What spooked the JSE? Behind the All Share’s 10% decline. JOHANNESBURG – The JSE All Share Index (Alsi) has had a rough ride over the past month or two. Despite short-term spurts of upward momentum on some days the Alsi closed at 47 092 points on Friday, down 10% from its high of 52 324. What has been spooking the bourse? Paul Hansen, fund manager at STANLIB, says the South African market usually tracks the world leader, the US. If the US market corrects, the JSE tends to follow. Hansen says there has been a severe correction in mining shares caused partly by a sharp dollar rally. The US dollar rallying has contributed in a big way to push down the prices of a range of commodities including oil, iron ore, copper, platinum, gold and palladium, he says. The situation has been aggravated by reports of weaker economic growth in China and Europe and commodity prices have taken a beating. Zwelakhe Mnguni, chief investment officer at Benguela Global Fund Managers, adds that the poor economic data coming out of Germany and the possibility that Europe could go back into recession have added to the market’s woes. He says that the big question is whether the European Central Bank has enough firing power to resolve such a situation, especially given that Germany is slowing down as well. Hansen says about 24% of the JSE is in commodity shares and this has been a considerable contributor to the local sell-off. By Friday’s market close, BHP Billiton, which accounts for about 10% of the Alsi’s market cap, had dropped more than 23% from its 52-week high of R377,18 – more than double the fall in the Alsi. Anglo American has also played a fairly considerable role with a 20% fall. Forward view Pierre van der Walt, portfolio manager at Rock Capital Management, says the market and market participants try to look forward by six to 12 months. “These players try to discount stocks in a world with higher interest rates, higher inflation and some good economic news. Rates will not rise if the central banks see bad news everywhere. It’s a fine balancing act,” he notes. The market also knows that with higher interest rates and cost of capital, stocks become more expensive. One should also keep in mind that a certain amount of profit must be allocated to service the interest account, he says. “This means less profit to shareholders which in turn prompt traders and analysts to update their valuation models. As they see a higher interest burden for the company they adjust stock prices lower. “This is where we are at the moment with the markets trying to find equilibrium. We think the market is fairly priced as these levels,” Van der Walt says. The good news is that the lower Brent Oil price should partly negate the higher cost of capital and rates to some extent, he says. Caution Hansen says retail investors should be mindful of the fact that the bull market has had an unusually long run of over five and a half years. While he believes the recent pullback does represent an opportunity to slowly start increasing equity exposure, this should be done cautiously.
Posted on: Tue, 14 Oct 2014 09:01:02 +0000
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