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Tides?

19 November 2004 Angelo Coppola

If it's the JSE you're talking about, it depends on whether you are locally-focussed or an exporter.

Over the year to date financials and industrials have steamed ahead, whilst resources have lagged considerably though they have had aggressive ups and downs within the period.

Industrials have been led to the upside by the cyclical services, which comprises cyclical retailers, transport and services.

It goes without saying that the rand has played a large part in the developments. Like the drugged-up athletes at this year's Olympics, our super-charged currency has surprised most with its performance.

A stronger rand has been instrumental in creating a very positive environment for inflation, hence interest rates. Low inflation, sharp interest rates cuts, a cheap stock market, chunky dividends, good earnings, fiscal discipline, truck loads of positive sentiment and voila you have the recipe for a bull market in those equities that don't export for a living.

It is clear how the locally-focussed sectors have moved up in unison and with some conviction. Volumes have been healthy and the march upwards has been relentless. The most effective investment strategy for the year has been buy and hold of local stocks.

You have needed to trade the resource sector to have got any joy out of that area of the market. The Resource Index is now negative for the year.

Looking forward, it is apparent that a bottom in the rand is required for resources to finally turn for the better in a meaningful way. The local plays are feeding off positive sentiment and the prospect of further interest rate cuts, which is questionable given the sharp expansion in credit extension and strong consumer demand.

It must be remembered that we are well advanced in the interest rate cycle, lots of money has been made and that eventually all cycles do come to an end.

Emerging markets have become the asset class of choice for foreign fund managers, and their recent preference for industrials and financials locally is a relatively new development.

The sharp appreciation by the local plays means they are overbought in the short term, but with positive news abounding it is difficult to foresee too much of a setback some time soon.

Also, these stocks are far from expensive. Indications are that retail investors are crawling back out of the woodwork and moving into the equity market, showing their faces for the first time since 1998, and though they are late in the day (as per usual) this will likely continue to provide an underpin for the market and may extend the run in the hot sectors on the JSE.

Very few want to touch the resource sector right now and we have a hunch that this provides a buying opportunity but patience may be required.

Newly-converted bulls in the investment community must be reminded that our market remains heavily influenced by overseas stock markets, and will suffer in the event of a major sell-off.

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