Trust the pilot
Don’t get too much of a shock if share prices suddenly fall
“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. ¤