Local shares: Is this the turning point?
The oversupply of liquidity, created worldwide to prevent deflation and stimulate economic growth, has started trickling through to shares, evident in the upturn in some major global and local indices.
“The MSCI World Index and the MSCI Emerging Markets Index have increased respectively by 23,1% and 30,8% from their 20 November lows,” says Dr Prieur du Plessis (pictured), Plexus group chairman.
Locally, the FTSE/JSE All Share Index and the FTSE/JSE Top 40 Index have climbed by 28,7% and 30,9% respectively since reaching a cyclical low on 20 November. Medium and small capitalisation shares have improved by 27,5% and 10,0% respectively since their 27 October lows, says Du Plessis.
The resources sector has improved by 52,6% since 20 November, mainly due to the Gold Index’s 55,5% increase. The financial, property and industrial sectors have increased by 17,8%, 28,1% and 18,0% respectively since 17 October.
“Several factors could have a further positive effect on specifically local shares,” says Du Plessis. “These include declining inflation, the current low share prices and the turning points evident in the FTSE/JSE All Share Index.”
He continues, “the Reserve Bank seems to have succeeded in containing inflation, with the inflation rate dropping for two consecutive months. Markets have seen the first 0,5% repo rate cut and further rate cuts are possible.
He warns that “sharp cuts could be hampered by a weaker rand, which could once again stimulate inflation. A moderately weaker rand could counteract the lower international commodity prices and have a positive effect on our resources sector.”
Secondly, local share prices have dropped to such low levels that shares offer good value for money at present. The price-earnings ratio for the FTSE/JSE All Share Index has reached a turning point (see accompanying graph) and is currently 10,1 as opposed to the 24-year average of 14,4, representing a discount of 42,6%.
“This turning point is lower than the 1998 emerging market crisis low, and just higher than the 2002/2003 bear market low,” says Du Plessis.
In addition, “the dividend yield of the FTSE/JSE All Share Index (see accompanying graph) has also reached a turning point and is currently 4,1%, as opposed to the 24-year average of 2,7%,” he says. This represents a discount of 51,9%.
“This turning point is higher than the highs of the 1998 crisis and the 2002/2003 bear market,” says Du Plessis.
Although South Africa has not been directly involved in the forces driving the global financial crisis, local markets have not escaped unscathed.
“South African markets were directly affected when foreign investors dumped large volumes of local shares under the guise of ‘risk aversion’,” says Du Plessis. “Money that flowed out of the country significantly weakened the rand against other currencies. The significant decline in international commodity prices (for which the weaker rand has not fully compensated) and the fact that SA’s economic growth is so dependent on global economic health, albeit indirectly, also affect the local market.”
He says the financial crisis, which has affected virtually every sector of the worldwide economy, causing wide-spread damage, “is definitely not over.”
“Developed economies like those in the US, Europe and Britain, as well as some emerging countries, are focusing on various bail-out packages and emergency measures to try and salvage their financial systems. At the same time, they have cut interest rates to improve liquidity and stimulate economic growth.”
“Economic conditions in the US have worsened so dramatically that the Federal Reserve Board has decreased interest rates to a range between 0,00% and 0,25% to prevent an economic meltdown and the concomitant negative effects of deflation,” says Du Plessis.
“Big surprises may still lie ahead,” says Du Plessis. “Investors should tread carefully and use the services of a skilled portfolio manager to guide their investments.”
(Click on image to enlarge)
