Speaking as the host of the latest meeting of the Group of Boutique Asset Managers (GBAM), Hlelo Giyose, founder and chief investment officer at First Avenue of South Africa, said the Johannesburg Securities Exchange’s (JSE) reputation has previously been hampered by its association with dominated mining stocks and the associated challenges of commodity pricing, managing industrial relations and legislative interference.
However, he said the JSE’s move towards other sectors has rebalanced that dependence.
“Retail and financial services are the fastest growing sectors of the economy, and mining, coupled with manufacturing, is now the lowest,” he said. “Even tourism and hospitality is now a higher contributor to GDP than mining.”
Low depreciation, high volatility
He said that while the rate of currency depreciation currently seems low, it is accompanied by high volatility.
“These market returns reflect the preponderance of high fundamental returns and strong cash flow growth in the local economy,” he said. “South Africa is just 1.57% of global market capitalisation, yet it has a return on equity of around three percentage points above the global average of little over 11%.”
At its latest meeting, GBAM discussed how high fundamental returns in the JSE are considered symptomatic of the dominance of corporate South Africa’s monopoly of new resources typically responsible for economic growth such as capital investment, labour, and technology.
It was also suggested that the high returns are a testament to the “exemplary microeconomics of capital allocation” by the managements of South African companies.
“South African businesses are not wasteful monopolies,” added Giyose. “High quality companies tend to be very defenseive during periods of uncertainty, and also outperform the local bourse a stunning 88% of the time during such spells.
“We anticipate that SA will continue to have one of the top performing stock markets given how its businesses have successfully expanded into the rest of the continent and the world while generating strong fundamental returns.”
Based in Johannesburg, First Avenue of South Africa is an asset manager set to offer European investors access to South African equities through a new UCITS fund in the second half of 2015.
GBAM is a global network of independent, specialist asset managers who aim to improve their presence in international markets.
