Financial and industrial indexes in bear territory
But the Reserve Bank's leading indicator and commodities provide some hope.
with63% of all listed shares on the JSE lying below their long-term moving averages – the internationally accepted 200-day exponential – it is understandable why so many investors have become disheartened. It also reflects in the Top40 Index, which has been moving sideways with its latest level similar to what it stood at in September 2014.
However, it is an index dominated by a handful of shares, which together, make up nearly 49% of the index. They are Naspers 19.3%, BHP Billiton 8.3%, Richemont 8%, British American Tobacco 4.8%, Anglo 4.3% and Sasol 4%.
If one looks at the most important sectors, then it is evident that the shares in, for instance, the financial and industrial sectors are bringing very little joy to shareholders. The declining long-term averages in the JSE’s financial and industrial indexes confirm that the general trend is that of a bear market.
One of the fundamental problems of the JSE is that growth in share prices can be attributed to increasing price-to-earnings ratios (P/E) over a relatively long period, which has been accepted by investors. This was not based on healthy increases in earnings. That upward readjustment has led to many quality shares becoming very expensive, measured in terms of traditional criteria such as P/Es, and in addition there is a trend to cut dividends in order to preserve cash.
Future growth in share prices will therefore have to come from healthy profit growth, which in turn depends on a growing economy. At the moment there is such a negative mood here that few investors can see any light ahead, because it isn’t just economic factors that confront them, but also constant political shocks and the possible downgrading of South Africa to junk status. Especially as far as mining is concerned – SA’s strong point under normal circumstances – there is an air of pessimism owing to corruption and the attitude – often even quite hostile – of departments and their ministers. It is clear that the continual clashes, which often end up in court, are unnerving not only to local but also to foreign investors interested in SA.
For all that, it seems that there is some light at the end of the tunnel as is apparent from the Reserve Bank’s composite leading business cycle indicator for the next six to 12 months. It increased by 1.1 percentage points in September on the back of an increase of 0.65% in August.
However, the most important factor that could spark a recovery in economic growth are indications that the commodity cycle is starting to recover after reaching a low earlier this year. The extent to which it could affect mining groups’ profit is evident in a remark made during the release of Anglo American’s half-year results. It was said that every $10 increase in the price of thermal coal equates to an additional $50m in pre-tax profit for the group. The price of thermal coal has more than doubled since the beginning of 2016, partly because China is importing more after it began restructuring its coal industry in order to reduce production partly owing to very low prices.
When these profits are made it has always been most valuable for the SA economy as it has a major knock-on effect as this enables mines to increase their purchases at a large number of businesses. For the state it means increased taxes derived from the sector after many mining companies have been paying relatively little tax owing to low profits and even losses.
The fact is that spokespersons of large mining groups such as BHP Billiton, Rio Tinto, Glencore and Anglo American have begun talking about shortages of certain metals and minerals (such as zinc) that could arise. With the US under Trump kicking off with large-scale infrastructure development and with China’s economy improving somewhat, it could really benefit commodity producers. This is already evident in the share prices of mining groups in SA and internationally as confirmed by the price graph of the Resi20, the JSE’s most important resources index, which has broken through the resistance line marked AB.
Especially as far as mining is concerned – SA’s strong point under normal circumstances – there is an air of pessimism owing to corruption and the attitude, often even quite hostile, of departments and their ministers.