Lo­cal mar­ket is along for the ride

Financial Mail - Investors Monthly - - Contents -

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

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