The Big Slumber On The Top 40 Index

Sage investment advice holds that long-term investors should include a fairly large proportion of equities in their portfolios. Equities traditionally outperform inflation by a sizeable margin. What happens when the go-to stocks on the JSE deliver meagre capital growth over the medium term? And which fundamentals need to change for the situation to improve?

- Jaco Visser

Equities, as the historical beaters of inflation, have lost steam and many retail investors and pensioners now begrudgingly keep an equity portion in their portfolios. Local and global market forces have beaten the life out of many of South Africa’s largest and most traded shares.

The FTSE/JSE Top 40 Index, a local benchmark index ranked by market capitalization, delivered capital growth of 3% per year over the past five years and a total return of just over 5%. Given that consumer prices rose by 5.9% per year over the same period, investors in the Top 40 Index lost out to inflation, even when dividends are considered.

Bonds, or listed debt by government and companies, returned an annual 8.16% over the past five years, according to Bloomberg data.

In addition to the largest shares’ lackluster performance over the past five years, several long-standing constituents dropped from the index, while the recent resource price boom benefitted only a few mining stocks. Of the 42-member * Top 40 Index during the final quarter of 2014, only 19 delivered capital growth to investors over the last five years. The other 23 shares delivered declines ranging from 98% for Steinhoff to 5.34% for Absa Group. Some issues were of an international nature while others were geographical and company-specific.

The Fed yanked the carpet

One of the main reasons for the share price malaise among the index constituents was the US Federal Reserve’s (Fed) interest rate hiking cycle which ended last year. Investors from developed economies, conscious of the risk of investing in emerging markets with all their political and policy uncertainties, theoretically favor less risky developed-market assets.