Economy drowns but JSE rides the wave

The economy is struggling to churn out growth, but the JSE is reaching new highs nearly every week.

South African companies have been darlings among investors over the past five years.

Even since the start of this year, the JSE's All Share Index has risen by more than 11%, while economic growth has dipped into negative territory and gross domestic product is expected to expand by only 1.7% this year, according to the Reserve Bank.

The reason for the divergence between Main Street and Gwen Lane is that the economy as a whole has a very different composition from the stock exchange, according to Old Mutual Investment Group's head of macro solutions, Peter Brooke.

The government sector accounts for about a sixth of the GDP but is not reflected on the stock market.

And the South African companies that have performed well in recent years derive a large part of their earnings from other parts of the world.

"Only about a third of the sales by companies listed on the JSE is driven by South Africa," says Brooke.

And their exposure to South Africa will continue to shrink, according to Brooke.

More than 80% of the sales of the South African financial sector are domestic. But the likes of MTN, Netcare, Nampak and MediClinic all rake it in from overseas.

South Africa's expected economic growth rate of about 2.5% to 3% a year for the next few years is not very attractive, says Brooke. This year will be even worse.

RECM senior analyst Linda Eedes says that more than half of the growth of the JSE's All Share Index over the past five years came from only three companies: media giant Naspers, brewer SABMiller and luxury goods group Richemont.

The All Share Index closed on 51771 points yesterday, down by about 0.9% on the day.