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EMEA Equity Research
South Africa
July 2012
South Africa
Franca Di Silvestro*
Analyst, Head of South African Equity Research
HSBC Securities (South Africa) (Pty) Ltd
+27 11 676 4223
[email protected]
Jan Rost*
Analyst, banks
HSBC Securities (South Africa) (Pty) Ltd
+27 11 676 4209
[email protected]
Michele Olivier*
Analyst, consumer and industrials
HSBC Securities (South Africa) (Pty) Ltd
+27 11 676 4208
[email protected]
Cor Booysen*
Analyst, metals & mining
HSBC Securities (South Africa) (Pty) Ltd
+27 11 676 4224
[email protected]
Richard Hart*
Analyst, metals & mining
HSBC Securities (South Africa) (Pty) Ltd
+27 11 676 4218
[email protected]
John Lomax *
Strategist
HSBC Bank plc
+44 20 7992 3712
[email protected]
Wietse Nijenhuis*
Strategist
HSBC Bank plc
+44 20 7992 3680
[email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
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EMEA Equity Research
South Africa
July 2012
Introduction
The South African market is viewed as the most mature equity market in the African territory, having
undergone a number of reforms initiated by both the Johannesburg Securities Exchange (JSE) and the
South African government. The JSE was founded in November 1887. Trading is allowed on the JSE on
weekdays between 0900 and 1700 South African standard time, and works on a rolling T+5 settlement
cycle, meaning that settlement occurs five days after the transaction date, although the exchange is
moving towards T+3 settlement.
The FTSE/JSE All Share (JALSH), a market capitalisation weighted index, serves as the primary gauge
of the South African equity market. Over the past 10 years, the JALSH had returned around 195% in
South African rand terms and some 237% in US dollar terms; this translates into compound annual
growth rates of 11% and 13%, respectively.
According to World Bank data from 2010, South Africa ranks first among the 21 emerging markets on
the metric of market capitalisation as a percentage of GDP. On a global basis, it ranks second only to
Hong Kong on this metric. One theme that attracts investors to the South African equity market is what is
termed “Access Africa” – its exposure to other African markets. Since many other African exchanges are
not liquid and open, investors prefer to look at South African companies with an African reach.
The dominant trends driving the upward trend in the South African equity market over the past decade
have been the global resources boom, together with rising spending by the emerging middle class (buoyed
by an influx of foreign immigrants). This trend has benefited all consumer sectors (including mobile).
Market structure
The MSCI South Africa index is relatively well diversified by comparison with other emerging EMEA
country indices such as Turkey and Russia. Excluding the London listed (dual-listed) stocks, the top 5
companies constitute about 39% and the top 10 companies 55% of the index’s market capitalisation.
MTN and Sasol together constitute around 20% of the index weight. Other major constituents of the index
are Naspers, Standard Bank and AngloGold Ashanti. The major London listed stocks include Anglo
American, BHP Billiton, British American Tobacco, Investec, Lonmin, Old Mutual and SAB Miller.
Equity index performance in South Africa
Major stocks in MSCI South Africa index* (excluding London
dual-listed stocks)
1000
40000
35000
30000
25000
20000
15000
10000
5000
0
800
600
400
200
0
96
98
00
02
04
06
08
10
12
MSCI South Africa price index (in Local currency)
JSE All share price index (in Local currency, RHS)
Rank
Stock Name
1
2
3
4
5
Top 5
6
7
8
9
10
Top 6-10
MTN Group Limited
Sasol Limited
Naspers Ltd.
Standard Bank Group Ltd.
Anglogold Ashanti Ltd.
Gold Fields Ltd.
Impala Platinum Hdg.Ltd.
Firstrand Ltd.
Sanlam Ltd.
Shoprite Holdings Ltd.
Note: * data as at 22 May 2012.
Source: MSCI, Thomson Reuters Datastream, HSBC
Source: MSCI, Thomson Reuters Datastream, HSBC
2
Weight (%)
10.7
9.1
8.0
6.4
5.2
39.4
3.6
3.4
3.3
2.7
2.7
15.7
Franca Di Silvestro*
Analyst
HSBC Securities (Pty) Ltd|
+27 11 676 4223
[email protected]
*Employed by a non-US affiliate of
HSBC Securities (USA) Inc, and
is not registered/ qualified
pursuant to FINRA regulations
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EMEA Equity Research
South Africa
July 2012
By sector, financials and materials constitute around 48% of the total index market capitalisation of MSCI
South Africa index, followed by consumer discretionary (15%) and telecoms (13%). Despite the higher
weightings of cyclical sectors such as financials and materials and a volatile currency (South African rand
– ZAR), the South African equity market has historically been perceived as defensive (low beta, low
volatility). This is because of its insulation from major markets and its healthy financial system (which is
underpinned by a large domestic institutional asset management industry) and its core gold mining sector
which gained from heavy safe-haven buying of gold. Strong corporate governance relative to other
emerging markets is also a factor driving relative performance.
