Rumour and resources keep JSE investors happy

The JSE All Share Index rose to record highs this week – spurred on by resource prices and various takeover and acquisition rumours. FAnews Online has previously commented on how resilient South African equities have been in the face of global credit co

Impala Platinum and Kumba Resources are also among the top ten. Adding the market capitalisation of the Top 40 shares gives us R4 404bn – with 59.72% of the total (R2 630bn) in resource companies. And we haven’t even considered the impact of investments into resource companies of banks and investment holding companies!

This answers the market riddle that might have been bothering investors in the first quarter of 2008. Our stock market is performing well because of higher resource prices and the relative weighting of resource stocks in our major indices. This also explains why the mere rumour of a deal in a top resource company will send the All Share Index higher.

BHP rumour sparks JSE rally

The latest example of the power of resource shares came on Wednesday, 14 May 2008. A share trader quoted on I-Net Bridge shed some light on the ‘news’: “BHP Billiton is the big one today on the back of rumours that that China is trying to increase its stake in the company.”

But there was another rumour doing its bit to prop up BHP. The company remains intent on getting its hands on global mining giant Rio Tinto. On Wednesday it emerged that BHP would allegedly offer 3.4 of its own shares for each Rio Tinto share in a massive takeover bid. That values the company BHP wants to swallow at a cool $175bn – certainly catching investors’ attention.

Although BHP Billiton’s main listing is on the Australian board the company is a cornerstone of the JSE too. Stocks in the All Share Index rushed to a new intraday high of 32 477 points – already some 12% higher than this year’s opening level. Considering analysts expected 15% from equities this year the market is really running ahead of itself. Investors liked what the possible deal would do for BHP sending shares in the company nearly 5% higher to R315.49 a share. BHP closed on Wednesday at R314.50.

Everyone wants a slice of MTN’s 68.2 million customers

But the talk of the town for local investors remains South Africa’s cellular giant MTN. Shares in the company surged to a record R165 each on 6 May this year. This price action followed confirmation that MTN was in talks with Bharti Airtel, an Indian company keen on purchasing a 51% stake. Although the bid had not been confirmed at that stage, it has since emerged that Bharti was offering R165 per share, valuing 51% of MTN at around $19bn. Despite talks of this offer being raised to R175 per share MTN has since slipped back to a more reasonable R154.

Right now no one can say whether the deal will go ahead, what price it will happen at or what company will emerge with the prize. Other international cellular operators have also been linked to the possible transaction. They include China Mobile, Reliance and Vodafone. We’d rule Vodafone out of the mix due to its stake in Vodacom – we doubt the competition commission would want a single UK-based firm to control almost 100% of the local cellular industry

Rumour gives the rand a boost

One of the biggest benefactors of this acquisition talk has been the South African currency. The rand has strengthened significantly against the US dollar in recent days largely due to expectations of huge demand for the currency should the MTN deal go ahead. The potential suitor would have to sell dollars and buy rand to pay for the transaction. And as we know from our Economics 101 textbooks: increased demand usually results in an appreciation in value.

Editor’s thoughts:
Stock markets move in cycles. Typically we experience lengthy periods during which share valuations move steadily higher – followed by shorter periods of relatively faster value declines. As things stand the JSE All Share Index has been trending upward since April 2003. But perhaps the two big corrections in August 2007 and January this year warn of an imminent slowdown. What’s going to happen when the seven year bull rally in commodities finally fizzles out? Send your comments to gareth@fanews.co.za, or respond below.