Stock rally raises hopes that storm may be over
But SA’s dismal economic outlook leaves clouds still hovering on horizon
● The JSE pulled back from the brink this week, with the all share index managing to finish higher for the first time in five weeks, raising hopes that the storm that has swept through broader global markets since the beginning of October may have passed.
But share markets are volatile and unpredictable, especially in the short term, making it tough to tell if the recent round of heavy selling has run its course. Even so, history shows that shares trend higher as an asset class in the long term.
With a total market value of R13-trillion, the JSE is vulnerable to a plethora of factors that determine its path and, ultimately, the returns to investors.
“The reality is that panicking out of the market simply locks in your investment return and it could mean that paper losses are converted into actual losses,” said Craig Pheiffer, chief investment strategist at Absa Stockbrokers & Portfolio Management.
“Equity markets are volatile and that’s exactly the characteristic that investors want to create wealth over the longer term.”
The JSE in particular had a rough ride for the better part of the year, with more than half of the 40 leading stocks satisfying a technical definition of a bear market, defined as a drop of 20% from the peak, before they recovered slightly this week.
The initial market euphoria that greeted Cyril Ramaphosa when he was elected president in February evaporated, the local economy subsequently fell into a recession and global markets increasingly became edgy.
Just more than a week ago, finance minister Tito Mboweni presented the mediumterm budget policy statement, which analysts say raised a worrying picture about the health of the country’s finances. The midterm budget triggered a backlash from the markets, pushing up government borrowing costs and stoking a weaker rand, though both have since stabilised.
The rand traded at R14.32 to the dollar on Friday, from R14.14 just more than a week ago. The yield on the benchmark R186 bond was at 9.19% from recent lows of 9.05%.
Market edginess is particularly reflected in the share prices of banks — Nedbank, Standard Bank, Absa, Capitec and FirstRand, which owns FNB — whose fortunes are closely linked to the economy. The index of leading banks regained 9.49% this week but was still down 20% from its peak reached in March.
And the forecast for economic growth is dismal.
The National Treasury halved the growth projection for 2018 to 0.7% and predicted that the country’s debt levels would peak later than it had anticipated and at higher levels, raising the concern that SA could lose its sole investment-grade rating from Moody’s Investors Service.
S&P Global Ratings and Fitch lowered the nation’s rating to sub-investment grade, or junk status, last year.
A universal downgrade to sub-investment grade could trigger bond outflows, weaken the rand and force the Reserve Bank to raise interest rates to ward off the threat of higher inflation.
However, recent signs that the government is attempting to fix troubled state enterprises and organisations will send positive signals to investors. On Thursday, Ramaphosa fired suspended South African Revenue Service commissioner Tom Moyane. Revenue collection under his watch shrank and boosting tax collection is a key priority for the National Treasury in order to stabilise the state’s finances.
Likewise, the announcement last week of R290bn in investments in SA could also help to boost sentiment.
But local markets have also been badly affected by developments in other parts of the world, notably several rate increases in the US that have resulted in bond outflows from emerging markets such as SA, and trade conflict between China and the US, which has cast a shadow on global economic growth.
But George Herman, director and chief investment officer of Citadel, said “economic growth in the US is strong enough and has enough impetus to take us well into 2019. Couple that with expected earnings growth in the US in excess of 20%, and it’s nearly impossible to make a case for a fullblown equity bear market.
“With China stimulating its economy as fast as [US] President [Donald] Trump is trying to hurt it, the global balance is being maintained. The Italian risk also isn’t imminent enough or large enough to cause a global meltdown on its own.”
Herman was referring to a budget dispute between the EU and Italy — the third-largest economy in the eurozone. If unresolved, it could hurt sentiment.
Media and internet group Naspers, which has increasingly become the proxy of the South African market, has felt the effect of edgy global markets more than most with its share price plunging as much as 15% in October, though it recovered strongly by the end of last week.
Naspers has enjoyed years of uninterrupted success on the market through its 31% interest in Tencent, the Chinese technology company that owns online games and social media network WeChat, which boasts nearly a billion active users.
But more recently, Tencent encountered a slowdown in its earnings growth and China’s authorities toughened their stance on the approval of new video games at a time when China’s economy was slowing down.
“Volatility remains high and with it, anxiety, but if we can get through the next couple of days relatively unscathed, investors may start to smell opportunities and bargains and the tide could turn back in favour of the bulls,” Oanda senior market analyst Craig Erlam said.
The all share index finished the week 6.75% higher at 54,271.80 points, trimming year-to-date losses to 8.8%.