Good start, bad ending for equities
After an upturn in January, the FTSE/JSE All Share Index is back where it was in July 2017.
Sentiment has big role in business decisions and even bigger one in financial market investments.
After 2017 delivered a 20% return, the local market stormed ahead in the first three weeks of January to an all-time high on the FTSE/JSE All Share Index. Since then everything seems to have gone wrong. The index is back where it was in July 2017.
Headwinds
Of the global macro factors weighing on investors’ minds, US interest rate hikes top the list, then Donald Trump’s trade wars, Italy’s budget stand-off with the EU and Brexit uncertainty.
Global investors have been pulling capital out of emerging market bonds and equities. The dollar has strengthened since March, putting pressure on emerging markets that borrowed in hard currency. Higher US bond yields and volatile currencies have made searching for yield in emerging markets unpopular. Concerns over China’s slowing growth and the impact of US tariffs haven’t helped.
The local economy is in a technical recession. Uncertainty around land expropriation has weighed on business confidence. Record high petrol prices and a VAT increase cut into consumer disposable incomes. The Reserve Bank has warned it might have to increase rates further. Unsurprisingly, it’s difficult for companies to grow.
Idiosyncratic or stock-specific issues have contributed to non-mining rand hedge’s returns. These include corporate governance issues (Resilient), regulator run-ins (MTN and Tencent) and changing consumer behaviour (BAT). Mediclinic shares dropped over 20%, joining Woolworths, Brait, Famous Brands and others may have bitten off more than they could chew in diversifying offshore.
Not all doom and gloom
Sasol and paper companies have done well this year. diversified mining heavyweights continue to do well, having turned a corner in 2016. Anglo American is up 21% and BHP 16% this year. They’ve streamlined operations, cut costs and reduced debt so much that investors expect solid earnings growth.
Recent Statistics South Africa data show activity has bounced in some sectors. Retail sales, wholesale sales, manufacturing and building activity all grew in July and August. It points to positive economic growth in the third quarter, which would take us out of a technical recession.
Together with Tito Mboweni’s appointment as finance minister and Ramaphosa’s various policy interventions, exiting the technical recession could add to improved business confidence.
Sentiment plays an even bigger role in financial market investments. History has shown that the best time to buy is when pessimism is at its highest. The opposite is also true.
Improved valuation
Valuation rather than forecasting is the best signal; the local market now trades at the lowest forward P/E ratio in five years. The 3.5% dividend yield is the highest since 2009. Dividends paid has hit a new record, up 14% from a year ago. SA equities remain the main growth asset for most local investors, since regulations limit global exposure in retirement funds. This asset class delivered a total return of -3% over the past year. However, the performance itself isn’t unusual if we look at history. It’s a volatile asset class, but has delivered world-beating real returns for long-term investors. Ironically, the worse the recent performance, the better the prospects for future returns.
FTSE/JSE Index is back where it was in July 2017.