Earnings season implications for JSE, says Absa Investments
The JSE – one of the world’s best performing equity markets in US dollar terms in 2010 – faces a February/March earnings reporting season with the potential to affect investor sentiment for months to come.
The domestic equities alert comes from Absa Asset Management (ABAM) Private Clients, an adviser to high net worth individuals and a market-watcher with strong focus on value opportunities.
Market scrutiny has recently become intense as some investors have become concerned that the JSE is expensive, making further significant gains unlikely.
Despite the market decline of 2% in January, the historical price to earnings (PE) ratio of the FTSE/JSE All Share index remains stubbornly around 17 – close historically to the top end of JSE share valuations.
“The crunch comes later in February when major JSE players like Anglo American and BHP Billiton report their earnings,” says Craig Pheiffer, General Manager Investments of ABAM Private Clients.
“At the moment, analysts are working with earnings estimates. 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.”
The JSE has been good to investors over the last two years. 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. However, since the start of the new year the unit has weakened against the dollar, euro and sterling.
“Currency factors and international influence on a highly liquid emerging market like the JSE are obviously important,” notes Pheiffer.
“With an appreciating rand last year, offshore investments performed poorly. However, the weakening of the currency over January showed just why offshore investments or offshore currency exposure shouldn’t be ignored.
“That said, we still believe local equities retain a central role in a well-balanced portfolio and that value can still be found for those looking for long-term capital growth.”
Pheiffer adds: “Our overall message to clients is to ‘stay balanced and don’t turn your back on the JSE just yet’.”
