There’s blood on the JSE’s floor

PERFORMANCE: ALL SHARE INDEX IS DOWN 6%

Top 10 companies account for 53% of the total return of the S&P 500 Index.

The JSE’s performance has been pretty dire, with the All Share index down 6% year to date, and unlikely to improve soon.

But SA isn’t alone in having negative market returns. USbased Yardeni Research has compiled a series of charts using MSCI data that show pretty much the only place to have been invested this year was in the US’s S&P 500.

The US is the only market to have moved strongly upwards this year on the back of a strong economy and earnings growth momentum.

Over the last five years the S&P 500 has delivered compound annual growth of 13% versus Europe’s 3.7% and 1.9% for emerging markets (EMs), says Old Mutual Titan’s Kyle Wales.

While the world has been experiencing a synchronised global recovery since 2016, the stronger economies are starting to pull ahead, says Sasfin Wealth’s Johan Gouws.

“Emerging economies, specifically China and India, have been driving global growth and are expected to continue doing so. ”

The market sell-off began in May or June, suggesting more than just economics at play. US President Donald Trump’s policies are boosting US economic growth; however, his escalating trade war with China is depressing economies in the rest of the world, says Gouws. “The risk is that Trump’s policies may be causing harm to emerging markets, which are export-oriented.”

The US is looking toppish valuation-wise, adds Wales. “The only time in the past that it has been more expensive … was in 2001, before tech bubble burst.” Emerging market assets are undervalued. “I would certainly have a bigger EM exposure right now.”

BlackRock says the market appears to have too narrow a breadth – a fragile state when a small group of stocks contributes to the lion’s share of market returns, buoying the broader index. The top 10 companies have accounted for 53% of the total return of the S&P 500 Index so far this year (2017: 30%).

However, the sell-off in emerging markets is also overdone.

“We do not see narrowing equity market leadership as a warning sign of the market’s health. More important than the number of stocks leading the market is the quality of the fundamentals driving the market,” says BlackRock’s Richard Turnill.

“Rather the steady global expansion underpins our preference for equities over bonds, and robust 2018 earnings estimates make the US the favoured region.”

The rising tide may not lift all markets and the JSE could be in for a longer period of sideways growth. “The JSE is an environment of great caution at the moment with current political developments, the mini-budget, rating reviews and elections in 2019 ahead of us,” says Gouws.

“With so many moving parts right now … I think the key takeaway is the importance of portfolio diversification.”