To say that the JSE is top-heavy is an understatement of note. The TOP-40’s biggest counters – NPN, BIL, CFR, AGL and SOL – make up 52.5% of the SA TOP40 free float. The 11 biggest shares make up a whopping 70% of the index, whilst the biggest 17 shares dominate 80% of the index. The smallest 15 shares make up only 10% of the free-float:
The weighting of the TOP-5 has fluctuated between 45-50% over the last 5 years. The total returns (including reinvested dividends) of the TOP-5, the TOP40 and the TOP-40 ex the TOP-5 are shown below:
We see that the TOP-40 excluding the Big-5 peaked in May 2016, showing that the Big-5 carried the TOP-40, creating the illusion all was well with the JSE. What is interesting is that from September 2013 to May 2016, the Big-5 lagged the rest of the JSE, with roles reversing since then. Since May 2016 the Big-5 have been on a tear, rising some 50% whilst the TOP40 rose only 10% and the TOP-40 ex the Big-5 fell 10%:
The situation is little changed if we redo the exercise with the biggest 10 shares making up just under 70% of the TOP40 index free-float. Again, the TOP-40 excluding the TOP-10 peaked in May 2016:
In this case, since May 2016 the Big-10 having returned 40% and the rest of the market having returned -20%
The Price/Earnings differential between the Big-5 and the rest of the TOP-40 becomes very apparent over this time period, with the TOP-40 currently sitting on a P/E of just under 19 whilst the rest of the index is only at 14.9 (much cheaper):
This is why herding around a few large-cap shares, resulting in narrow market participation (weak breadth) results in dangerous market conditions, because the handful of shares propping up the index reach heady valuations that get ridiculous and something has to give. Eventually one of the funds can’t stomach the high valuations anymore and fall to temptation to take profits and then the whole room tries to exit through one narrow doorway when everyone cottons on. As it’s the large caps that eventually cave into ridiculous P/E’s the indexes they belong to can fall hard, as we have recently witnessed, where the TOP-40 reached a whopping historical all-time high of 23x P/E before succumbing to a collapse. At this point the P/E of the TOP-5 was in excess of 30x whilst one counter, Naspers was in excess of 100x PE!
There were lots of warnings signs with reliable multi-decade track records that were screaming trouble ahead as early as late 2013 to mid-2014:
You can go read about these warning signs in our prior articles, “This is how unhealthy our stock market is“, “A major leading indicator for the JSE just tanked” and “Yet another Major Leading Indicator for the JSE tanked“
Dwaine van Vuuren
RecessionAlert, Sharenet Analytics
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.