Market euphoria could end in tears

The slow recovery in the United States and continued distress in Europe has seen investors piling into stock markets around the globe to enjoy the party while it lasts, and driving the markets to euphoric highs. But is a market correction around the corner?

Last week, the US Federal Reserve chair, Janet Yellen, made it clear rates would not be rising any time soon, while European Central Bank president, Mario Draghi, signalled that the European Union might introduce fresh monetary stimulus into their stagnant economies.

It may appear to be bad news for the world’s largest economies, but it is great news for the financial markets. They soared in response to the promise that cheap money would continue to flit around, at least for the foreseeable future.

The JSE is one of many which has performed well thanks to the liquidity in the market through fiscal ­stimulus in the US and reached its highest level yet in July.

In its annual report, the Bank for International Settlements, which serves central banks in their pursuit of monetary and financial stability, described financial markets as “euphoric” and “under the spell of monetary policy”. And many believe a correction is due.

Momentum portfolio manager Wayne McCurrie believes the market has been overvalued since September last year. “The market loves an improving [global] economy. It doesn’t have to be ­incredibly strong growth, but just improving,” he said. “The market also loves low interest rates, and in the last five years we have experienced the lowest interest rates in living memory … So we have a bull market overseas and locally, what bursts the bubble is when the interest rates start to rise.”

McCurrie said dual-listed multinationals, which have served to drive the JSE higher, were the ones vulnerable to a correction because local stocks had already began to correct in response to the poor performance of the domestic economy.

Geoff Blount, chief executive of Cannon Asset Managers, agreed: “The JSE market is divided into two segments … domestically driven stocks, especially financials, are all cheap at the moment. They are priced for bad news.”

Banks such as Standard Bank and Barclays Africa are on a price-to-earnings ratio (PE, an indicator ­calculated by dividing the stock price by earnings per share) of 11 or 12, he noted, while the market as a whole is on a PE of 18. In the larger stocks, by market capitalisation, the likes of SABMiller has a PE of near 28, Glencore’s is near 26 and Naspers is at 92.

“The world is stupid at the moment, it is on its head; in the past you had a recession and economic recovery where everyone would get excited and shares would go up,” said Blount. “[Now] it’s a perverse thing when there is real good news and markets react negatively.”


David Shapiro, market watcher and deputy chairperson at Sasfin Securities, believes it’s best to stick with the winners. “I would run away from emerging markets and I would stick to developed markets, particularly the US.”

A US rate hike is six months to a year away and “even if they do it, I don’t think it will be at breakneck speed”, he said. “When we start to normalise I think it’s a very good sign … We might have a little bit of a speed wobble, but it’s better for equity markets. It doesn’t mean we are going to crash … You don’t crash off a PE of 18. We are nowhere near a bubble.”

The market is unpredictable, said McCurrie. “But it’s more than likely if you bought shares today your chances of being happy in three years are slim. If you are truly a long-term investor and can withstand market corrections, stay in.”

No one knows what the market is going to do, Shapiro agrees. “But you can feel the momentum at the moment, there are more buyers and sellers and no one wants to get out of it.”

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. But it comes at a cost. Advertisers are cancelling campaigns, and our live events have come to an abrupt halt. Our income has been slashed.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years. We’ve survived thanks to the support of our readers, we will need you to help us get through this.

To help us ensure another 35 future years of fiercely independent journalism, please subscribe.

Advertising

ConCourt settles the law on the public protector and interim...

The Constitutional Court said it welcomed robust debate but criticised the populist rhetoric in the battle between Busisiwe Mkhwebane and Minister Pravin Gordhan

Small towns not ready for level 3

Officials in Beaufort West, which is on a route that links the Cape with the rest of the country, are worried relaxed lockdown regulations mean residents are now at risk of contracting Covid-19
Advertising

Press Releases

Covid-19 and Back to School Webinar

If our educators can take care of themselves, they can take care of the children they teach

5G technology is the future

Besides a healthcare problem Covid-19 is also a data issue and 5G technology, with its lightning speed, can help to curb its spread

JTI off to court for tobacco ban: Government not listening to industry or consumers

The tobacco ban places 109 000 jobs and 179 000 wholesalers and retailers at risk — including the livelihood of emerging farmers

Holistic Financial Planning for Professionals Webinar

Our lives are constantly in flux, so it makes sense that your financial planning must be reviewed frequently — preferably on an annual basis

Undeterred by Covid-19 pandemic, China and Africa hold hands, building a community of a shared future for mankind

It is clear that building a community with a shared future for all mankind has become a more pressing task than ever before

Wills, Estate Administration and Succession Planning Webinar

Capital Legacy has had no slowdown in lockdown regarding turnaround with clients, in storing or retrieving wills and in answering their questions

Call for Expression of Interest: Training supply and needs assessment to support the energy transition in South Africa

GIZ invites eligible and professional companies with local presence in South Africa to participate in this tender to support the energy transition

Obituary: Mohammed Tikly

His legacy will live on in the vision he shared for a brighter more socially just future, in which racism and discrimination are things of the past

The best local and international journalism

handpicked and in your inbox every weekday