Weak economic growth forecast for JSE in 2020

Despite analysts’ bleak outlook for local companies next year, there is still value in holding on to investments in local equities, writes Edward West

JSE share prices are likely to present another year of “abysmal returns” in 2020 as forecasts of weak global and local economic growth translate into lower earnings growth for locally listed companies, market analysts said on Friday.

On Friday the JSE All Share Index was up 7.17 percent, while the FTSE Top 40 Index, where most of the constituent companies have globally focussed operations, was up only 10.13 percent. This follows an 11 percent decline in the JSE All Share Index in 2018.

Citadel Investment portfolio manager Nishlen Govender said South African focused-listed companies were likely to continue to struggle in 2020.

“Retailers are battling to grow revenue, and especially selling price inflation, and so, too, the financial sector. Both segments have tried to maintain margins by trimming costs. This has been earnings supportive, but I see little of this left,” he said.

“In South Africa, low confidence and sentiment is associated with weak fiscal figures, leading to the continued threat of a credit downgrade. Continued uncertainty means business spending has remained weak and, with little in the way of room for government to assist, this has placed additional pressure on consumers. Monetary policy is also constrained,” he said.

On Jse-listed rand hedge stocks, he said their prospects were company specific, but the weaker global environment and geopolitical issues had taken their toll on companies like Mondi, Richemont, Naspers and British American Tobacco, “and I believe that this pressure will continue”.

Govender believed mining companies still had some upside, even the share prices of precious metals companies that had risen significantly.

“If you look at spot commodity prices, there is still some upside and a much better balance sheet environment, with many companies degearing and showing improved quality for investors. This includes the likes of Anglo American, Billiton, and even Impala Platinum,” he said.

“The story looks different across the three segments, but two out three looks weak overall, so I believe that earnings growth will be benign.”

Sanlam multi manager head strategist David Galloway said earnings per share (eps) on the JSE had reached a low point in 2016 and had been rising steadily since then, despite weak domestic economic growth.

Resource stocks had benefited from gains in precious metals prices amid global recession fears and very low developed market interest rates.

“Domestic trailing earnings are increasing at around 15 percent year on year. This is in contrast to MSCI World eps that have contracted some 4.7 percent and emerging market eps that have fallen some 14.1 percent year on year to end October.”

However, given weak domestic PMI indices, “eps growth will slow in 2020 against the backdrop of a strengthening rand and a tepid economic recovery,” said Galloway.

However, given the high concentration of foreign income generating companies listed on the JSE, and attractive valuations of local equities despite the uncertainties, discretionary savings could well find their way back into the equity market as a hedge against a struggling economy, in the event, for instance, of a junk status credit rating downgrade by Moody’s after the February Budget, said Galloway.

Global markets have significantly outperformed the JSE over the past 10 years.

Govender said although global equities currently represent a more attractive “buy” prospect than local shares, this did not mean that one should sell out of South African (SA) equity.

“A closer examination of the MSCI All Country World Index excluding the US reveals that global market returns were largely in line with the JSE’S returns in dollar terms,” he said.

He said the most compelling argument for SA equity as part of a long-term investment strategy lay in a comparison of the JSE’S historical performance with the US market.

“The SA market regularly goes through cycles of outperforming and then under performing the US,” he said.