Liquidity (6M ADTV) of equity indices in South Africa
Sector composition of MSCI South Africa index*
2000
Sector
Weight (%)
Financials
Materials
Consumer Discretionary
Telecommunication Services
Energy
Consumer Staples
Industrials
Health Care
1500
1000
500
26.8
21.2
15.4
12.8
9.1
6.9
4.7
3.2
0
07
08
09
10
11
12
SA FTSE/JSE All Share Index 6M ADTV (USD m)
Total
100.0
Note: * data as at 22 May 2012.
Source: MSCI, Thomson Reuters Datastream, HSBC
Source: Bloomberg Finance LP, Thomson Reuters Datastream, HSBC
Earnings and valuation
As a result of the country’s very well-developed market and financial system, corporate earnings in South
Africa are generally less volatile than those of many emerging markets. Looking at an extended history,
SA corporate earnings have been increasing at a steady pace.
Actual, trend and forecast earnings of MSCI South Africa index
Annual growth in earnings: MSCI South Africa index
2.5
40%
30%
2.0
20%
1.5
10%
1.0
-10%
0.5
-20%
0%
94
96
98
12M trail
00
02
04
06
08
Trend
Source: MSCI, IBES, Thomson Reuters Datastream, HSBC
10
12
14
I/B/E/S fcast
-30%
2001
2003
2005
2007
2009
2011
MSCI South Africa EPS growth
Source: MSCI, IBES, Thomson Reuters Datastream, HSBC
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EMEA Equity Research
South Africa
July 2012
Earnings momentum* vs. returns: MSCI South Africa index
100%
20%
10%
50%
0%
Earnings growth* vs. returns: MSCI South Africa index
100%
40%
30%
50%
20%
-10%
0%
-20%
-30%
-50%
96
98
00
02
04
06
08
10
0%
10%
0%
12
-50%
96
M SC I South Africa earnings momentum
M SC I South Africa y -o-y returns (R HS)
98
00
02
04
06
08
10
12
M SCI South Africa earnings grow th
M SCI South Africa y -o-y returns (RHS)
Note: *Earnings momentum is defined as the 6M % change in 12 month forward EPS
forecast.
Source: MSCI, IBES, Thomson Reuters Datastream, HSBC
Note: *Forecast growth in 12M-forward earnings.
Source: MSCI, IBES, Thomson Reuters Datastream, HSBC
Earnings momentum in 12M-forward earnings estimates measures the changes in analyst perceptions
about future earnings. Earnings estimates for MSCI South Africa were cut around 30% during the 200809 financial crisis. However, actual earnings growth around this period was consistently above 10%.
Over the long term, earnings revisions have been a good indicator of market performance. IBES
consensus recommendation scores, which measure the extent to which the analyst community is bullish or
bearish about South African equities (bottom-right chart below), show that, in aggregate, analysts have
been bearish on the market for the most part since the financial crisis. However, since the beginning of
2009, the MSCI South Africa has outperformed the broader MSCI EM index by around 9% in US dollars.
