How can the market be cheap if it is at an all-time high?

Debra Slabber, Portfolio Specialist Director at Morningstar Investment Management

Why South African equities are still attractively priced

During 2022, we saw significant movements in global markets, from both an equity and fixed income perspective. Risk-off, fear and uncertainty were the order of the day. On the local side, markets held up relatively well in comparison and it left local investors puzzled. Weak growth, a record amount of loadshedding, high interest rates and an uncertain global backdrop are all factors that should send investors running for the hills, but local seems to remain lekker.

Year-to-date, there has been a healthy rebound in asset prices as inflation numbers are starting to ease, China is reopening and Europe seems to be more resilient than what the market initially expected. The JSE All Share Index reached an all-time high in January 2023, despite the uncertainties our market currently faces. How is that possible you may ask?

A reminder that the stock market and the economy are different

When it comes to distinguishing between the economy and the stock market, the answer is actually very simple as to why they don’t always speak the same language. Economic factors are backward-looking and effectively this data reflects events that already happened – like GDP growth, unemployment, manufacturing, etc. The equity market, on the other hand, is forward-looking, taking expected future earnings into account.

Historically, the equity market has been a great discounter of information that is readily available and knowable. That’s the reason why the market tends to price in information about potential economic events and information (for example an upcoming recession, a credit rating downgrade, etc.) before the event happens.

The other factor that can’t be ignored - and one that is especially important in the South African landscape - is that listed companies that sell products offshore are not reliant on how the South African economy performs. These shares are more broadly known as rand hedges.

Whether it's government policy, investor behaviour, or the way we measure the stock market, several factors can cause a disparity between the stock market and the state of the economy at any given moment. The key point to remember is that the stock market is not the economy, but instead, a leading indicator of where investors think the economy will go.

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