As some stocks enter what might be considered expensive territory, investors have been curious as to whether they should sit tight, look offshore or simply watch the rand closely.
Craig Pheiffer, general manager investments at Absa Asset Management Private Clients (ABAM PC) has hinted that the JSE may face a tricky earnings reporting season this month and next, which could, in turn, affect how investors behave in months to come.
Pheiffer says that investors have expressed concern that the JSE is expensive as the price-to-earnings (PE) ratio on the FTSE/JSE all share has remained around 17 — this is close, historically, to the top end of JSE share valuations. And while stocks with a PE of 23 or 24 (such as retail stocks) haven’t scared off foreign investors, our “expensive” is not the same as theirs.
As major JSE players, such as Anglo American and BHP Billiton report their earnings, so investors will balance good earnings against prospects; if a company posts good results but is not going to get volume increases and costs are going to rise, the picture won’t be that rosy.
Kumba has just released its results and although 2010 earnings doubled it’s expected that costs will go up by 20% this year.
“At the moment, analysts are working with earnings estimates,” Pheiffer says. “In a few weeks, their calculations will be based on actuals. Higher earnings will have a material impact on historical PEs in a number of recovering stocks and sectors. One year forward, PEs will also decline and investors may have a better picture of value.”
An increase on the earnings side of the PE ratio has the effect of bringing down PE multiples.
“If multiples for the likes of Anglo and Billiton stay at 17 or 18,” says Pheiffer, “some may continue to view those shares as expensive. But a fall closer to 12 or 13 would tend to encourage investors to stay in or recommit to those counters. Our view is that value is still to be found in the JSE, given proper sector and stock selection.
However, we acknowledge that with the strong market gains in 2009 and 2010, value identification has become more of a challenge.”
Earnings won’t necessarily disappoint, but other factors may well do so.
Pheiffer believes, though, that equities as an asset class are still performing better than cash and bonds may not be the go-to for investors that they have been, because the next move in official interest rates is likely to be a hike. The bond market may already be factoring this in.
The lure of offshore investment in a weak rand environment has had investors making inquiries. But Pheiffer is still adamant that local equities have a place in any well-balanced portfolio, with a current strong emphasis on resources. Pheiffer suggests clients sit tight, weakened currency notwithstanding.
“In 2009, the all-share index achieved a total return of 32% followed by 19% in 2010 for a compound annual market return of 25%. Last year, the JSE even outperformed in US dollar terms such heavily supported emerging markets as China and Brazil as the strong rand bolstered JSE performance,” says Pheiffer.
Although it may be tricky to find value right now, it’s possible to identify some stocks with low PEs. Be cautious, though, as sometimes a low PE is an indication of a company in trouble — take professional advice when it comes to selection.
The best thing to do may be to hang tough but keep in mind the importance of currency factors and international influence on a highly liquid emerging market.
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