The share prices of JSE-listed Naspers and Prosus have declined sharply in recent months, with more steep declines in the past few days. These two closely linked companies (Prosus was spun out of Naspers in 2019) share a large underlying exposure to Chinese internet giant Tencent.
The general climate of uncertainty around the war in Ukraine is a contributing factor, specifically given its direct Russian exposure through Avito and VK. Even before the war, global technology shares came under pressure from rising interest rates. However, the main factor is most likely a clampdown of Chinese regulators on technology companies that started last year but has more recently seen Tencent potentially facing a massive fine for allegedly not complying with anti-money laundering rules.
What is the impact on your investment?
Naspers and Prosus are big companies in the South African equity market and widely held by local managers. In addition, they are also held across global portfolios given that Tencent is a big stock in the world index. At the end of February, the combined weight of the two shares in our benchmark FTSE/ JSE Capped SWIX Index was 8.2%.
Our SA equity managers were somewhat overweight, with a combined holding of 10.6%. In addition, our global equity managers had a combined weight to Naspers, Prosus and Tencent of approximately 3% at the end of February.
It must be noted, however, that the size of Naspers and Prosus in the local market and in our funds has reduced substantially over time. This is partly because they underperformed the rest of the market since early 2020, but also due to deliberate steps we have taken to manage the exposure. In February 2018 we moved to the capped version of the SWIX benchmark which limits the weight of a share to 10% (now 6%). At that stage, Naspers had a 25% weight in the SWIX.
It should also be noted that although the Naspers share price has halved since its peak a year ago, it is still five times higher than 10 years ago and has contributed significantly to local equity returns over the past decade.
What is Mutual Multi Managers’ view?
Naspers and Prosus are large in the local context, but there is more to the JSE than just these two shares. While there has been a lot of volatility in markets this year, exacerbated by the recent extreme movements in Naspers and Prosus, the local market has held up well, thanks to elevated commodity prices and a domestic economic recovery. Importantly, valuations remain supportive. Local equities are still materially ahead of global equities this year.
It is up to our underlying equity managers to pick stocks in line with their process and philosophy, and it is up to them to decide how to respond to this latest sell-off. Our role is to combine managers in a sensible way and manage overall risk. We did this by changing our local equity benchmark to the FTSE/JSE Capped SWIX four years ago, and by continuously engaging with our managers on their positioning.
Events such as this highlight the importance of diversification. Our strategies are diversified across securities, asset classes and fund managers.
By Mutual Multi Managers