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Three reasons to feel more positive about SA’s stock market

There is a well-known saying that “it’s always darkest before the dawn”. 

Let’s use the 2002 Disney film, The Country Bears as an example. 

This film failed so badly that it nearly earned more bad reviews than actual revenue. 

Its global revenue totalled a mere $18m and many speculated that Disney might not be able to recover from such a failure. 

The very next year, however, Disney released the first in a series of Pirates of the Caribbean films. 

That first film earned more than $300m in revenue and served as inspiration for many other pirate movies that followed. 

Historically, stock markets and individual shares have placed us in similar positions quite a few times. 

And just as it seemed that all hope was lost, the markets surprised us with a rally. 

A fine example of this can be seen in the JSE’s performance roughly 20 years ago: 

After losing more than 30% of its value in 1998, we had to endure a mere 3.5% growth per year five years later (April 2003) – a growth percentage that couldn’t even keep up with inflation.

More importantly, before concluding that five-year period, the JSE lost 30% of its value between April 2002 and April 2003. 

That was without a doubt the darkest moment before dawn. And did the sun shine after that!

By April 2004, the JSE had grown by 43% over that 12-month period. In the following 12 months, it grew by a further 25% and in the 12 months thereafter, by an incredible 73%. 

I know very well that past performance and prices do not bear any guarantees for future performance, and I also know that much like 2003, investors are starting to feel that the sun may never shine on SA markets again. 

But I would like to point out three reasons why I think investors should start to have a more positive outlook on local shares:

1. Expected business activity

The Bureau of Economic Research (BER) recently released the seasonal ABSA Purchasing Managers’ Index (PMI) expected business activity figures and with a current figure above 50, it definitely reflects better than in 2018. 

Furthermore, if we superimpose this graph on top of the annual JSE growth graph, you will see that the PMI figures have produced very accurate results in the past. 

You will also see that since 2000, the JSE managed to recover quite well in most cases after this index started to turn and gain momentum. 

Schalk Graph

Graph 1: 12-month percentage change of the JSE vs. SA PMI expected business activity 

(Source: Iress, BER & PSG Wealth Old Oak)

2. Investors are becoming more optimistic about emerging markets globally

When we place the MSCI Emerging Market Index relative to the MSCI All Country World Index (ACWI), you can clearly see just how dark the period since 2018 was for emerging markets compared to the ACWI. 

More importantly, you can also see how this trend started to turn in the second half of 2018 as it became more attractive to emerging markets. 

Many of you may wonder what this has to do with local investors?

South Africa forms part of this index and is currently in 6th place weight-wise next to China, South Korea, Taiwan, India and Brazil.

This graph also shows how we suffered along with other emerging markets in 2018 and it may be reasonable to expect that if other emerging markets have a better year, South Africa may also have a better year. 

Schalk Graph 2


Graph 2: MSCI Emerging Market Index relative to MSCI All World Index 

(Source: Thomson Reuters & Schalk Louw)

3. Analysts’ expected 12-month price consensus forecasts predict a stronger SA market

I have referred to consensus forecasts in many of my reports, but what exactly is it? 

Each analyst follows his/her own sifting process in terms of research into companies. 

This research is then combined with the countless other analyst reports and expressed as a consensus. 

When we look at Thomson Reuters’ expected 12-month consensus price forecasts and adjust them according to the weight of the FTSE/JSE Top40 Index, you will see that IF they are correct in their predictions, the index should be trading 24% higher than current levels (as at 14 January 2019) in 12 months’ time. 

I need to make two things very clear, though:

Firstly, consensus forecasts are definitely not always 100% correct, but it does give us a good indication of the general views of investment experts.

Secondly, it should be noted that these forecasts have already been lowered in the past 30 days. It was only lowered by 1.4 percentage points, however, with 25 share price forecasts on the FTSE/JSE Top40 Index lowered, while 19 were increased.  

Schalk Graph 3


Graph 3: Consensus forecasts for FTSE/JSE Top40 Index 

(Source: Thomson Reuters & Schalk Louw)

I am well aware of the prevailing global market uncertainty out there. 

Throw a local political election into the mix and we will most likely be left with a predominantly volatile market for a while longer. 

But the fact is that more and more experts are starting to have a positive outlook on the JSE. 

Another fact is that the JSE does offer good value at current levels. 

I still feel that individuals who act within their risk profiles and remain selective about their purchases are most probably buying good value right now

Schalk Louw is a portfolio manager at PSG Wealth.

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