There is a bear hiding on the JSE

It might not look like a bear market when one surveys the JSE’s main indices. At 58 905 points at Friday’s close, the JSE Top 40 Index is only 15% off its 12-month high of above 69 600 points and still 4% higher than its low of September 2021, just about a year ago.

But all the classic signs of a bear market are there. The only reason the bear can’t be clearly seen is because it’s hiding behind the good performance of a select few shares.

The recent big increases in the prices of Naspers and Prosus – two shares that have an abnormally big weighting in the index – come to mind immediately.

Read:
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JSE breaks through 70 000 points – highest level ever

Naspers jumped 66% from a recent low of barely R1 470 to R2 454 after the Naspers/Prosus group announced its new plan to narrow the discount at which the shares trade relative to the value of their investment in Tencent. Naspers is trading 76% above its 12-month low.

Prosus increased from a low of R690 in May to a high of R1 218 following the announcement at the end of June that the group plans to sell billion of rands worth of Tencent shares and then use the proceeds to buy up the relatively cheap Naspers and Prosus shares in a massive buy-back scheme.

That Prosus increased by 61% from its annual low of less than R680 also supported the index.

The rand

The shares of several large international companies also served to disguise the bear market, largely due to the sudden weakness in the exchange rate. The rand was sitting steady at around R15 per dollar before suddenly crashing to R17.

Sasol is currently trading at more than 70% higher than its annual low.

This comes of the back of the weaker rand, high oil and chemical prices that are benefiting the group, and better performance from its plants in SA and around the world.

Read:
Sasol outage means all South African oil refineries are now shut
Rand hits R17 to the US dollar

The weak rand also gave British American Tobacco South Africa (Batsa), AB InBev and Richemont a push. That these heavyweight shares are all trading comfortably above their lows of the past year – Batsa is 38% higher while AB InBev and Richemont are around 17% better than their 12-month lows – is not what investors would expect during a bear market. Interestingly, Datatec is currently trading 83% above its recent low.

Special situations have supported others. The restructuring of assets has seen Remgro deflecting the bear’s attack, and also supported Mediclinic and Distell.

Remgro’s offer for Mediclinic has seen the share price jump to trade at more than 70% its annual low.

Read:
Remgro offer for Mediclinic is a ‘done deal’
Is Remgro planning its exit from the JSE?

Share prices relative to 12-month lows
	Price	12m high	12m low	Change from low
Datatec	44	45	24	83%
Naspers	2,454	3,013	1,392	76%
Mediclinic	95	98	55	73%
Sasol	333	439	195	71%
Prosus	1,096	1,416	676	62%
Omnia	76	88	49	55%
Astral	189	195	132	43%
MTN	141	211	102	38%
Batsa	705	716	510	38%
Nedbank	204	246	151	35%
Shoprite	203	248	154	32%
Telkom	42	60	32	31%
Pick n Pay	56	63	43	30%
Absa	155	195	123	26%
Remgro	129	155	107	21%
FirstRand	62	79	52	19%
Harmony	50	89	42	19%
AB InBev	932	1,050	796	17%
BHP	417	583	358	16%
Richemont	170	250	147	16%
Karoo	370	620	320	16%
Tiger Brands	154	210	134	15%
Kumba	442	803	386	15%
Dis-Chem	31	39	28	11%
Woolworths	54	65	49	10%
AngloGold	232	434	213	9%
Anglo	517	843	475	9%
Satrix 40	59	72	55	7%
Sanlam	53	73	50	6%
JSE Top 40	58,905	69,628	56,552	4%
Implats	152	309	146	4%
Massmart	33	76	32	3%
Mr Price	170	242	165	3%
Sibanye	37	80	36	3%
Santam	236	316	231	2%
Amplats	1,215	2,675	1,201	1%

Source: JSE data, rounded to nearest rand

Omnia, Astral and MTN also performed well compared to recent lows. Omnia has shown good recovery and declared big special dividends, while Astral is coping with its challenges.

Signs

However, the classic signs of a bear market are noticeable. Companies providing basic needs are performing relatively well, as are those classic defensive stocks.

The allure of defensive stocks like BatSA and AB Inbev are withstanding the pressure, while banks, foods retailers and pharmaceuticals are doing well too.

For instance, Nedbank is 35% above its 12 month low, be it 17% below its recent high. Absa is still 26% above its annual low and 21% below its high.

Pick n Pay is only 11% off its high and Woolies some 17%.

