The relationship between JSE earnings and SA GDP Growth

We live in an era dominated by superheroes, and when I say this, I’m not referring to the real brave man climbing up the side of some building to rescue a child that’s hanging by a nail. No, I’m talking about comic book characters that usually find themselves on the big screen in a wonderfully colourful Lycra costume, and who have usually acquired one or more amazing superpowers along their life’s journey. And just when you think that every possible superhero has been thought of, writers, artists or creators manage to come up with a new one.

If I could choose a superpower, it would definitely be the ability to see into the future: to read tomorrow’s newspaper today, for example. Many of you will disagree with me here, and argue that knowing the future won’t help you at all against a future enemy that is stronger than you in every way. Well, if I knew beforehand that a strong enemy was going to cause me trouble tomorrow, I would just sleep in and avoid any trouble altogether.

Although that superpower would come in very handy in the investment world, no one has it, and so no-one can predict the future of our markets. What we do have, however, is a set of tools that can help us to formulate forecasts (expectations), a lot like in the case of weather forecasts. While I have been soaked on the golf course on a few rare occasions after consulting my weather app and believing that it was NOT going to rain, weather forecasters have to rely on past data and weather patterns in an attempt to predict tomorrow’s weather. Portfolio managers, analysts and economists also have to consult data patterns to try and forecast possible future outcomes.

On our local front over the past few years, two main subjects dominated the investment world. The first is our extremely poor economic growth and the other one that coincidentally happens to go hand in hand with poor economic growth, the lack of growth in our local stock exchange. I’m using the word “coincidence”, because although this relationship goes without saying, I was quite surprised with the results when I juxtaposed a graph of the annual South African GDP growth with the FTSE/JSE All Share Index’s (JSE) earnings growth. I had to take a second glance to tell these to graphs’ movements over the past 25 years apart.

After further analysis of the data, it became clear that although SA GDP and JSE earnings growth were both one-year historical data points, it would appear as though the market usually waits for actual economic growth (or in this case, the lack thereof) to take place before reacting to it.

I took my analysis even further by having a look at the average earnings growth with GDP growth of less than 1.5%, between 1.5% and 3.5%, and also what the average was with GDP growth in excess of 3.5% per year. The results were astonishing.

Whenever annual GDP growth fell below 1.5% over the past 25 years, not only did the average JSE earnings growth fall flat, it actually shrunk on an annual basis (by 0.16% per year on average). When GDP showed relatively normal growth of between 2.5% and 3.5%, our earnings growth rose to an average of 10.88% per year (more specifically, inflation +5%). During good years where GDP grew by more than 3.5% per year, JSE earnings increased to an amazing 22.4% growth per year.

But this data may not appear as sexy as a superhero in a Lycra costume to all, and many of you may wonder what makes it so significant.

Earlier, I mentioned how portfolio managers, analysts and economists formulate consensus forecasts or calculated predictions. We have already seen that South Africa’s current GDP growth of 0.87% (which is slightly higher than the last 4-year average of 0.78% per year) until the end of the second quarter of 2019, has been slightly higher than economists’ consensus forecasts. When we look at consensus forecasts for next year, you will see that between the International Monetary Fund’s (IMF) expected 1.5% growth and Thomson Reuters’s 1.6% expected growth, both of these forecasts should place us in a much better position in the field of expected earnings growth.

No one knows what will happen tomorrow and I don’t want to leave anyone standing in the rain next year based on these results. Just be aware of tomorrow’s forecasts and don’t let yesterday’s negativity cause you to lose out on good investment opportunities tomorrow.

The opinions expressed in this blogare the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.


Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

Leave a Reply