As old as the hills
Since 1602, investors have been winning and losing their fortunes on the stock market – and today is no different, with many investors betting it all on the latest, greatest thing.
In 2000, it was the dot.com bubble when tech shares reached stratospheric highs and fell off a cliff the next day, bankrupting investors overexposed to tech shares. More recently, it was the so-called meme stocks – shares, like GameStop, a struggling videogame retailer, that had gone viral on social media platforms. Its share price increased 64 times in six months before losing 75% of its value in 85 minutes.
But when calmer heads prevail, history has shown that stock markets offer the best returns out of all the investment options because they consistently outpace inflation over the long term. For that reason, typical multi-asset class funds have at least 60% invested in equities – so it’s in our interest to know how the stock market is doing.
The easiest way to check in on the stock market’s performance is to watch the stock market indices, which give you a sense of the overall market sentiment and what’s driving the ups and downs of the equity market. But what are they, and which ones should you be watching?
The best ones to keep an eye on are what are generally called benchmark indices, the indices that investment managers measure their performance against, hoping to outperform them consistently. If you’re invested in a general equity unit trust fund, the fact sheet will show you the benchmark index your fund aims to outperform.
Most fund managers benchmark their equity portfolios against the FTSE JSE All Share Index, representing the entire universe of listed shares on the Johannesburg Stock Exchange (JSE). Some may use the FTSE JSE Top 40 All Share Index, which represents the 40 biggest listed companies in South Africa.
The equivalent benchmark indices in the US are the S&P 500 Index, which represents a broad base of 500 companies, and the Dow Jones Industrial Average Index, usually referred to as the Dow Jones, which represents the 30 largest companies in the US.
If you’re interested in monitoring stock market performance in other developed markets, it’s worth following the FTSE 100 Index in the UK, the Eurostoxx 50 Index in Europe, the CSI 300 Index in China, and the Nikkei Index in Japan.
Big fish in a small pond
In South Africa, the indices representing the entire stock market have evolved over time because of the relatively small and concentrated nature of our stock market. Shares like Naspers, which comprises more than 20% of the JSE All Share Index, and other companies that also operate globally dominate the stock exchange because they are so big and can sway the performance of an index disproportionately.
The index that best addresses this issue is the Capped Shareholder Weighted All Share Index (Capped SWIX), which represents 99% of the shares listed on the JSE and caps the weightings of all shares in the index at 10%. This makes it more representative of the performance of the entire universe of shares on the JSE.
Despite the complexities of South Africa’s stock market make-up, most investors monitor the JSE All Share Index to understand what’s happening in the equity market. But if you are invested in a unit trust fund, it’s worth understanding what your investment is being measured against to gauge how well the investment manager is performing relative to its benchmark.
Putting the theory into practice
To get an idea of the difference in performance of the indices, in September, the JSE All Share Index decreased 1.6% compared with a more significant 2.34% decline in the SWIX. Looking at the year to date, the difference in performance becomes even more significant, with the JSE All Share Index increasing 14.56% compared with JSE SWIX’s 9.8% rise.
The South African equity market delivered negative returns in September, mainly because investors became less optimistic globally that interest rates would drop anytime soon. This higher-for-longer narrative made investors nervous that economies would be hurt by a prolonged period of far higher interest rates than before COVID. The higher oil price and its potential impact on inflation didn’t help either.
As a small, open economy, with most of the companies listed on the JSE getting the bulk of their revenues offshore, the JSE is significantly affected by global events. As the adage goes, when the US sneezes, South Africa catches a cold. During September, the Dow Jones fell more than 2%. The broad-based S&P 500 experienced a steeper 5.2% decline because it includes tech shares that had a particularly rough month.
Swings and roundabouts
What is immediately noticeable if you look at the performance of the indices over the year is how volatile they are, reflecting the significant changes in investor sentiment that occur based on the latest news. It’s a good reminder of why it’s so important to keep the long-term in mind when investing rather than responding to every up and down in the market – investment behaviour that has also contributed to many people losing their fortunes over time.
Note: All figures quoted in this article are correct at date of writing.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.