “country risk”.

Third, people forget what these values measure. They are essentially the function of the earning power of large, listed companies, and contain at least one big, implicit distortion, which has to do with inflation. Large companies typically have pricing power, which means their earnings are less affected by inflation than smaller companies, which are price-takers. Of course, that doesn’t always apply, but in general, you do need to differentiate between how the market is performing and how families are holding up. The market could be rolling, but families are suffering, and it is pretty safe to say that is the case today

That’s the great thing about investing in stock markets; they have a kind of built-in inflation hedge, which means we should take stock market records at times of high inflation with a pinch of salt. You could put it this way: big, well-established companies generally find it easier to log big year-on-year increases in times of high inflation (like now) than in times of low inflation.

But honestly, I don’t want to come across as a big, wet blanket. Let me at least try to make the argument that this record is a precursor to many more.

The most obvious reason to be positive is that even after this increase, SA’s stock market is cheap. The SA market is trading at around 11 times annual earnings, while the S&P 500 has been trading at more than double that for years. Think of that valuation differential: it’s mind-boggling. Even a mild revaluation would make a very big difference to the JSE.

SA is not alone in this, by the way: “emerging markets”, as they are sometimes known, are not that much better; probably around 15 times annual earnings. It shows how much money is caught up in a small number of US tech stocks. There may be good reasons for that, but facts are facts.

There is also a much broader reason to be cheerful: so far, this year — the grand year of democracy in which more people are voting than ever before — is turning out surprisingly well.

Writing in the Financial Times, foreign editor Alec Russell points out that if there is a common theme to elections this year, it’s that incumbents have got thumped. This applies to established liberal democracies like Britain and France, rambunctious “dominant party” democracies like India and South Africa, and even authoritarian or quasi-authoritarian states like Venezuela and Bangladesh.

In both Venezuela and Bangladesh, the elections were rigged, as they always are in thug states, as we expected. But in Venezuela, unexpectedly, the rest of Latin America, which generally turns a blind eye to South American countries’ absurdities, isn’t putting up with it this time — even countries with leftist governments like Brazil.

In Bangladesh, the extraordinary happened. The former prime minister Sheikh Hasina was physically drummed out of the country even after notionally winning her fourth straight term. She is lucky she had a helicopter at her home — oh wait. That’s run of the mill for authoritarian leaders, I suspect.

The point is that decreasing interest rates alone are not powering the markets. And it’s not just increasing confidence in a soft landing as inflation subsides. It’s that the “woe is me, democracy’s failing” narrative is not panning out as predicted. Of course, things could still go spectacularly wrong as they have to a certain extent in the recent past. But democracies are resilient, which is one of the reasons they are such powerful political devices.

So, things could still go backwards from here. But you know what: they could also go forward. George Bernard Shaw said the power of accurate observation is called cynicism by those who don’t get it. But what if it’s the cynics who are not getting it? DM