JSE may disguise impact of latest rate rise – STANLIB

Don’t be fooled by the JSE’s All Share Index when trying to gauge the impact of the latest interest rate increase. It could understate the downside to the economy by a significant margin.

The tip to investors comes from STANLIB, the country’s leading unit trust company and a Group committed to investor education on issues such as market risk and the need for balanced portfolios.

The extent of the Reserve Bank’s April interest rate increase surprised many observers and STANLIB has voiced concerns that a 50 basis-point rise on top of eight previous hikes since June 2006 could prove to be a tipping point leading to considerable consumer pressure.

STANLIB believes corporate earnings will be affected and projected returns from domestic equities for 2008 may come down, but the overall picture could be skewed by the JSE’s heavy resource component.

Paul Hansen (pictured right), director of Retail Investing, explains: “Resource stocks account for approximately 50% of JSE market capitalisation, incredibly high in global terms.

“In view of the continuing commodity boom, resource counters may escape the fallout from the latest rate rise and could do quite well. An overall view of the JSE might therefore reflect only a mild reverse in the coming weeks. In fact, the impact could be quite severe in some sectors.”

One false assumption among pension fund members guided by the All Share Index might be that their fund’s domestic equity investments are holding up rather well. In fact, says Hansen, very few equity portfolios would have a 50% allocation into resources as the sector has traditionally been associated with relatively high volatility and risk.

“There’s a local mismatch,” says Hansen. “Resources account for half the JSE yet the consumer accounts for 70% of our economy.

“Some retail categories, financials and industrials could take strain. The impact on sentiment might also be severe … and sentiment affects market trends and therefore share performance.”

Effects on the emerging middle class are of particular concern.

Hansen points out: “Investment professionals hate uncertainty and the Great Unknown for us is the reaction of the new middle class. No one knows how they will react to these challenges because it’s never happened before.

“Many of these families have just bought their first house, their first new car and for the first time have made heavy use of credit for furniture and household appliances. Suddenly, they face a credit crunch for the first time in their lives.

“The effect on consumer sentiment will be followed closely. Scrutiny won’t be confined to fund managers checking macro indicators. The authorities will also be concerned.”