In August 2014, something broke! Momentum found a new address, and that address was not the Johannesburg Stock Exchange. Decades of on average 18% per annum portfolio growth ended.
The Top 40 Rolling P/E and Returns chart tells a story. The light blue “Top 40 Returns” line shows the inflection point where in 2014, the market turned “sideways”.
The sideways movement in the market has the effect of keeping the price constant (the “P” in the P/E ratio). We can therefore draw broad conclusions about the earnings of companies in the Top 40.
The P/E ratio for the Top 40 peaked at a hair under 24 in January 2017. Since then, the ratio has halved. Earnings have grown while the price has mostly remained constant, except for the price volatility during the lockdown shock.
The eternal optimist will see this as the market as being cheap. This is the time to pile in and stock up. Buy the Satrix 40! The question is, “will you be rewarded with price growth?” Many Top 40 companies have diversified their earnings away from South Africa, so hopefully, the earnings will remain robust.
The Returns line (Light Blue) has shown some flickers of potential, trying to break out above the long-term sideways trend. Some of this break-out can be attributed to post-lockdown hope. But what must happen for price growth to continue?
There must be more buyers than sellers for the price to go up. That means South Africa must attract foreign money back into the market. It will take significantly more than just a cheap market to attract buyers.
The lack of price growth is not due to poor earnings. It is due to poor policy. Economic policy needs to change to attract foreign capital. There is no sign that the political incumbents care about the performance of the financial markets and the wealth creation of its citizens. This is seen as the domain of the elites.
We live in a global world, and South African economic policy is based on advancing the interests of some and excluding others. The result is economic recession for everyone. So far, seven years of recession and soon to be a decade come 2024. Coincidentally, 2024 is an election year. Could that mark the end of a lost decade?