Earnings revisions* vs. returns: MSCI South Africa index
IBES Consensus recommendation score* versus MSCI South
Africa index
80%
3.0
100%
50%
2.6
40%
0%
20%
0%
-50%
96
98 00 02 04 06 08 10 12
M SCI South Africa earnings rev ision
M SCI South Africa y -o-y returns (R HS)
Note: *Number of 12M-forward EPS estimates up over the last month as a % of total
number of revisions in estimates over the corresponding period
Source: MSCI, IBES, Thomson Reuters Datastream, HSBC
4
Bearish
2.8
60%
2.4
Bullish
2.2
2.0
01 02 03 04 05 06 07 08 09 10 11 12
Score
Mean
± 2Stdev
Note: *represents the market cap weighted aggregated score of the IBES consensus
recommendation of all the constituents. Score should be interpreted as follows – 1.00
to 1.49: Strong Buy; 1.50 to 2.49: Buy; 2.50 to 3.49: Hold; 3.50 to 4.49: Underperform;
4.50 to 5.00: Sell
Source: MSCI, IBES, Thomson Reuters Datastream, HSBC
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EMEA Equity Research
South Africa
July 2012
MSCI South Africa index; 12M-forward PE scenarios*
Earnings yield versus bond yield* in South Africa
2500
15%
2000
1500
1000
500
25x
13%
20x
11%
15x
9%
10x
7%
5x
5%
05
0
01 02 03 04 05 06 07 08 09 10 11 12
06
07
08
09
10
11
12
South Africa 10Y nominal par y ield on Gov t. securities
12M -forw ard earnings y ie ld of MSC I South Africa
MSCI South Africa Price Index
* Note: Based on five scenarios of 12M- forward PE multiple (5x, 10x, 15x, 20x and 25x)
Source: MSCI, IBES, Thomson Reuters Datastream, HSBC
*Note: Earnings yield is calculated as the reciprocal of the 12M- forward PE ratio of the
MSCI index and the bond yield is the 10Y nominal par yield on Govt. Bonds.
Source: MSCI, IBES, Oxford Economics, Thomson Reuters Datastream, HSBC
In terms of valuation, since 2001 the market has traded at around 10x its 12M-forward earnings estimates.
Thanks to the relative resilience of the market, the PE ratio has remained sticky and tightly range-bound,
even during the financial crisis, and earnings yields on equities have largely been above those offered by
government bonds.
For about 10 years after the liberalisation of the market in 1996, the South African equity market
constantly re-rated relative to the MSCI EM as a whole. However, during most of this time, South
African equities traded at a discount to broader EM. In absolute terms, PE bottomed around October
2008. Since then, the market has re-rated constantly but the PE multiple has remained well below the precrisis level of around 12x. The South African market has generally enjoyed a rich PB valuation – between
1.5-2.0x since 2005 – underpinned by a strong return on equity.
12M-forward PB versus RoE: MSCI South Africa index
3.0
12M-forward PE ratio of MSCI South Africa relative to MSCI
EM
26%
24%
22%
20%
18%
16%
14%
12%
10%
2.5
2.0
1.5
1.0
05
06
07 08
09
10
11
12
MSCI South Africa 12M -forward price to book ratio
MSCI South Africa 12M -forward RoE (RHS)
Source: MSCI, IBES, Thomson Reuters Datastream, HSBC
15.0x
1.2x
13.0x
1.0x
11.0x
0.8x
9.0x
0.6x
7.0x
0.4x
5.0x
98
00 02 04 06 08 10
12
MSCI South Africa 12M -forw ard PE ratio
rel. to MSCI EM (RHS)
Source: MSCI, IBES, Thomson Reuters Datastream, HSBC
Fund flows
In absolute terms, South African equity funds have seen redemptions amounting to USD361m since 2000.
In the same period, other CEEMEA markets, Russia, Poland and Turkey, have seen net subscriptions of
USD10.8bn, USD0.2bn and USD1.2bn, respectively.
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EMEA Equity Research
South Africa
July 2012
In GEM fund managers’ portfolios, South Africa had been a structural underweight relative to the MSCI
EM benchmark index. The underweight position was more pronounced between 1996 and 2004, but has
decreased since 2005. The South African market is perceived as a defensive play in an emerging market
context. Generally, investor sentiment about the market tends to become more negative during secular
market upswings. This is not to say that during “risk-on” environments South African equities fall while
other EM equities rise; it merely indicates that South African equities tend to rise less than those in more
cyclical markets. Conversely, South African equities tend to fall less in a “risk-off” environment.
Flows (% of AuM) into South Africa dedicated funds
Weight of South Africa in GEM funds versus benchmark
20%
20%
10%
15%
0%
10%
-10%
5%
-20%
0%
-30%
00 01 02 03 04 05 06 07 08 09 10 11 12
South Africa F und flow s as % of as sets under
m anagem ent
Source: EPFR Global, HSBC
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Weight (%) in GEM Equity F unds
Weight (%) in M SCI EM index
Source: MSCI, EPFR Global, HSBC
Economic basics
South Africa is the African continent’s largest and most advanced economy. The country’s GDP per
capita, around USD8,000 in 2011, is significantly higher than the sub-Saharan African average, while the
economic infrastructure boasts a sophisticated financial system and a large web of companies in almost
every sub-sector of the manufacturing, mining and services businesses. South Africa is also the business
portal to the sub-Saharan Africa region thanks to its numerous internationalised institutions. The country
generally leads the continent on development indices, too, such as the United Nation’s Human
Development Index, the World Economic Forum’s Global Competitiveness Index and the World Bank’s
Ease of Doing Business Index.
