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Blog: 20 January 2017 (Interest Rate vs Total Yield on the JSE)
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In today's blog we compare the 28 day average Reserve Bank debenture rate (our proxy for money market interest rates) with the total yield offered by the Johannesburg Stock Exchage (JSE). Not we are not referring to capital gains (share price movements). In this case we are talking about the return you are getting by buying into a company via what percentage of it's share price it is earning in profits.
For example Share A's price is R100 a share, it earns R5 in profits. Its PE is 20 (R100 share price /R5 in profits per share) and its earnings yield (EY) is 5% (R5 profit per share/R100 a share). For this analysis we are only concerned about what the company you are buying into's yield is, And not the gains from share price movements. |
So does the JSE offer you a better yield than money market interest rates?
So ever wondered if you should rather invest money on the money market than the stock market? And what kind of returns you are making my investing in one above the other? Today we will compare interest rates to the yield of the JSE. We will use the earnigns yield and dividend to derive a total yield offered by the JSE and compare that to interest rates.
From the graphic above it is clear that in the recent past the yield provided by both the JSE and money market interest is very close. And one can understantd why some investors would shy away from the stock market and invest their money in safer assets such as money market accounts, when there is less risk and th returns offered are virtually the same.
High share prices (or lower earnings achieved by companies) is pushing PE ratios on the JSE higher (which in turn brings down the earnings yield as it is the inverse of the PE ratio). The more you pay for the share, the less it's earnings per share is as percentage of the share price. During significant stock market declines (due to whatever reason), as seen in 2008 with the US housing market crises, share prices drop sharply even though earnings might not drop as drastically, and this pushes up the earnings yield of shares considerably, making them relatively more attractive to invest in due to subdued prices and these companies offering higher earnings yields.
The trick is for investors to know when they should look to buy and when they should sit on their hands and not go out and buy shares. Based on the current graphic it does look like the JSE is relatively expensive when looking at it's total yield. As the returns offered is very similar to that of the money market. But as we mentioned in one of our blog posts recently. What is expensive for us in South Africa might not be expensive for foreign investors. As we showed the dollar adjusted PE ratio of the JSE is a pretty low levels compared to previous years. Read more about that here.
We do think the JSE is overpriced and dont forsee stellar returns for the market in 2017 so we understand why investors ask and wonder if it's better to invest money on the money market right now instead of investing in shares. Total yield of the market needs to be considerably higher than that of the money market to compensate for the risk investors are taking.
We do think the JSE is overpriced and dont forsee stellar returns for the market in 2017 so we understand why investors ask and wonder if it's better to invest money on the money market right now instead of investing in shares. Total yield of the market needs to be considerably higher than that of the money market to compensate for the risk investors are taking.