JSE shrugs off global pessimism
The JSE has been on the boil despite the markedly gloomy economic picture both at home and inter-nationally.
The JSE’s all-share index hit record levels during trading last week, even allowing for the poor performance of some key sectors such as resources. In addition, interest by foreigners in the local bond market has been gathering steam.
According to experts, there are many reasons why local equities and bonds have been performing relatively well.
According to Stanlib economist Kevin Lings, several dynamics were driving the apparent disconnect between the overall economic outlook and the performances of these assets.
Companies are doing well, despite the broader gloom, showing strong earnings and balance sheets.
In the United States, corporate cash levels are at all-time highs but gearing remains low. Because of the recession, the US economy has lost more than eight million jobs but has replaced only three million during the recovery, Lings said.
The US economy has shown some growth, producing more goods than before the recession but using fewer workers. That has translated into major productivity gains, chiefly at company level, and it “flowed straight to their bottom line”, he said.
Similarly, South African companies are showing strong balance sheets, have large cash stockpiles and, from an investor perspective, are attractive.
Local companies are sitting on cash reserves of about R500-billion. “Companies are being rewarded by gains in productivity and for being conservative with their cash,” Lings said.
Investors are also struggling with alternatives, he said. Yields on government bonds internationally are lower than inflation and so the equity market appears more attractive.
The South African bond market has also done well for a number of reasons, Lings said. Local bonds offer better returns for foreign investors and are supported by relatively low government debt levels. The sophistication of South Africa’s market, its liquidity and anticipation of its inclusion in the World Government Bond Index also make the country an attractive choice.
He said equities in South Africa are being driven by local investors, who do not view bonds as lucrative.
Declining commodity prices
Although mining stocks had performed poorly on the back of declining commodity prices, thanks to slowing growth prospects, other shares such as industrials have done well, Lings said.
There is a third dynamic, which has resulted in ultraconservative investors staying put in US and European Union bonds to avoid risk.
“We are seeing different investors with different imperatives, resulting in these odd performances,” he said.
According to the JSE’s most recent statistics on the movements of its indices, the industrials index has increased by 22% year on year, whereas resources have declined by about 8%.
Andrew Newell, head of business development at Cannon Asset Managers, said resources have been under pressure because of poor global growth forecasts and uncertainty caused by ANC policy deliberations on state involvement in the minerals sector. On the other hand, industrials and financials have been doing “all right”.
But the profit warning from Absa earlier this week sent shock waves through the market. It said that profits could be down as much as 10%, thanks in large part to distressed mortgages on its books.
The companies that appears to be doing well have a positive growth proposition attached to them, Newell said. Companies such as Capitec, which has grown rapidly in the lower income market, is one example, as is the local retail sector, which has been expanding into sub-Saharan Africa.
South Africa still generates a great deal of foreign interest, Newell said, evidenced by the boost to the bond market, although this money could leave the country as quickly as it arrived, which could have negative consequences.
Peter Brooke, head of MacroSolutions, which is part of the Old Mutual Investment Group, said the performance of the local market is, first, in large part thanks to the weakening of the rand, which has protected returns for local investors.
Second, among the developing markets, South Africa’s market has been defensive and has companies that have performed relatively well.
“When the world is an uncertain place, South Africa looks all right,” Brooke said.
In part, this has contributed to increased purchases of local bonds by foreigners, which have reached almost R36-billion in the year to date. In 2011, foreigners bought local bonds worth R17-billion.
At present, dividend yields are better than cash and bond yields in the developed world, and are therefore cheap, he said.
But the picture in the equities market is not the same. In the year to date, foreign purchases on the JSE have appeared flat at R1.5-billion, compared with R80-billion in 2010.
But ultimately, Brooke said, highs on the equity market should not come as a surprise because in the long run they outperformed other asset classes, despite volatility.
The JSE has shown some good growth in recent years, despite the damage done to markets globally by the financial crisis and subsequent recession.
According to its figures, in the eight years preceding the financial crisis the growth in value traded on the JSE equity market rose by 26.2%. Between 2000 and 2011, the growth in value was 18.5%, despite the crisis.
Meanwhile, the growth in the number of trades in equities on the JSE during the past decade has grown by 19.05% (2000 to 2011).
Annualised returns from the top 40 index for the six years before the financial crisis grew by 18.17%, according to the JSE, whereas the years since the financial crisis, 2009 to 2011, had seen returns of 18.37%. Taking the crisis into account, returns between 2002 and 2012 on the JSE top 40 have been 10%.
The all-share index has reflected similar patterns. It experienced an annualised return of 18.74% in the six years before the financial crisis and a return of 18.9% in the two years following it.
Over the past 10 years before 2012, and accounting for the crisis, it showed a return of 11%.