New bull market or bear market rally?

The FTSE/JSE All Share Index has made a remarkable 14.1% recovery since its low on 3 March 2009, led by the technology, financials and telecommunications sectors.

“The recent recovery in equity prices poses the question of whether this is the start of a new bull market, or if it is a bear market rally,” says Dr Prieur du Plessis, chairman of the Plexus group. “These cyclical sectors traditionally do well in a declining interest rate environment, and typically outperform in the early stages of a bull market.”

“Financials benefit directly from lower interest rates due to possibly lower defaults on bank loans and other forms of debt. Technology and telecommunications benefit indirectly from infrastructure spend on a national level and upgrades on a business level, both on the back of an expected recovery in economic growth,” he explains.

“The strong performance from financials was also no doubt helped by better than expected first quarter results from US financial institutions such as Citigroup, Goldman Sachs and JP Morgan,” says Du Plessis.

Sectors that are lagging include health care, oil and gas, consumer goods and consumer services.

“Health care is traditionally a defensive sector that does not decline at the same rate as other sectors during a downturn and therefore does not reach the same oversold levels or depressed valuations at or close to market bottoms,” says Du Plessis.

The crude oil price has fallen from above $140 to below $40 per barrel when the commodity bubble burst. It has since recovered to about $50 per barrel. “One could expect the oil and gas index to continue its recovery as the global economy begins to show signs of improvement and the price of crude oil continues to rise,” he says.

The consumer goods and consumer services sectors are also sensitive to interest rates. Although the SA Reserve Bank has already cut rates by 2,5%, and another 1% cut is expected on 29 April 2009, improvement in consumer spending is not yet evident.

The industrials and basic materials sectors moved more or less in line with the rise in the FTSE/JSE All Share Index.

“The current financial crisis is unprecedented,” says Du Plessis. “Although there seems to be a slowdown in global economic deterioration - there are strong indications that the fire sale of assets has come to an end and that some normality has returned to the South African equity market - it would take a brave person to bet his house on the bear’s demise so soon.”

“Even if we see the March lows being breached again, and even if it takes a while before the bull is back to stay, long-term investors who accumulate equities at current levels should be rewarded in time to come,” says Du Plessis.