By Andrew Bahlmann

As we enter the second half of 2024, the JSE Top 40 Index, a crucial barometer of the South African economy is poised for a reshuffle. This bi-annual review process based on market capitalisation and liquidity can significantly impact the investment landscape.

In this column we review the past six months, analyse the current composition, predict potential inclusions and exclusions, and profile key companies and sectors expected to dominate the index.

Six-months review: Major changes and emerging trends

The first half of 2024 has seen significant movements within the JSE Top 40. The ongoing global economic uncertainties, coupled with local challenges have influenced investor sentiment and market performance. Notably, the resource sector has continued to be a significant player, driven by commodity price fluctuations and geopolitical factors.

One of the standout changes has been the resurgence of the financial sector. Banks and insurance companies have shown resilience amid economic headwinds, with improved earnings reports and stronger balance sheets. The consumer staples sector has also remained robust, supported by steady demand for essential goods.

In contrast the technology sector has faced challenges, with some companies experiencing declining share prices due to increased competition and regulatory pressures. However, there are signs of stabilisation and potential for recovery in the latter half of the year.

Current composition and emerging trends

The current composition of the JSE Top 40 reflects the diverse nature of the South African economy. The index is heavily weighted towards the resource sector, with mining giants like Anglo American, BHP and Glencore occupying top positions. Financials, including FirstRand, Standard Bank, and Old Mutual also have substantial representation, underscoring their importance in the market.

A notable trend is the increasing focus on sustainability and ESG (Environmental, Social, and Governance) criteria. Companies that prioritise these factors are gaining investor favour, leading to better performance and higher market capitalisations. This shift towards sustainable investments is expected to influence future index compositions.

Potential contenders for inclusion or removal

As we look ahead to the next reshuffle, several companies are on the radar for potential inclusion or removal. Market capitalisation and liquidity remain the primary criteria, but sectoral representation and growth prospects are also crucial considerations.

Potential Inclusions

Dis-Chem Pharmacies: This leading pharmaceutical retailer has shown strong growth in revenue and market share. With the ongoing focus on healthcare, Dis-Chem is well-positioned to join the Top 40.

Kumba Iron Ore: A subsidiary of Anglo American, Kumba has benefited from the global demand for iron ore. Its solid financial performance and strategic initiatives make it a strong contender for inclusion.

Capitec Bank: Known for its innovative banking solutions and growing customer base, Capitec has been a consistent performer. Its inclusion would enhance the financial sector’s representation in the index.

Potential removals

Sasol: Once a stalwart of the index, Sasol has faced challenges related to fluctuating oil prices and operational issues. Unless it shows significant recovery, it might be at risk of exclusion.

Prosus: The technology investment company has seen volatility in its share price, partly due to its exposure to Chinese tech stocks. If this trend continues, it might fall out of the Top 40.

Key players and sectors to watch in 2024

Resources sector:

The resources sector will continue to be a dominant force in the JSE Top 40. Companies like Anglo American, BHP and Glencore are expected to maintain their strong positions, driven by global demand for commodities. The ongoing energy transition and investments in renewable resources could also boost companies focused on green energy and sustainability.

Financial sector:

The financial sector, comprising major banks and insurance companies is poised for growth. FirstRand, Standard Bank, and Old Mutual have demonstrated resilience and adaptability in a challenging economic environment. Innovations in digital banking and fintech are likely to further strengthen this sector.

Consumer staples:

The consumer staples sector represented by companies like Shoprite and Tiger Brands will remain a stable performer. Steady demand for essential goods ensures consistent revenue streams, making these companies attractive to investors seeking stability.

The impact of mergers and acquisitions (M&A)

Mergers and acquisitions (M&A) have a profound impact on the composition and performance of the JSE Top 40 Index. These strategic moves can alter the competitive landscape, drive growth, and create value for shareholders. Over the past few years, several significant M&A activities have reshaped the index, and this trend is likely to continue.

Recent M&A activity:

Discovery and Vitality Group: Discovery’s acquisition of a controlling stake in its Vitality Group has solidified its position in the healthcare and insurance sectors. This move is expected to drive synergies and enhance growth prospects.

Companies ready for change of ownership

The possibility of further M&A activity looms large, particularly in sectors like technology and healthcare. Companies like Telkom and Aspen Pharmacare could be ripe for ownership changes as they seek strategic partnerships to enhance growth prospects. Such M&A activities could reshape the JSE Top 40 landscape significantly.

Conclusion

The upcoming reshuffle of the JSE Top 40 Index will reflect the evolving dynamics of the South African economy. As investors navigate global uncertainties and local challenges, understanding the key players and sectors driving the market becomes crucial. With a focus on sustainability, growth, and resilience, the JSE Top 40 will continue to be a vital indicator of economic health and investment opportunities in South Africa.

Andrew Bahlmann is chief executive of Corporate & Advisory, Deal Leaders International.

BUSINESS REPORT