Uncertainty reigns on JSE
The bull market that just keeps climbing worries experienced investors
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.