Trust the pilot

Don’t get too much of a shock if share prices sud­denly fall

Finweek English Edition - - Creating wealth - BY VIC DE KLERK vicd@fin­week.co.za

“SHARE PRICES ARE still on au­topi­lot,” is the apt de­scrip­tion of the cur­rent steady in­crease in shares on nearly all world mar­kets by Thebe Se­cu­ri­ties’ Lafras van Rens­burg. “Ev­ery mi­nor di­ver­sion on the JSE that’s too small or too big is quickly cor­rected by the au­topi­lot. The tra­jec­tory is be­com­ing flat­ter but we haven’t reached our cruis­ing al­ti­tude yet,” is how he in­ter­prets the mar­ket.

The com­pa­nies with fi­nan­cial year- end­ings in June and De­cem­ber will soon start treat­ing in­vestors to healthy dec­la­ra­tions of profit. The Fe­bru­ary/ Au­gust and Septem­ber/ March com­pa­nies will also be bring­ing in­vestors great plea­sure soon.

Along with this, the latest state­ment by the Mone­tary Pol­icy Com­mit­tee, the Pres­i­dent’s ad­dress to the na­tion and the Bud­get place em­pha­sis on sus­tain­able, qual­ity eco­nomic growth in SA. All this is enough to make me sus­pect that in fu­ture the au­topi­lot will be quick to con­tinue cor­rect­ing any sig­nif­i­cant falls in the prices of lo­cal shares.

This makes my thoughts turn to May last year when the con­fi­dence in emerg­ing mar­kets through­out the world was sud­denly given a sharp blow. Of course, it’s easy to say af­ter the event that you shouldn’t have been shocked.

Look how quickly the mar­ket re­cov­ered again, and many peo­ple, even those in­vested in listed prop­erty, en­joyed a 50% or more in­crease since the low point of July last year.

Lo­cal shares are not at all cheap any more (see ta­ble). Our price:earn­ings ra­tio of about 17 is much in line with those of de­vel­oped mar­kets like the US, Europe and Aus­tralia. It’s even higher than those of East­ern Europe and is touch­ing the 19 of In­dia.

The sud­den fall or world­wide loss in con­fi­dence by emerg­ing mar­kets co­in­cided with a sud­den fall in the cop­per price in May last year. Many of the old hands in the mar­ket be­lieve, of course, that the cop­per price, the largest metal mar­ket, is like a doc­tor­ate in eco­nomics. Fluc­tu­a­tions in the price of­ten tell prospec­tive in­vestors much more about the fu­ture than a whole lot of an­a­lysts and es­pe­cially as­set man­agers, who live on end­less buy­ing rec­om­men­da­tions.

The au­topi­lot still has things firmly un­der con­trol, but there’s tur­bu­lence ahead, which could shock many peo­ple, as hap­pened in May last year. This time the mar­ket may not re­cover rapidly within two months.

Garry Evans, Pan-Asi­atic share strate­gist for HSBC, says in his latest an­nual sur­vey for the re­gion that share prices there could fall be­tween 10% and 25%. He feels that last year’s 78% in­crease in China’s share prices cre­ated the dan­ger and room for a cor­rec­tion. If Evans is right, we will be con­tend­ing with more than just bird flu on the JSE later in the year. ¤

FTSE/JSE AFRICA ALL SHARE IN­DEX... STILL ON AU­TOPI­LOT

Source: Thebe Se­cu­ri­ties

COM­PAR­I­SON OF RE­TURNS ON WORLD MAR­KETS

Source: Bloomberg and I-Net Bridge

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