Wendy Myers, Head of Securities at PSG Wealth

 

While the phenomenon of stock market delistings is not only restricted to South Africa, the picture locally appears to be acute. The Johannesburg Stock Exchange has seen the number of listings more than halving from 616 in 2000, to just 284 at the end of 2023. This is a result of a confluence of global and local factors, with the big one being tepid economic growth in our local economy. Investors are therefore asking what role the shrinking JSE should play in their investment portfolios.

 

 

The key implication of a shrinking investment universe on the JSE is market concentration risk. The JSE is effectively dominated by a few market heavy weights, including for example China-related internet counters (think Naspers and Prosus) and commodity stocks. However, despite the reduction in the number of single stock counters, we have seen a rise in the number of Exchange Traded Funds (ETFs) that are listed on the JSE. Investors should not assume that their portfolio will be suitably diversified if they only have JSE exposure via ETFs – since these instruments effectively track an index and may, by extension, not provide as many diversification benefits as investors would assume.

 

 

In general, when considering equity investments, it is very important to ensure your portfolio is well-diversified, and similarly, the JSE should not be your only form of equity exposure. International diversification is key and investors need to consider exposure to other currencies and geographies in their portfolios. This can be obtained in various ways and it is not always necessary (or cost-effective) to invest directly offshore. At PSG Wealth we recommend an allocation of almost 40% of your total portfolio to international securities. It is possible to invest internationally on the local exchange through rand denominated ETFs that have exposure to offshore stocks, or through feeder funds. It is also worth remembering that when you invest in Regulation 28-compliant portfolios (like those typically found in retirement products), you are likely to have some offshore exposure via those vehicles as well.

 

 

However, the reality is that valuations of JSE listed companies are at an all-time low compared to international companies and selected companies may be offering investors good buying opportunities. Although these companies are trading at low valuations, they are paying very attractive dividends, so savvy investors can benefit from owning stocks that have high dividend yields, and because of low valuations, they also provide upside potential if interest rates start to decline or economic conditions improve, even if off a low base. Thus, the potential upside for South African assets could be pronounced.

 

 

However, stock selection is incredibly important when looking to exploit this opportunity and investors must select stocks that have both high dividend yields, but also relatively low share price volatility. “Value traps” must also be avoided and investors should steer clear of companies that have limited control over revenues and costs. A long-term horizon remains essential, allowing dividends and market returns to compound effectively.

 

 

All of this can be daunting and complex and the importance of a financial adviser to guide you through the process can not be underestimated. We always urge people to employ the services of a trusted professional financial adviser, with good fundamental skills, who can actively manage your portfolio and provide holistic advice in the context of your long-term financial goals. They will be able to guide you on the right investment vehicle to use to ensure you gain the most out of your investment returns, the types of stocks and ETFs to buy to ensure you do not fall into a value trap, while addressing the potential concentration risk that exists on the JSE, and how best to incorporate offshore diversification into your overall balanced portfolio.

 

 

Finally, a key, and often overlooked, role of a financial adviser is that they help ensure you keep investing and that you are reviewing your portfolio regularly. This ultimately underpins the achievement of your defined investment outcomes.

 

 

ENDS