The Economic Focus video will now only be available on the first Monday of every month. Please click on http://www.stanlib.com/EconomicFocus/Pages/EconomicFocusWeeklyWrap.aspx, for this month’s video.
(05/05/14) where Kevin discusses what is happening both globally and domestically on the economic front.
- With both the US and SA stock markets reaching record highs on Friday, the bull remains firmly intact. However, we are mindful of the May to September (“sell in May, go away, come back on St Leger day”) story whereby markets have a history of taking knocks during this period; not always, but frequently, including each year during the past 4 years.
- Last year markets were strong in May, but corrected sharply in June (-9% for the JSE All Share Index, following the -8% dollar correction of the MSCI World Index).
- After the June correction last year, the JSE ran up by 21% in 4.5 months.
- This year the MSCI World Index is up only 2.2% so far (was up 13.5% last year by the time the correction occurred), so there is a view that because we’ve had very little return so far in 2014, that this May to September period may be better for markets. It is possible, although investors should remain on guard because of history.
- As we’ve mentioned, most fund managers in SA believe our market is expensive.
- Interestingly, if we look at the All Share Index, it peaked on 25th May 2008, before the crash, at 33,300, before dropping sharply to around 17,800 in November 2008.
- At the current level of 49,950 it is only 50% higher than it was almost exactly 6 years ago, which equates to just 7% compound growth per year (excluding dividends), not much more than inflation. This is certainly a modest return from the peak, well below the average return for the JSE.
- However, this is because the JSE Resources Index (now 26% of the ALSI) is still -27% from its peak on 25th May 2008.
- If instead we look at the JSE Financial & Industrial Index (74% of the ALSI), this has been unbelievable in its bull run so far (see chart in main report).
- This index has risen by 112.7% (excluding dividends) since its peak, which was in November 2007, to its current level, which equates to a 12.1% annual average compound return (excluding dividends). This is impressive and a lot better than the 7% return for the ALSI, thanks mostly to Naspers, BAT, Richemont, SAB Miller and to a lesser extent Billiton.
- Sure, the extent of the rise has slowed from previously. From the low in 2003 to the peak in 2007 the index rose by over 4 times, whereas this time round it has risen by 3.5 times! It is still fantastic.
- The problem is the index is now trading at 20 times earnings of the past 12 months, i.e. on an historic PE ratio of 20. It has only been higher than this briefly in both 1997 and 1998, after which it fell sharply in the crash of 1998.
- The average PE of this index in the new SA is 14.7 times earnings.
- STANLIB’s view is that this is expensive and it is hard to find value in many of the shares in the index.
- The most expensive share in this index is Naspers, trading at 68 times its earnings. The share has recently jumped by 20% from its recent low. The share looks expensive on a PE ratio basis because of its 34% holding in the listed company Tencent, which is China’s biggest internet company. Naspers tends to follow Tencent’s movements closely. Tencent is apparently not as highly priced as some of the hot US internet companies like Facebook and Linked-In.
- SAB Miller is trading at 27 times its earnings, which at least is lower than the 34 times PE seen last May.
- Of course the weaker rand has helped many of these big rand hedges, because they generate a large chunk of their profits in hard currencies.
- Taking a look at the chart in our main report of the rand to the euro, one notes that the more aggressive trend since August 2012 (then at 9.89 to the euro) appears to be in the process of being broken. Already the rand has moved from a low of 15.50 in early February this year to 14.05 to the euro.
- Investors need to watch this closely. The break of trend is not necessarily a done deal yet, because it could conceivably bounce back into trend, but it does look quite good so far, especially if the fairly consistent inflows from foreign investors into our bond and equity markets continue AND the moves into emerging markets continue, because we follow quite closely.
- The price of copper hitting an 11-week high is also positive for our rand and other commodity currencies.
US Market Analyst, Elaine Garzarelli
- Garza notes that the minutes of the Fed’s last meeting indicated general agreement amongst the members that any sustained uptick in US inflation was perhaps still years away, despite short-term fluctuations.
- Garza’s proprietary stock market indicator composite (quantitative model) is at 71%, a bullish level. It would take a level below 30% for her composite to signal a bear market. So she recommends full exposure to shares and believes corrections should be limited to 4-7% for the US S&P 500 Index.
- The risks to the current bull markets include a bubble developing as in 2000, much higher oil prices, problematic inflation, a financial crisis or a recession. These events are not present today. Terrorism/war is unpredictable and is also of course a risk for shares.
- Her valuations indicate that the S&P 500 Index remains 12% below fair value.
- As a short-term warning, she notes that the number of bullish investment advisors in the US rose to 57.2%, the highest reading for this indicator since mid-January and a bearish level on its own. This suggests a near fully invested position among investment advisors. As a contrarian indicator, a very high number of bullish advisors is negative for shares and frequently causes a 4-7% correction.
BCA’s Chen Zhao
- Chen says a combination of softening economic growth, poor stock market performance and the recent fall in real estate prices has caused a growing sense of fear toward China’s economy.
- The mainstream media is littered with reports of a “China crash”, a sign that sentiment towards the Chinese economy has soured decisively. The consensus view is that the real estate market is a ticking time bomb and that the financial system will undergo a period of severe stress.
- Chen thinks the bearishness is excessive and he is buying, not selling, Chinese shares, bank shares in particular.
- He thinks that property prices may keep softening, but this will not translate into widespread loan losses. The Chinese household sector leverage ratio is very low and most Chinese buy their homes out of savings.
- Chinese property developers will be hurt by falling prices and some of them will go under, causing some damage to Chinese banks. However, banks’ exposure to developers is limited, at 6.5% of the total loan book.
- Chen also thinks the economic growth rate is at a trough, to be followed by a mild upswing in the second half of 2014.
- Last but least Chinese banks are trading at 4.5 times earnings, on dividend yields of 6.7% and price-to-book ratios of under 1. So they are as cheap as, if not cheaper than Greek banks at their most severe moment of the sovereign debt crisis. The shares seem to be already priced for the worst.
- Chen recommends either buying Chinese banks or the H-share Index in Hong Kong, which has close to 40% exposure to Chinese financials.
- Locally last week, the SA Reserve Bank opted to leave the Repo rate (5.50%) unchanged at the MPC meeting. This was in-line with market expectations, although 4 out of the 30 analysts surveyed by Bloomberg expected rates to increase. The Reserve Bank last adjusted interest rates in January 2014, when they increased rates by 50bps.
- In April 2014, SA headline CPI inflation rose by 0.5%m/m, with the annual rate of inflation rising to 6.1%y/y from 6.0%y/y in March 2014 and 5.9%y/y in February 2014. This was slightly above market expectations for inflation to remain unchanged at 6.0%y/y (Bloomberg 6.0%y/y. STANLIB 6.1%y/y).
- CPI excluding food and petrol is still within the inflation target at 5.5%y/y, and down slightly from 5.6%y/y in March 2014.
- Offshore, major US indices moved higher over the week, with the Conference Board’s US Leading Indicator increasing 0.4% in April, following a 1.0% increase in March and a 0.5% increase in February.
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