Equities resilient despite economic challenges in SA
As South Africa’s economy continues to come under strain from power supply constra ints and the increasing threat of aggressive industrial action from organised labour, the equities market is being forced to shift the weighting of its various sectors. While t he resources sector comes under pressure, other service sectors are starting to take up the slack as the biggest value drivers.
South Africa has historically been seen as a resource-based economy, but this has shifted dramatically in recent years. In 2008, 55% of the market capitalisation of the JSE was in the resources sector; it is now currently sitting at around 35%, a major transition.
Despite the decline in resources, the South African equities market remains resilient and the overall index made new all-time highs again in late April.
There are a significant number of stocks that are already at all-time highs, mainly in the financials and industrials sectors; however, very few resource names are making new highs.
One of t he big t hemes of 2014 was the rotation of capital from other emerging markets into South African equities; a trend that has continued strongly in 2015. A big geopolitical theme driving the strength of the South African equities market at the moment is the persistent tension between Russia and the Ukraine, which started in March last year and contributed to the equity inf lows that we saw at mid-point last year.
It continues to be a crucial geopolitical hotspot even with progress on ceasefire negotiations, but Russia i s being viewed as almost uninvestable by some international funds.
As a result, SA is now viewed as much more of a relative safe haven. There are several negatives in the macro economy and Eskom, with its power supply issues, is probably the most prominent problem right now. But it seems that most negatives in SA are well known and well f lagged by investors. If anything, they are probably getting priced in more negatively and more aggressively than what the underlying situation really warrants.
From that perspective, if SA can show some incremental improvement in policy, we’ll begin to see some strong gains on the JSE, and that doesn’t require a 180° overnight miracle that boosts our GDP – to 8%.
What we need to do is to start showing that the tide is slowly turning. There are a few key events this year that will lead up to that, the f irst of those being the recently held National Budget
and President Jacob Zuma’s State of the Nation address.
The South Africa Reserve Bank (Sarb) is likely to leave interest rates unchanged in the medium term and the updated broad-based black economic empowerment (B-BBEE) codes are set to come into effect in May.
Also, Deput y President Cyril Ramaphosa has voiced his intention to develop interventions to prevent industrial action similar to the drawnout strikes we saw last year.
The gold price has overtaken the platinum price, which is a bearish indication for risk appetites. Gold has been driven by safe-haven demand while platinum has not seen an uptick in its industrial usage.
The demand side for industrial usage may be assisted by European quantitative easing (QE), though car sales across the EU continue to rise without boosting platinum.
In the second half of last year, resource stocks came under tremendous pressure. Besides the oil price having halved from where it was at this stage last year, we saw iron ore prices drop 40% and copper sell off. There’s a very risk-averse sentiment towards mining players generally at the moment, and wariness on their turnaround potential.
The sector that really outperformed the market into the back end of last year was property. South African real estate investment trusts strengthened on the back of a global search for higher yield in a f lat rate environment. In the global context, SA is still relatively higher yielding when it comes to bond proxies, being listed property and high dividend paying stocks.
The sector attracted strong demand in a global environment which is showing lower and lower rates. In the last month, since the start of the year, there have been over 10 central banks that have cut rates in an attempt to boost economic growth.
The exception is the US, which likely will raise rates this year, contrary to the easing trend elsewhere. World economies are struggling to see inf lation pushes coming through into their markets as there simply isn’t enough demand for goods to push prices higher while supply remains high – obviously evident in oil and iron ore, amongst many other examples.
But again, this demonstrates the vulnerability of markets when it comes to growth and how the US has distanced itself from everyone else. They’ve gone through their own quantitative easing (QE) cycle. The next course of action is for them to raise rates and resume more ‘normal’ monetary policy.
The US is showing good economic growth numbers and outstripping all five Brics nations. At this stage, we have to ask ourselves why risky emerging markets deserve any kind of demand premium if they can’t achieve greater growth than established ‘safer’ economic titans like the US. Emerging markets need to prove their merits.
In the South African consumer sector, it was basic necessity-type industrial consumer players that outperformed last year, healthcare and pharmaceuticals in particular.
Aspen had a great r un last year and hospital stocks had extremely strong performance, along with food producers. Tiger Brands, Pioneer and AVI recorded very strong performance in the back end of last year, benefitting from a low inflationary environment and inelastic consumer demand despite tough economic conditions.
The worst performers, however, included the listed construction sector, which is down in the region of 30% year on year and – 27% year to date.
Resources remain laggards – with iron ore stagnant without any real support as supply vastly outstrips demand. Although gold ran strongly to start the year from $1 200 to $1 300 an ounce in the first three weeks, which pushed the sector very strongly, it’s back to $1 200.
While the resources sector continues to strain under poor demand and a challenging environment, the cyclical nature of the markets means that the sector will recover eventually. In the meantime financial and industrial shares continue to drive growth in our market.
DESPITE THE DECLINE IN RESOURCES, THE SOUTH AFRICAN EQUITIES MARKET REMAINS RESILIENT AND THE OVERALL INDEX MADE NEW ALL-TIME HIGHS AGAIN IN LATE APRIL.