Un­cer­tainty reigns on JSE

The bull mar­ket that just keeps climb­ing wor­ries ex­pe­ri­enced in­vestors

Finweek English Edition - - Creating wealth - LU­CAS DE LANGE ldl@mweb.co.za

ASK A STOCK­BRO­KER which ques­tion has been asked most of­ten this year in con­ver­sa­tions with ex­pe­ri­enced clients and the an­swer will prob­a­bly be some­thing like: “What must I do? The mar­ket is ex­pen­sive and just keeps go­ing up. A sub­stan­tial cor­rec­tion is over­due.”

Judg­ing from opin­ion polls and news­let­ters, many ex­pe­ri­enced mar­ket play­ers agree with th­ese sen­ti­ments. A sur­vey by Mer­rill Lynch among 19 fund man­agers shows that only three are net buy­ers, nine feel the mar­ket is over­val­ued, while seven re­main un­cer­tain about whether to buy or sell. This means 84% of them are not pre­pared to com­mit to pos­i­tive ac­tion.

How­ever, as for the year as a whole, the ma­jor­ity – 63% – are op­ti­mistic about prospects and feel the mar­ket should pro­vide a re­turn of about 14%. That’s in line with re­search by JP Morgan, which pre­dicts 15% on the ba­sis of above-av­er­age eco­nomic growth and con­tin­u­ing su­pe­rior profit growth, as­sisted by na­tional pol­icy.

How­ever, Moody’s warns that the JSE could ex­pe­ri­ence an as­set fall this year. In other words, a cor­rec­tion. The in­ter­na­tional rat­ing group says it’s watch­ing SA’s cur­rent ac­count deficit in par­tic­u­lar.

Ac­cord­ing to bro­kers, a cau­tious approach is clearly no­tice­able among in­formed in­vestors, which is re­flected, among oth­ers, by the large flow of money to the money mar­ket funds of the unit trust in­dus­try. Many of th­ese in­vestors re­alise the mas­sive prof­its pro­duced by the JSE over the past few years are vul­ner­a­ble and they have al­ready sold and “parked” the money in the funds.

Oth­ers are in­ves­ti­gat­ing de­riv­a­tives as a means of safe­guard­ing their cap­i­tal. An­other fac­tor is cap­i­tal gains tax and a fear among private in­vestors that if they be­come too ac­tive, they may be­come can­di­dates for clas­si­fi­ca­tion as traders. It’s been said that es­pe­cially in cases where the cap­i­tal gain ex­ceeds nor­mal in­come, the Re­ceiver could start ask­ing ques­tions. A trader’s profit is taxed by as much as 40%, in­stead of the nor­mal 10% cap­i­tal gains tax.

How­ever, vir­tu­ally all clients are pos­i­tive about prospects for the econ­omy, es­pe­cially in view of the ex­cel­lent prof­its be­ing an­nounced. Aveng, the coun­try’s largest con­struc­tion group, for ex­am­ple, said last week that it ex­pects a profit in­crease of 110% to 130% for the half-year to De­cem­ber, com­pared to the cor­re­spond­ing pe­riod last year, while Im­plats was talk­ing of 120% to 140%.

Many of those ex­pect­ing a mar­ket set­back are plan­ning to buy back as soon as the blue chips of­fer bet­ter value. Some are re­ported to have made ar­range­ments at banks and else­where for credit lines.

Bro­kers say it’s dif­fi­cult to make “safe” rec­om­men­da­tions in a mar­ket where the price: earn­ings (p:e) ra­tio is about 50% above its long-term av­er­age. “But how do you ar­gue with profit fig­ures like those of Aveng – even if the whole con­struc­tion in­dus­try is his­tor­i­cally so over­val­ued? The Gau­train and 2010 projects have barely be­gun. Look at Re­unert, which is cur­rently clinch­ing such ex­cel­lent con­tracts. Hardly three years ago, you could buy it at a p: e ra­tio of about 7,5 and a div­i­dend yield of 7%. Now its p:e is nearly 15 and the div­i­dend yield is on 0,75%. What ad­vice do you give a client? Must he lock in his profit on Re­unert hop­ing he will get it back cheaper? Or should he rather hang on for the sake of the ex­cep­tional profit growth pre­dicted?’’

In this re­gard, there’s an­other phe­nom­e­non to be taken into ac­count. This is that for­eign­ers see a spe­cial op­por­tu­nity in SA be­cause of the mas­sive spend­ing on in­fra­struc­ture, and for them the mar­ket is not too ex­pen­sive com­pared with the de­vel­oped mar­kets. For ex­am­ple, those who in­vested in Aveng a year ago show a 155% profit on its mar­ket price, though the rand weak­ened al­most 20% from R6,10/US$ to R7,27/US$ over the pe­riod.

Nev­er­the­less, the Morgan Stan­ley bank- ing group sees po­ten­tial prob­lems be­cause of the power strug­gle within the ANC ( Fin­week, 11 Jan­uary). For­eign in­vestors may take fright at the left­ist-backed on­slaught by Ja­cob Zuma on the pres­i­dency of the ANC (and per­haps on the coun­try) later in the year. For­eign-ex­change mar­kets, in par­tic­u­lar, are sen­si­tive to this kind of thing. But the bank also refers to the many op­por­tu­ni­ties SA of­fers to in­vestors.

So it’s clear why ex­pe­ri­enced in­vestors are so un­com­fort­able: they are ex­pect­ing a sub­stan­tial mar­ket cor­rec­tion, but, on the other hand, eco­nomic prospects are so good that they are even pre­pared to ar­range loans for when there are op­por­tu­ni­ties to ob­tain prime stocks at bet­ter prices.

But there’s an­other side to the stock ex­change that must be noted. That’s the one of smaller in­vestors who are hav­ing a ball among the penny stocks, es­pe­cially on the AltX. Sto­ries are again do­ing the rounds about how prices dou­bled within months, thereby en­cour­ag­ing other in­ex­pe­ri­enced play­ers to en­ter the mar­ket. The age-old search for tips in such times – known, ac­cord­ing to the Dow the­ory, as the third, spec­u­la­tive phase be­fore the bear at­tacks – is there­fore again be­com­ing the or­der of the day. And this is an­other fac­tor that should cause those who have in the past ex­pe­ri­enced the pain of a real bear mar­ket to ex­er­cise cau­tion.

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