The Markets Jacques Magliolo
MARKET experts are more vague than usual in their predictions for economic activity and the Johannesburg Stock Exchange in 1995.
“Depending on who you are talking to, you can get diametrically opposite viewpoints,” says one industrial analyst, adding that “maybe the holiday season has already hit them”. On industrial shares expert advice ranges from “sell before the next correction” to “accumulate as much as you can before a listing boom in 1995”.
EW Balderson portfolio manager Louis Venter is bullish and says: “The world economy is in a strong long-term growth phase and so is South Africa. In addition, the JSE is one of a number of emerging markets, our reserves are up and I simply cannot see a bear trend taking place next year.” His prediction is a 15 percent rise in the Industrial Index next year.
Another bullish market pundit is Silvis Barnard Mellet Jacobs analyst Mike Howarth, who believes: “If the overseas markets stop sliding we could see the industrial index climb by as much as 50 percent.”
His argument centres on overseas fund managers being obliged to place a percentage of their portfolio into emerging markets. The expected inclusion of South Africa in the International Finance Corp’s emerging market index indicates that portfolio managers will have to place up to 13 percent of their funds in South Africa.
“Even if they spend two percent of their funds in our market, we will see a re-rating of our industrial shares,” says Howarth. The JSE’s industrial market has a 20 times p:e ratio, compared to emerging markets average of 30 times. This means that compared to international markets, the JSE is cheaper and offers better returns and should re- rate in the new year.
On the pessimistic side, some analysts warn investors to tread carefully. For instance, a First National Bank publication issued this statement to shareholders: “There is no doubt that by historical standards the market is high and in order to justify this rating, growth in corporate earnings will have to come up to expectations.”
Another bear says: “If only one of a number of negative factors present in our market surfaces, corporate earnings will fall and thus share prices will become vulnerable.”
There are a multitude of unknown variables, which can affect our market, and includes strike action, higher inflation, a fall in reserves and confusion over the timing of a lifting of foreign exchange controls.
The question is, what will happen to company results next year? No one is willing to hazard a guess. At Anglo American’s interim results last week Leslie Boyd, Hiveld’s chairman, said that the motor industry “had almost recovered from the winter attack, but must now face the summer assault”. He was referring to wage negotiations and the unpredictability of unions to call for a nationwide strike.
An equity researcher for a Cape Town-based institution believes that “given all options, we advise clients to invest in government bonds”. He says that clients who hold bonds until maturity will earn at least a 16,4 percent return. This compares favourably to the equity market which offers yields of less than two percent.
He adds: “Prospects for higher bond yields are even better in 1995. By the end of the year (1995) we will still have single digit inflation and interest rates will have declined by at least two percentage points.”
Some economists believe that interest rates will climb next year. The Bank of Lisbon’s Economic Focus states: “On the negative side interest rates will somewhat blunt the attractions of industrial shares.” The document then contradicts itself by saying “this will probably be accompanied by higher dividend and earnings growth, but hopefully this can be achieved through rising profits and dividends rather than share price falls in South Africa during the next two years”.
While it is understandable that analysts cannot foresee the future, to be only “hopeful” does not inspire any investor confidence. With such predictions the outlook for our market can only be bleak.