With the JSE reaching new highs, people may be convinced that the good times are here to stay. But in reality there is enough uncertainty in the market to keep investors guessing.
The market soared with the JSE All-Share Index breaking 22Â 000, but the rand continues to tumble past R7,60, which suggests increasing threats of inflation, confirmed by the latest figures coming in at 5%. Oil, however, is lower, hovering at about $60 a barrel.
Inflation has remained in the 3% to 6% target range, but if it starts to become too unwieldy, there could be some unexpected rate hikes. This could put a dampener on the economy, which appears to be growing strongly with recent job creation figures suggesting that South Africa’s official unemployment rate is at its lowest in six years.
Latest steel sales are at a 25-year high and the commodity drive still favours parts of the economy. In fact, most of the gains on the JSE have been driven by resources, mostly because of the weaker rand. This bodes well for companies that have offshore revenue, such as the mining companies and other rand hedge shares.
But before you invest all your cash in resources, Wayne McCurrie of Advantage Asset management warns that the commodity cycle has turned. While there is no clear confirmation of this, McCurrie argues that resource shares are expensive if the commodity cycle does turn down over the next three to five years.
A slowing of commodity prices will put further pressure on the rand. While this increases the threat of imported inflation, it will offer a buffer to lower commodity prices. A weaker rand is good news to major exporting industries and we could still see strong growth coming from manufacturing.
A weaker rand and imported inflation, however, is not good news for banks and retail shares. Although they are showing good value, the threat of higher inflation is hanging over the sectors and McCurrie argues that there is nothing stopping them from falling if sentiment goes against them.
McCurrie believes that the overseas markets, the United States in particular, are showing relatively good value.
With the rand in a period of weakness that can only be compounded by higher inflation and the widening current account deficit, offshore investments are looking compelling.