Fi­nan­cial and in­dus­trial in­dexes in bear ter­ri­tory

But the Re­serve Bank's lead­ing in­di­ca­tor and com­modi­ties pro­vide some hope.

Finweek English Edition - - MARKET PLACE - Ed­i­to­rial@fin­week.co.za

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.

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