Tuesday was one of the most volatile days the JSE has ever experienced and it followed a bloody Monday that saw the market plunge more than 4%, wiping R130-billion off the stock market.
If it were not for the unexpected and very welcome news from the United States Federal Reserve that it was cutting interest rates by 75 basis points, Tuesday could have been a lot worse with the market down a further 4% at one point. Equities have continued to remain volatile with further losses this week. The All Share Index is now trading at less than it was a year ago. In other words, investors who had bought into the equity market a year ago can now start counting their losses.
Monday’s bloodshed was a reaction by global markets to the news that the US could really be going into recession. Commodities, which had continued to rally earlier this month despite concerns, finally gave way as further bad news came out of the US and UBS (an international investment bank) downgraded emerging market prospects. Globally, stock markets experienced some of their worst trading days since 9/11. Tuesday’s rate cut was the Federal Reserve’s response to the chaos, but the volatility remains high and investors and traders are feeling as if they are caught up in a washing machine on the hot cycle. By all accounts brokers should be throwing themselves off ledges and private investors should be in a blind panic. But, unlike other market crashes such as 1998, which saw 40% wiped off the market, there does not appear to be the same level of panic this time around.
Firstly, our market is not coming off ridiculous valuations as were seen in the late Nineties. According to Patrick Lawlor of Investec Securities Online, the valuation of the JSE — the price earnings (PE) ratio — is at the same level as four years ago. We saw a strong four-year bull run on the back of those valuations. The average PE is now below the long-term average of 13,82. Value Fund portfolio manager John Biccard says it is unlikely that we are entering a bear market. “Local equity valuations are low and central banks globally are cutting rates — a scenario that does not usually accompany protracted bear markets.”
Peter Brooke of Omigsa says the world is at its lowest valuation in 20 years, which means risk is already priced in. Brooke says even if earnings disappoint out of the US because of a recession, this has already been priced in, providing a margin of safety.
JPMorgan released a report this week suggesting that the banking sector could be reaching a bottom and providing buying opportunities in the near term. An investor can pick up banking stocks such as Firstrand and Absa at PE ratios of under 9 with dividend yields of close to 5%.
Apart from reasonable valuations, this time around the private investor has been far less exposed to the market. The unit trust industry statistics show that investors have been selecting low-risk asset allocation funds rather than pure equities. This has meant that, over the last four years, investors have missed out on a spectacular bull-run; however, it also means that they will not be feeling quite as panicked this time round.
The general consensus is that this level of volatility is expected to continue for a while and that we may see further losses, but it does create opportunities to enter the market. “With the markets down nearly 20%, the risk of share-buying is reduced. At these levels investors will make a good return on a two- to three-year view,” says Brooke. However, he warns that the first half of the year will remain volatile. Investors will also need to get used to more pedestrian returns from equities. Mark Hodges of Foord Asset Management says it is appropriate to reduce return expectations to a more normalised level of about inflation plus 5 to 7% (about 12% per annum).
Interest rate hike or hold?
Investors will also be watching the monetary policy committee (MPC) meeting carefully next week as some pundits suggest that, given the market turmoil and the emergency rate cut in the United States, Governor Tito Mboweni will hold rates this time. The debate is about whether there will be a rate hike now and a cut later in the year or no change for the year.
Recent data suggests that the economy is slowing, with retail sales down to 0,2% and certain sectors such as household goods and appliances contracting by 11%. Vehicle sales are also down by 18%. According to Standard Bank, house prices did not rise in December and they are expecting prices to drop this year.
All of this suggests that consumers are feeling the pinch and putting the brakes on spending. The oil price has now fallen well below $90 per barrel, which should also be a factor in inflation expectations. Peter Brooke of Omigsa is not expecting the Reserve Bank to hike rates next week. Brooke says this would be an error on the part of the Reserve Bank and would cut off growth momentum in the economy. However, economist Fanie Joubert of the Efficient Group argues that broad-based inflationary pressures, which have seen CPIX above 8%, will mean a rate hike this month. However, they predict that with inflation starting to fall towards the end of the year, we would most likely see a rate cut later in the year, ending the year flat with the prime rate at its current level of 14,5%.
If Mboweni does not hike rates, that could give the market a shot in the arm, but unfortunately neither the markets or economic growth are part of his mandate. — Maya Fisher-French