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Taking stock of the JSE

Max Gebhardt

On stock exchanges worldwide, share prices have been soaring to new heights on the back of strong bullish sentiment. Wall Street’s records, and its breaking of the all-important 6 000 barrier, inspired similar advances on the Johannesburg Stock Exchange (JSE) all-share index.

Compared with London and Wall Street, however, the JSE has lagged behind. This underperformance has been pinned on the fact that interest rates in South Africa have risen, in the wake of the rand’s unexpected plummet. There are, of course, fears that if Wall Street starts turning bearish this will affect Diagonal Street.

However, there is comfort in the belief that in the event of a decline on Wall Street the blow to the JSE will not be too severe, as there could well be a number of interest-rate cuts in store for South Africa next year, so ensuring a softer landing.

Nonetheless, investors are saying that given the vulnerability of the global equity markets, local capital markets will offer superior opportunities to the equity market in the coming year.

Given all this sentiment, the JSE has seen a fairly pedestrian year, according to brokers, with local market sentiment towards equities remaining largely bearish.

The JSE industrial index did manage to achieve a record in late January, which, 11 months on, it has yet to match. There were several further rallies and in August it reached 8 739, but this was still almost 13% lower than January’s peak.

The all-share index set a record high in April of 7 049, which was eclipsed six months later by 50 points. Since then it has slipped badly.

Evidence of a downturn in the economy, the rand’s depreciation by 30% and a lack of movement by the government on exchange controls in mid-year put the breaks on any further upturn in the JSE all-share index.

High real interest rates, apart from curbing corporate profits, meant that mortgage and money-market instruments offered an attractive alternative to shares.

According to one London report, the South African stock market proved to be one of the worst performers among major exchanges this year and the third worst among emerging nations.

There was also strong disenchantment among foreign investors with the South African stock exchange following the currency depreciation. The expected windfall of foreign investment in South African equities never really materialised as capital inflows into the country dwindled.

The disappointing economic indicators saw many sectors, particularly stores and consumer-related stocks, take a knock in earnings as the downturn in private consumption expenditure took hold.

And the decision by Reserve Bank Governor Chris Stals to raise interest rates meant that many economists started to revise downwards their growth expectations for the markets.

This was factored into the share prices of consumer-related stocks, said one trader, leading to a poor performance in their share prices.

One of the exceptions was LA Stores, which saw its share price gain 350% for the year, according to the JSE Markets Division.

LA Stores had identified a lucrative niche market catering for the youth and fashion-conscious consumers. It has been one of the few clothing retailers able to boost earnings by expanding its operations.

There was widespread disappointment among brokers with the performance of the all-gold index, despite the fact that the gold price reached record highs in rand terms for the first time in three years.

This can largely be pinned, they said, on rising labour and production costs in the mining industry.

The subsequent crash in the gold price also started to squeeze margins, though there are one or two mining houses that deserve special mention.

Perhaps foremost on this list is JCI, not only for its purchase by Mzi Khumalo’s Capital Alliance from Anglo American, but for its remarkable share performance over the past 12 months – which has almost doubled.

Randgold, according to analysts, also deserves a special note: its shares rose by 128,4%. The group managed to establish itself this year as a major, low-cost South African mining house.

Since September last year the share price has soared from R14,25 to R32,10.

Coal shares brought some good news to the mining sector, performing better than expected.

The industrials didn’t have an overly exciting year. Decelerating industrial earnings and concerns about the duration of real growth diminished returns from equities.

The traditional rand-hedge shares have also in general been disappointing this year, according to brokers. This could possibly be the result of large institutions being net sellers of these shares, due to their ability to gain direct access to rand-hedge exposure through asset swaps.

But it was to be the high-tech industries that gained the plaudits on the stock exchange.

Training and education company Advtech gained top honours, with a share growth for the year of 1 028%. In the six months to August the company reported a turnover of R29-million up from R9-million.

The JSE’s electronics and electrical sector continued to outperform the other sectors this year. The companies in the electronics sector are relatively small compared with the heavyweight industrials and gold mines in terms of market capitalisation, but that’s what makes them so attractive, say analysts.

But of course the all-important question as the year comes to an end is, where to invest your money in 1997?

According to investment strategists, cash will be “king” next year. However, many feel there is still money to be made in equities, especially in the mining sector, as the impact of the weaker rand starts pushing up the earning yields of mineral exporters.

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Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

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