Markets look good, but not party time just yet – Absa

Investors buoyed by positive third-quarter figures should not uncork the champagne just yet. The uptick looks good, but sectoral trends demand close scrutiny. What’s more, the market may be approaching a crossroads in the coming months.

The assessment comes from Craig Pheiffer, General Manager Investments, Absa Investments: Private Client Asset Management.

This arm of the Absa Group consults to a wide range of high net worth investors and the general advice going out to this astute category of clients is to make no assumptions in the current environment and engage in searching stock selection when looking for value.

“Most categories look good when comparing third- and second-quarter returns,” says Pheiffer. “In uncertain times, we should be thankful for strong performance, but we could be approaching a critical period in the coming months so it’s best not to get carried away.”

Total return statistics (%) from various FTSE/JSE and other indices indicate:

Over the quarter, the rand moved from R8,16 to R8,31 to the dollar.

Pheiffer comments: “Star performer in our low interest rate environment is listed property, up 11% for the quarter and 32.2% year to date. The financial and industrial sectors also look good, with financials up 25.6% year to date and industrials close behind.

“Even the embattled resources sector has done well, moving 2.9% higher in the third quarter after two quarters in negative territory.”

However, overall trends can be deceptive.

Pheiffer says the reversal of fortunes in the resource sector is almost entirely due to strong performance by just two counters – BHP Billiton, up 12,9% in the third quarter, and Sasol, up 10,7%.

The equity rebound versus bonds looks convincing with the Alsi up 14.8% year to date on the back of a 7.3% upsurge in the last quarter. In contrast, the All Bond Index moved 5% higher in the quarter for a total year-to-date return of 13%.

But close interrogation of the numbers is necessary.

“There were good gains in each of the months of the quarter but the recent gains were largely in response to initiatives to improve liquidity in the USA, the UK, Eurozone and Japan,” explains Pheiffer. “The markets liked the new bout of quantitative easing and asset-buying, but can these initiatives sustain a continued market upturn?”

The acid test is corporate earnings and “the crossroads on that journey is expected in the coming months”.

Cost-cutting had enabled many companies to report acceptable profits, but corporate performance in the long term demands top-line growth as sales pick up and businesses expand.

Pheiffer adds: “Recent efforts to provide extra liquidity are an attempt to foster economic growth. Should those policies have the desired effect then corporate earnings will ultimately result. Cost-cutting by companies is only a short-term solution and for continued strength, markets demand positive sentiment on upcoming earnings.”

“Unfortunately, the previous quarter’s numbers – no matter how welcome – provide few clues on this issue.”