Local market is along for the ride
Market fundamentals have taken a back seat to central bank action ever since the US Federal Reserve embarked on its first bout of quantitative easing back in 2008, as the global financial crisis pushed the world into recession and interest rates could be cut no lower. Since then, cheap money has flowed across the globe looking for yields better than those offered by US treasuries.
Some of those flows found a home in SA, providing a fillip to our bond and equity markets.
So much so that equity valuations appear to be divorced from the economic reality we face at the moment. The FTSE-JSE Africa all share index closed above 53 000 for the first time two weeks ago, putting it on a price to earnings multiple of more than 17.
Its long-run average is around 14. How are these valuations justified in an environment where the economy will battle to grow by 2% this year as Eskom continues its programme of load shedding due to the woeful situation it finds itself in; where government doesn’t have the means to develop infrastructure at a rate that will support local construction and materials firms; and where low commodity prices are forcing mining companies to mothball unprofitable operations and scale back on spending?
Cheap money aside, cheap oil has also done its part in propelling the JSE to its latest highs, with investors betting that savings on petrol will boost consumer spending. So retailers have also lent their weight to the JSE’s lofty valuation.
But the benefits could be short-lived. The price of Brent crude oil has recovered to around $60 a barrel from below $50 in January, while the rand flirted with R12 to the dollar earlier this month. Motorists can expect a petrol price increase next month, which will shave off some of the cumulative R4 per litre they’ve saved since August.
Granted, a significant part of the JSE’s rising market capitalisation has come from large dual listed stocks including SAB-Miller, Richemont and British American Tobacco. Also, the value of other large industrials such as Naspers and Steinhoff is determined not by what’s happening in SA, but by the health of the Chinese and European consumer.
That means it’s not so much what’s happening here in SA that is driving the market, but by what’s happening globally.
So while the US Fed has turned off the quantitative easing taps, the European Central Bank has stepped into the breach with its own bond-buying programme. That starts next month, but it’s not a certainty that it will continue to fuel the hunt for yield globally. Recent events in Greece, which put its future within the eurozone at risk, add to the uncertainty.
In an environment where investors believe that markets will continue to rise — and that central bankers will provide further stimulus if they don’t — Glenn Silverman, chief investment officer at Investment Solutions, says his overriding concern is complacency. With the macro and market risks increasing, he says investors need to exercise common sense and caution.
The value of other large industrials such as Naspers and Steinhoff is determined … by the health of the Chinese and European consumer