Peter Brooke 00:01
Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 11 of 2022, and I'm back from a week's holiday.
00:10
The first thing I do when I get back is to check what's happened in the market and it's absolutely extraordinary what is going on with Naspers and Prosus. In the last week, Prosus is down 19%, bringing the year to date fall to nearly 50%. This has a massive impact on the JSE, as the two shares combined are the largest contribution to our market.
When we look at the drivers of this, some of the decline is driven by the tech sell-off, with an expectation of higher US rates this week, and the NASDAQ is down 20% year to date, and the World Growth Index is down a similar amount. Some of the decline is driven by the fall in food delivery companies as the world reopens from Covid lockdowns. But also, these companies have been unable to make profits in what has been a fantastic operating environment. Prosus' listed horse in this race, Delivery Hero, is down 62% year to date. Some of the decline is due to the Russian conflict with Prosus writing down 12 billion of Russian assets in their balance sheet. Their listed investment, Vicomte, is down 93% year to date and is untradable at that level.
Obviously, a big driver of the decline is the fallen Tencent, which has been hurt by continued Chinese regulation, which was the big driver of last year's underperformance, with this week seeing some further regulation targeting video streaming. Further bad news out of China was the Wall Street Journal reporting a record fine coming for Tencent's - for their payment business. This is definitely possible as it would bring WePay in line with Alipay, whose fine last year has held Alibaba back. Finally, this week also saw further evidence that China's zero Covid policy is untenable, with the lockdown of Shenzhen causing all Chinese shares to sell off.
02:09
Putting these all in a row explains a lot of what's happened, and management must be wishing this year will end. While this is all bad news for the JSE, there is a silver lining for the active fund management industry. When a dominant share out-performs, it is typically much harder for active shares - for active managers - to out-perform, as they often cap exposure to large shares on risk grounds. And also, to be fair, there tends to be a bias towards cheaper shares and smaller size.
A good indicator of how big this difference is, is if we just take two JSE indices: the All Share Index, which has a full weight in Naspers and Prosus, and the Capped Swix Index, which caps the weight. Year to date, the All Share Index is down five and a half percent, whereas the Capped Swix is down one and a half percent. A 4% difference just from the choice of benchmark. As a result, we expect a big dispersion in performance across managers driven by their allocation to Naspers and Prosus.
03:15
Our investors fund entered this year with 5.9% invested in the fund into Naspers/Prosus, compared to 14% in the Swix Index, and we are underweight across our entire fund range. This should hold us in good stead in terms of an alpha or performance relative to benchmark basis. But now the big question is when to buy. Generally, experience has taught us that when a share has negative theme, we have to wait for a very cheap price before piling in. But these price falls really are extraordinary and are causing us to sharpen our pencils.
I hope you enjoyed this perspective. Until next week.