This year will be remembered as the year that local equity bulls finally chased the bears into hibernation.
A low-interest-rate environment locally made fixed-interest investments unattractive, while offshore markets had little to offer South African investors.
As the JSE Securities Exchange’s (JSE) rally gathered steam, more and more money was pumped into the market, with people not wanting to be caught on the wrong side of the rally.
With the local economy looking buoyant and interest rates remaining low, solid corporate earnings growth and the continued search for yields is likely to see the JSE’s rally continue into 2005, analysts say.
At the close on December 15, the all-share index was up 18,1% this year. At its peak reached on December 2, it was up more than 21%. The all-bond index was up 13,9% at the close on Wednesday.
“When it comes down to it, where would you rather be — in cash or in shares?” asks Barnard Jacobs Mellet Private Client Services director David Shapiro.
“If you look at companies, there is generally a very positive outlook for earnings growth of 15% to 20% — closer to 20% in the majority of cases. If you can have companies growing at these levels, with an inflation environment of 3% to 4%, you still have 11% real growth in earnings, which is fantastic.
“It might only translate to 10% growth in share prices, but even if you have a down rating and only get 8%, it is still better than cash. If you add dividend yields, you get a total return of up to 15%.”
Sasfin Frankel Pollak Securities chief investment strategist Craig Pheiffer agrees that earnings growth will drive the market, with stocks with a local economy focus again coming to the fore.
“We are still going to have a healthy economy, with growth close to 4% next year. That economic activity will help drive earnings, which will drive the market — there will be a local flavour. I don’t think the rand will appreciate very sharply and a lot of resources counters could find a base to their earnings,” he says.
He adds that at its peak reached in early December, the market had come back from a price-earnings ratio (PE) of more than 15 to a PE of about 14,4, which was not expensive.
“The market got a bit of a wake-up call from Massmart that some shares had got a bit frothy, but retailers have still got legs and retail banks can still do well,” he asserts.
Retailer Massmart said in a trading update on December 7 that Christmas sales had been below expectations. It expected to report higher sales and headline earnings per share for the year to the end of June 2005, but at a slower growth rate than that experienced in 2005.
“I think earnings growth will come through in the teens — between 10% and 20%. If the rand does depreciate a bit, it could give tailwind on the resources side.”
Pheiffer says that the JSE could repeat this year’s performance and climb between 15% and 20% next year.
Efficient Group chief economist Dawie Roodt agrees that the JSE had a lot more upside and sees it appreciating by up to 15% next year.
“Locally, interest rates are driving demand and from an international point of view, the commodity cycle is fairly strong. If the rand depreciates slightly — which I expect — we will get some foreign stimulus, but strong local demand is the main thing.”
Roodt agrees that “SA Inc” stocks, such as retailers, retail banks, wholesalers and construction companies, are again likely to outperform next year.
The only stocks that one has to be careful of are those with dealings overseas that still haven’t discounted the firming rand, says Shapiro.
“There could still be some fall-out from the strength in the rand, which could result in a pullback in profits. Those stocks with a local focus shouldn’t have a problem,” he says.
He adds, however, that those commentators who have incorrectly forecast rand weakness over the past two years will eventually be right. As long as the rand doesn’t collapse, this will also help the market.
“The rand could be the wild card. No one wants to bet because people have been so wrong. Who knows what will happen with the dollar? If the dollar continues to depreciate, who knows what the base case for the rand will be?”
He says overseas markets could also be a wild card.
However, even in the event of slower global growth, increased United States rates, a slowdown in China and commodity prices coming off their best levels, equities will still offer better yields than cash. — I-Net Bridge