Share prices relative to annual highs
	Price	12m high	12m low	Change from high
Massmart	33	76	32	-57%
Amplats	1,215	2,675	1,201	-55%
Sibanye	37	80	36	-54%
Implats	152	309	146	-51%
AngloGold	232	434	213	-47%
Kumba	442	803	386	-45%
Harmony	50	89	42	-44%
Karoo	370	620	320	-40%
Anglo	517	843	475	-39%
MTN	141	211	102	-33%
Richemont	170	250	147	-32%
Telkom	42	60	32	-30%
Mr Price	170	242	165	-30%
BHP	417	583	358	-28%
Sanlam	53	73	50	-27%
Tiger Brands	154	210	134	-27%
Santam	236	316	231	-25%
Sasol	333	439	195	-24%
Prosus	1,096	1,416	676	-23%
FirstRand	62	79	52	-22%
Dis-Chem	31	39	28	-21%
Absa	155	195	123	-21%
Naspers	2,454	3,013	1,392	-19%
Shoprite	203	248	154	-18%
Satrix 40	59	72	55	-18%
Nedbank	204	246	151	-17%
Woolies	54	65	49	-17%
Remgro	129	155	107	-17%
JSE Top 40	58,905	69,628	56,552	-15%
Omnia	76	88	49	-14%
AB InBev	932	1,050	796	-11%
Pick n Pay	56	63	43	-11%
Astral	189	195	132	-3%
Mediclinic	95	98	55	-3%
Datatec	44	45	24	-2%
Batsa	705	716	510	-2%

Source: JSE data, rounded to nearest rand

Shares in the cyclical metals and minerals industries had no place to hide as global economies are expected to slow down following central banks’ stricter monetary policies.

Amplats, Sibanye-Stillwater, Implats, AngloGold, Harmony and Kumba fell between 45% and 55% each.

Massmart has crashed. It declined by 57% from its November 2021 high of R76.

This comes as investors seemed to shy away from the inherent risk of a retailer that has been struggling for years with different strategies to recover its lost lustre.

Warning

Victoria Reuvers, managing director at Morningstar Investment Management SA, wrote in a research note that investors often feel a “sense of betrayal” when markets fall.

“Not only does this create worry and stress, but with it the [belief in the] need to take action and fix the situation,” she says.

“If investors are concerned about falling returns, they may be more inclined to sell rather than hold or buy shares. A sell-off can then trigger further pessimism about market performance, acting as a negative feedback loop that sends the market into decline.”

This behaviour is typical of a bear market, defined as a broad market index falling by 20% or more from a recent high.

“And as of market close Monday, 13 June 2022, the S&P 500 index officially hit bear market territory. It’s down more than 21% year-to-date,” says Reuvers.

Read: Wall Street’s latest bear market may be here to stay for a while

She adds that a bear market is essentially a crisis of investor confidence, the causes of which can vary. The most common trigger of a bear market is rising interest rates, which results in a weak or slowing economy, or the anticipation of an economic slowdown.

The decline of 15% in the JSE Top 40 since its recent high does not quite comply with the formal definition, because of the special situations described above.

The truth is that the market capitalisation of the JSE is concentrated in only a few shares, which often distorts the underlying market sentiment.

Investors holding those shares that have tumbled between 30% and 50% will definitely think the bear is loose.

Relax

Reuvers says investors should stay disciplined during periods of market turmoil. “If your goals haven’t changed, neither should your investment strategy.

“The get rich trick to long-term investing is simple – invest your money, sit tight and let it grow over time. That’s also where the added benefit of compound interest starts to work its magic the best.

“If in doubt, look at your investment values and market prices less often. If you have a five-year investment horizon, what good does it serve you to worry about the values in the first year?”

Read: Bear market puts ESG investing to its first big test

Reuvers says investors must “tune out noise”.

“Instant market updates and shocking headlines stream our way via news channels that have access to almost every outlet we consume. The media is designed to evoke emotion. In most instances, we are left feeling worked up and helpless with no clue how to react.

“Remember that markets are forward-looking. By the time you buy the best performing shares on the market, the market has already reacted and priced in its forward-looking view. Not only have you sold out at a low price, but traded them for very expensive shares.

“All your action does is to lock in that short-term loss,” says Reuvers. “The current market conditions and economic environment are both challenging and uncomfortable, but we have been here before and we will be here again.

“Often the worst days in the market are followed by the best days,” she adds.

“Unfortunately, you need to be invested through both the good and the bad to reap the benefits of gaining long-term market returns, which translate into wealth creation over time.”