17 August 2023
The domestication of the JSE All Share Index
The JSE has a number of different equity indices that offer access to the broad market. These include the free-float weighted versions of these indices (The All Share and Top40), the shareholder-weighted versions (The SWIX indices), which only count the shares held in South Africa when determining their index weight, and various capped indices.
While most fund managers now benchmark their equity funds to the Capped SWIX All Share index (work by Investec estimates over 75% of equity funds by AUM), derivatives markets in South Africa focus predominately on the Top 40 index.
Over the past two years, the Top40 index has become more and more similar to the SWIX40. The Top 40 index differs from the SWIX40 index in that it weights the grandfathered group of stocks by their global free float factors. These stocks include AGL, CFR, INP, and MNP.
The remaining foreign counters in the Top 40 index are weighted by their local free floats. Examples include PRX, GLN, and BHG. The recent corporate action in CFR that replaced the CFR DR programme with a secondary listing on the JSE removed its grandfathered status in the Top 40 index, resulting in further convergence of the SWIX40 and Top 40.
The JSE’s planned index harmonisation in March next year will remove the remaining differences (mainly the weight of American stocks) between the Top 40 and SWIX40 Indices.
The chart below shows the active share of the JSE Top 40 index measured relative to the JSE SWIX40 index. The active share measures the percentage of one index that differs from the other. Given the proposed harmonisation these indices will converge by March 2023, taking the active share to zero.
Source: FTSE/JSE and Mergence
A natural consequence of this convergence is that the global component of the Top 40 has fallen over the past three years. We measure this in two ways. Firstly, using a subjective list of global stocks defined as businesses with a large proportion of their operations outside of South Africa and material non-Rand-denominated revenues Secondly, we use a narrower measure of all stocks in the Top 40 that would be eligible for inclusion in the MSCI World Index as a proxy for developed market equity exposure.
The charts below show the change in these measures over the past three years.
Source: FTSE/JSE and Mergence
Based on our definitions, the share of global businesses in the Top 40 has dropped from over 75% to under 60% over the past years. Harmonisation with the SWIX40 will cause that to fall even further, potentially below 55%. The share of developed market companies peaked at 50% in late 2021 and looks set to move closer to 25% post-index harmonisation.
Source: FTSE/JSE and Mergence
These changes have implications for investors in these indices as well as how we expect them to behave in different market environments. These changes have also coincided with an increase in offshore allowance for pension fund investors under Regulation 28 of the Pension Funds Act.
While investors have been allowed to invest more in offshore markets, some local equity indices have become less global, possibly motivating local investors to increase global equity allocation.
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