Stock market dynamics are changing fast
The JSE all share index (Alsi) has been a great performer year to date (May 10), rising 15.1% in rand terms and 10.1% in US dollar terms. And for the first time in a long while, Naspers and Prosus have not been primarily responsible for the Alsi’s performance. Indeed, year to date, Prosus has slid about 7%.
The main drivers have been the large market capitalisation of mining shares such as Anglo American (+31%), AngloPlats (+23%), Glencore (+40%), BHP (+21%) and Sibanye-Stillwater (+12%). The S&P 500 index by comparison is up 11.5% for the year, marginally beating the Alsi in US dollar terms. But the dynamics affecting both foreign and local equity markets are changing. What happened in the first few months of this year is no indication of what is likely for the rest of the year.
Regarding the US equity markets, it is becoming clear that President Joe Biden is serious when he talks about reforming the US economy.
He has already managed to get his $1.9-trillion stimulus bill through the US Congress and is now determined to pass legislation relating to infrastructure and family matters. And he is determined that this spending will not necessarily be financed by more debt but rather by higher taxes.
While Biden will have a tougher time getting this type of legislation passed than was the case with his stimulus bill, there can be little doubt that the days of lower corporate taxes are over for the time being. Higher taxes mean lower profits, which in turn means lower returns for shareholders, which means weaker equity markets.
The US market was also spooked recently by US treasury secretary Janet Yellen, who strongly hinted that US interest rates should rise to prevent the economy from overheating. Yellen understands her actions exquisitely, having been chair of the US Federal Reserve before the incumbent, Jerome Powell.
She also understands that Fed chairs hate hearing about interest-rate tampering from government officials, no matter how well-intentioned or knowledgeable those individuals may be. Which is precisely why she knew what she was doing when she made those remarks and no amount of retraction on her part will soothe markets.
Potentially higher US interest rates in the medium and longer term are of particular concern for growth stocks, as the current prices of these stocks tend to discount events that may happen years from now. It therefore was not surprising that highly rated technology stocks came under pressure after Yellen’s remarks. The trick for US investors now is to try to find growth stocks at a reasonable price, if that isn’ ta contradiction in terms.
Locally, opinions vary on the longevity of the commodity price boom driving mining shares higher. Commodity prices are being driven by infrastructure demand in China and soon in the US, as well as the move from internal combustion engines to electric vehicles (EVs).
Already the copper price has breached the $10,000/tonne level and is now trading at an all-time high. Bank of America recently forecast a move to $13,000/tonne in the face of global stocks at a 15-year low.
One can debate the nuances of whether it is better to go the EV route or the alternative strategy of using “green hydrogen” for vehicles. But EVs are in the ascendancy and likely to remain so for the foreseeable future, with most global car manufacturers opting in.
The demand for copper and other industrial metals to satisfy EV demand seems insatiable and that isn’t a cyclical event — it is structural.
The bottom line appears to favour a slowdown in the US equity market trajectory with a continuation of a gradually improving local market. The joker in the pack is the rand. It has been very strong so far this year amid an improving balance of payments situation. If it were to weaken noticeably, the Alsi would get a further boost.