October turned out to be a good month for those invested in stocks, with all the stock markets that we typically invest in up by more than 5%. The single exception was the Chinese Shanghai Index, which fell by 2.6%.
Markets are currently being driven by a variety of factors:
- Against all expectations, the US economy has recovered very well and GDP has surpassed pre-Covid levels.
- Company results in the US have also recovered more quickly than most analysts expected. In most cases, the reporting period for the third quarter of 2021 topped all expectations.
- This strong profit performance on the part of US companies has contributed to the market valuation of the S&P 500 being less expensive than it was earlier this year. Nonetheless, this doesn’t mean that investors can relax over US valuation levels, given that the price-earnings of the S&P 500 remain much higher than the long-term average for this index.
- Worldwide, inflation is rising sharply due to supply chains struggling (including those concerned with microchips), while, at the same time, a sharp rise in energy costs is driving prices higher. Covid-19 has also contributed to fewer people wanting to return to work and this, in turn, has resulted in staffing shortages and higher salaries (South Africa, unfortunately, does not have too few workers). The scarcity of microchips is standing in the way of new vehicles being completed, thus contributing to a shortage of new cars.
- The question that central banks must now deal with is whether this increase in prices is likely to be temporary or not. The shock effect of the sharp rise in the oil price may be temporary, but if there is no quick resolution to the other factors that are pushing prices up, we can expect to see higher inflation which brings several dangers with it.
- Should central banks start to be concerned about the persistence of inflation, they may well decide to raise interest rates or to make monetary policy less accommodating. This could serve as the trigger that puts stock markets under pressure once more.
- The governor of the South African Reserve Bank (Sarb) has sounded a warning that the application of tighter monetary policy will result in exchange rates realigning. The outcome of this would, in all likelihood, be that emerging market currencies (including the rand) would start to weaken.
- On the face of it, the JSE seems to offer a lot of value. The question, though, is whether it might be a so-called “value trap”. We can also query just what it is that is needed to unlock the value on the JSE.
- South African exports have performed superbly over the past year and will undoubtedly contribute to a recovery in our economy. At the same time, our inflation rate has not risen much, and the Sarb can thus “afford” to keep interest rates low. However, the latest rise in fuel prices could lead to higher inflation and this might force the Sarb’s hand.
- The sharp decline in Covid-19 cases in South Africa could also contribute to the reopening or further normalisation of our economy.
- The election results are likely to result in coalitions in various municipalities, and this could cause further instability. At the same time, the country continues to struggle with poor service delivery, high crime levels, Eskom load shedding and corruption – as well as with ongoing dissatisfaction over the slow rate of prosecution of those involved in that corruption.
All these factors suggest that how your portfolio is composed and ensuring adequate diversification, are extremely important.