South Africa is one of the most mineral-rich countries in the world. Endowed with the world’s largest
resource base in PGMs, gold, manganese and chrome, it is also the global leader for thermal coal, mineral
sands, iron ore and uranium resources. South Africa has a well-developed and well-regulated banking
industry, which compares favourably with the banking industries in most developed countries. Banking
sector assets total around ZAR3,397bn, with loans and advances contributing about 76% of total sector
assets. The four major banks (Absa, FirstRand, Nedbank and Standard Bank) account for 84% of total
banking assets and 86% of the total credit extended in the South African banking sector.
South African banks have been largely protected from the global financial crisis, as banking activities are
mainly focused on the domestic and Sub-Saharan Africa markets. Nevertheless, the tougher capital and
liquidity requirements introduced worldwide under Basel III as a result of the crisis are set to be adopted
by South Africa in January 2013. The challenges of meeting these requirements have been resolved
through the introduction of a Committed Liquidity Facility by the South African Reserve Bank.
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EMEA Equity Research
South Africa
July 2012
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South African industry, together with the mining and quarrying sector, makes up nearly one-third of
GDP; the agricultural sector is relatively small, at around 2.5%, and the remainder of GDP comes from
services, including the construction business. On the demand side, household consumption remains the
largest driver of GDP, at c65%, followed by government consumption at 21%. National infrastructure
projects are the main driver of fixed capital investment, in both public and private sectors, which accounts
for c20% of GDP.
South Africa is a relatively closed economy as exports account for less than 30% of GDP. However, the
country is a large exporter of commodities, in particular precious metals (gold, diamond, and platinum),
coal and other industrial metals. Asia has overtaken Europe as the main destination of exports in the past
two years. Currently, some 35% of South Africa’s exports end up in Asia, around 25% in Europe, 20% in
Africa and 15% in Americas.
The growth rate of South Africa’s fairly large, 49 million strong population has nearly stalled lately,
although it is still dominated by young people, with a median age of around 25 years. However, these
population figures do not take into consideration illegal foreign immigrants, whose inclusion would bring
total numbers closer to 60 million. Nevertheless, SA’s population structure presents significant challenges
as the country’s unemployment rate runs chronically high, at around 25%. The South African economy
suffered only a shallow recession during the global financial crisis, but its recovery has also been very
muted. There are substantial structural constraints to growth, such as a very rigid and unionised labour
market, skill mismatches, a high drop-out rate in the education system, an infrastructure deficit, problems
surrounding social delivery, lack of competition in public utility (parastatal) sectors and uncertainties
surrounding future policy making – for example the ongoing nationalisation debates. On the other hand,
South African officials have been successfully tackling other social problems, such as health, crime,
security and housing for the poor population.
Economic policy primer
South Africa generally adheres to free market principles based on open trade and a flexible exchange rate
regime. The National Treasury (NT) has been liberalising the capital account by gradually removing the
remaining restrictions preventing residents from investing abroad, while inward investments and capital
inflows generally take place in a very liberal framework.
The National Treasury and the South African Reserve Bank (SARB) are orthodox in their execution of
fiscal and monetary policies, respectively. The SARB operates an official inflation-targeting regime,
defining price stability as urban headline consumer inflation within its 3.0-6.0% target band. South
Africa’s recent fiscal challenges stem more from the need to support the investment plans of the parastatal
companies, which are large public utility concerns such as Eskom, the power utility, and Transnet, the
logistics and transport utility. Both have to invest heavily to prevent infrastructure bottlenecks in the
country’s manufacturing and mining sectors.
Political structure
South Africa has a stable and democratic political system with a very progressive constitution. Since the
fall of the apartheid regime in 1994, the country has been run by the liberalising force, the African
National Congress (ANC). The ANC is in a formal tri-party alliance with the Congress of the South
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EMEA Equity Research
South Africa
July 2012
African Trade Unions (COSATU) and the South African Communist Party (SACP). The incumbent ANC
President Jacob Zuma took office in 2009. The next presidential election will take place in 2014, while
ANC’s primary is scheduled for December 2012.
Key regulatory bodies
National Treasury: agency managing national economic policy and government finances.
South African Reserve Bank: supervisory authority of the banking system.
Financial Services Board: agency responsible for the non-banking financial services industry.
National Credit Regulator: regulator of the consumer credit industry.
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