Jacques Magliolo
THE March 1995 Reserve Bank Bulletin outlines a number=20 of interesting South African stock market trends which=20 suggest that all major sectors have reached maturity=20 and are facing a sideways movement.
Using an index of 100 for 1990, the following trends=20 were determined:
* Industrial shares have reached maturity. After the=20 1987 stock market crash, industrial shares fell by 21,5=20 percent before recouping losses the following year. By=20 the end of 1989 the value of industrial shares trading=20 on the Johannesburg Stock Exchange (JSE) had doubled,=20 and by 1993 had grown by a further 55 percent.
Industrial shares are now showing signs of slowing=20 down. Between January 1993 and January 1994 the=20 industrial market rose by 21,3 percent and by 19=20 percent between January 1994 and January 1995.
While capital growth derived from investing in=20 industrial shares still offers better returns than bank=20 interest rates, income obtained from dividends=20 (compared to the prices paid for shares) has declined=20 since 1990. This ratio, called dividend yield,=20 displayed amazing gains after Black Monday, before it=20 started a downward trend in 1990. Industrial shares=20 offered investors dividend yields of 2,17 percent in=20 1987, but had climbed to over 4,0 percent by 1990.
Analysts point out this rise is not a result of=20 companies trying to lure investors back by offering=20 them higher dividends per share. Dividend yields are=20 calculated by dividing dividends per share by a=20 company’s share price. If the price drops without an=20 equal fall in dividends, the yield rises.
Dividend yields have since returned to pre-1987 levels=20 and stood at 2,1 percent this week.
Earnings yields (earnings per share divided by share=20 price) have displayed similar trends for the same=20 reasons. In 1987 these were 4,7 percent and by 1990=20 they had risen to 11,3 percent, but they have since=20 fallen to 6,1 percent. Market experts suggest that=20 higher corporate profits in the last year have limited=20 the fall in earnings yields to the 1987 level.
Bruce Krugel, analyst at Mathison & Hollidge, says: “We=20 are not looking at a crash, but I believe that shares=20 will track sideways.”=20
He explains that, as higher corporate earnings filter=20 through to the market and shares remain fully valued,=20 price earnings ratios (share price divided by earnings=20 per share, which is a ratio to denote how expensive=20 shares are) will drop. The shares may look cheapsx, but=20 investors who are buying industrial shares for their=20 capital growth potential could be in for a long wait.
* The financial sector faces a sideways movement,=20 possibly a correction. After a minor downward movement=20 in 1988, banks and insurers have seen an exponential=20 rise in the index. In 1987 the level was 81, it fell to=20 60 in 1988, but has since climbed by 450 percent to an=20 index level of 329.
However, between January 1994 and January 1995, growth=20 has been 27 percent and stockbrokers suggest that,=20 based on earnings yields of 6,3 (1987: 6,8 percent) and=20 dividend yields of 3,0 percent (2,8 percent), shares=20 are fully priced and financial companies face the same=20 future as industrials.
John Balderson, stockbroker at=20
E W Balderson, says: “I don’t believe that we will see=20 a crash, but if not a correction, then definitely a=20 sideways movement in financial shares.”
* Unlike industrial and financial shares, mining=20 counters have moved in a more cyclical way since 1987,=20 but are now also in a sideways track. While total=20 mining shares climbed by only 14 percent since 1987,=20 they remained unchanged between January 1994 and=20 January 1995.
The value of these shares may have remained static, but=20 dividend yields are offering investors poorer income=20 with lower rates than during 1987. Dividend yields were=20 5,04 percent before Black Monday and are now 3,35=20
The most graphic indication that the market has slowed=20 down since 1990 is the number of shares traded since=20 that year. Based on an index of 100 in 1990, twice as=20 many shares traded in 1994 than four years ago. Between=20 January 1994 and January 1995, however, the total=20 volume of shares traded on the JSE has fallen by 14=20