A November to remember

ANALYSIS: BITCOIN MANIA, EMERGING MARKETS AND FUTURE EXPECTATIONS

There’s evidence supporting an improving outlook.

Bitcoin is firmly in bubble territory. It jumped 70% in November, closing above $10 000 for the first time. In the last week of November alone, it surged 28% (including a 20% decline). These kinds of rapid price increases (with sharp declines) are typical of a speculative mania.

While the underlying blockchain technology is useful and might become part of our daily lives, its fundamental value can’t have increased that much in 11 months. Daily bitcoin transactions have risen 30% this year, but the price has increased tenfold. Unfortunately, bubbles tend to burst only when many latecomers are sucked in by the lure of quick riches.

Equity markets have been supported by favourable conditions on the ground. Global economic growth is accelerating, inflation’s low – but positive – and the interest rate outlook’s benign.

A positive JSE month

Local equities had another positive month, outperforming global markets in dollars. The FTSE/JSE All Share Index (Alsi) broke through 60 000 index points in November, but slipped below that on the last trading day. However, it returned 1.5% in November, including dividends and 21.4% for the year. The JSE rally was driven by large-cap shares.

The mid-cap index only gained 2.5% year to date while the small-cap index was marginally negative. The Top 40 Index returned 24%. The Swix’s forward PE of 16.8 is high versus its long-term average, but has changed considerably over the past decade and is now dominated by shares priced in global markets. Valuations of domestically focused shares generally reflect the economic outlook, described by the Reserve Bank as “subdued but positive”.

Subdued outlook

Recent evidence of the “subdued” outlook includes business confidence and credit data.

But there’s also evidence supporting an improving outlook: SA posted a surprising R4.5 billion trade surplus in October. It’s typically a deficit month as imports surge ahead of the festive season and year-end.

For the first 10 months of 2017, the surplus is a healthy R51 billion (2016: R10 billion deficit). This improvement in our external balance – largely due to robust iron ore and coal exports – is a factor supporting the economy’s gradual recovery. The Absa Purchasing Managers’ Index increased for the fourth month in a row in November. However, at 48.6 index points it remains below the key 50 level that separates positive from negative growth.

Encouragingly, the forward-looking component is positive, as new sales orders exceed stock levels, suggesting production will have to be ramped up. New vehicle sales increased 7.2% in November year-onyear (y/y), the sixth month in a row of positive y/y growth.

To December and beyond

The rand gained 3.5% against the dollar in November despite the downgrade. The rand ended the month at R13.66 per dollar, a few cents below where it started 2017. This despite all the bad domestic news since January. Ultimately, global factors overshadow local conditions when it comes to SA markets’ overall direction. Global conditions are currently still favourable. Remember this as political uncertainty will increase around the ANC’s elective conference this month.

Dave Mohr and Izak Odendaal are at Old Mutual Multi-Managers.