Equities let off some steam
Shares ended in the red across the board yesterday as the JSE reeled in sympathy with falling global exchanges. Locally listed shares fell 2.99% on Monday – the largest one day slide in more than two months. Investors ran for the hills in the US too. Their Dow Jones Industrial Average fell 1.99%, the NASDAQ composite sank 2.75% and the S&P 500 ended 2.43% weaker! There are a number of reasons for the sharp pullback. Some analysts say the market has run too hard and needs to let off steam. The reality is that investors have pushed equity prices way ahead of realistic levels given the outlook for the real economy.
“Overall, we still believe that equity markets have rallied well ahead of the economy,” said Wells Fargo commentator Vassili Serebriakov (quoted in an AFP article on Fin24.co.za). This sentiment applies to the domestic economy too. Ferdi Heyneke, portfolio manager at Afrifocus Securities told Reuters that “the market ran ahead of itself – and all we are seeing at the moment is a bit of an adjustment…” Prior to Monday, the JSE All Share had recovered almost 40% from its early March lows, despite a raft of negative real economic data.
Finance minister warns of a slow recovery
Monday’s market meltdown coincided with some hard-line economic observations from finance minister Pravin Gordhan. He was addressing an audience at the Land Bank’s financial results presentation. “We are at a time when there is a lot of talk about green shoots and the possibility of the recession having bottomed out, and are seeing the very beginnings of some optimism in the world about the economy,” said Gordhan, before adding that “in South Africa, we are at a point where that optimism will come with a bit of a lag, as with the recession itself.”
How long will this ‘lag’ take to work through the local economy? We’ll have a better idea later this morning, when Statistics SA releases the long-awaited Q2 2009 GDP growth number. Economists expect a third consecutive period of contracting growth after data released in Q4 2008 and Q1 2009 confirmed South Africa’s slide into technical recession. And although a Reuters ‘consensus’ poll suggests the second quarter GDP number will be around -3.2% (Q1 2009 was -6.4%) there are economists who expect growth to contract more aggressively, perhaps by as much as 6%!
A sharp contraction in GDP growth shouldn’t come as a surprise. The consumer – a major contributor to GDP – has been under severe stress for some time. Many sectors of the domestic economy have been contracting for months. You need only look at the latest motor vehicle sales, retail sales, manufacturing production or mining production statistics for confirmation. Demand for South Africa’s export goods has fallen too, regardless of product or geographic region.
Share price action defies logic
Recent share price action doesn’t tie in with corporate results. Although the stock market cycle tends to lead the business cycle by some margin we believe stocks have recovered prematurely. Recent earnings reports confirm significant declines in earnings across all sectors of the economy. Standard Bank reported a 34% drop in earnings per share for the six months to June 2009. The group’s credit impairments surged 58% to a staggering 7.1bn. If you thought gold miners were in the pound seats with gold above $900 per ounce, think again. Gold Fields’ earnings fell 45% in its latest period. Platinum miner Aquarius, uranium outfit Uranium One, heavy machine manufacturer Bell Equipment and long-term insurance giant Liberty Holdings all reported heavy losses! And perhaps most surprising, despite an abundance of international sporting events in the recent months, hotel group City Lodge reported a 31% decline in earnings too.
Johan Rupert, chairperson of investment holdings company Remgro told shareholders at his group’s annual general meeting that he wasn’t convinced the recent market rally was sustainable. “I have never before seen so many highly intelligent people disagreeing with strong and cogent arguments. It’s got to mean a period of uncertainty,” he said. Rupert urged caution until world financial markets had time to digest the “experimental” quantitative easing strategies applied in the US and Europe. According to Rupert these governments were counterintuitive: “Growth leads to more taxable income – but there’s not a single government that is pro-growth; instead it’s [all about] tax and spending.”
Editor’s thoughts:
We’ve been surprised at how investors have poured into equities given the poor outlook for corporate earnings in most business sectors. Mining counters have been hit by falling demand and commodity prices, banks have been affected by sub-prime and indebted consumers and manufacturers are mothballing plants and resources to survive. Do you think the equity markets have run too hard since the March 2009 low? Add your comments below, or send them to [email protected]
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