China dominates Top40 (Dali-e)

The Top40 index has had a good start to the year trading up almost 9% year-to-date and over 25% in the last three months and closing at a new all-time closing high on Friday.

The driver of this performance is simple – it’s China.

The biggest holding in the Top40 is Richemont (JSE code: CFR) at 17.88%. Richemont benefits as it sells a lot of its high-end products in China and since they have lifted its zero-covid policy and essentially opened its boarders internally and internationally the stock has run hard.

Third on the list in the Top40 index is Naspers (JSE code: NPN) at 9.69% and fifth is Prosus (JSE code: PRX) coming in at a 3.96% weighting. These two hold Tencent (Hong Kong code: 700) which is directly Chinese. The tech crackdown has seemingly ended as the Chinese government is allowing 44 new games to be issued and even ride-hailing company Didi is once again allowed to onboard new customers. Both for the first time in eighteen months.

This has sent Chinese stocks soaring with the China-heavy Hang Sing Index up almost a third off the late October lows.

Keeping an eye on the Top40 index constituents Anglo American (JSE code: AGL) is second at 12.4%. Here a reopening of China should be good for commodities and Anglo has platinum group metals (PGMs), copper and iron ore. They also have DeBeers which supplies diamonds, including to Richemont.

So directly we have 13.65% of this index related to China via Naspers and Prosus. Then we have 30.28% indirectly related to China via Richemont and Anglo American.

This makes 43.93% of the Top40 index about China and we’ve only looked at the five largest stocks (Firstrand (JSE code; FSR) is at position 4 with a weighting of 4.44% and has no China exposure.

This means to be bullish on the Top40 one needs to be bullish on China and I certainly am. The moving away from zero-covid is going to be messy and weekend reports saw the Chinese government claiming 60,000 covid related deaths as a result. This number is likely understated but does give an indication of the difficulties in China right now.

Further, recent Chinese economic data was weak, but it was better than expected and only includes a few months of the new covid policies and we should see a decent rebound during the course of 2023.

A bunch of Chinese data released this morning ..

All of it is weak, but all better than expected .. pic.twitter.com/QHGfQUBrif

— Simon Brown (@SimonPB) January 17, 2023

Importantly, recently elected General Secretary Xi Jinping got his third term in October and is not going to back down on their new covid policies. He needs to get the economy growing again and under a zero-covid policy this was not going to happen.

There are also two Chinese ETFs on the Joe and we reviewed them last year here. But considering how much China we’re getting in the Top40 be careful of going too big on just one region even if it is the world’s second-largest economy.

There are four Top40 ETFs listed below and a Top50 ETF from CoreShares. This Top50 will have a little less China exposure as it has ten extra stocks, but those extra ten are right at the bottom so won’t reduce exposure much.

• Satrix – STX40* (TER 0.1%)
• 1nvest – ETFT40 (TER 0.29%)
• Sygnia – T40 (TER 0.18%)
• FNB – FNBT40 (TER 0.13%)
• CoreShares – CTOP50 (TER 0.13%)

* I hold the Satrix40 ETF and am a happy holder.

Simon Brown

At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.