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Investors have given up on the JSE

Does that mean it’s time to get in?
One could argue that the time to be greedy is ‘while confidence is so poor and everyone is so fearful’. Image: Moneyweb

To the end of September this year, just six companies in the FTSE/JSE Top 40 had made any gains in 2018. Five of those are resource counters, responding to a single theme. The sixth is Investec, which has gone up on the back of the announcement that it will be unbundling its asset management business.

Overall, that makes for a pretty dismal market, and it doesn’t get any better if one looks more broadly. According to analysis by Denker Capital, almost 40% of stocks in the FTSE/JSE All Share Index (Alsi) are currently trading at prices below where they were five years ago.

Source: Denker Capital

If you adjust for inflation, that number goes up to over 60%. In other words, nearly two thirds of the market has gone backwards in the last five years.

Source: Denker Capital

“There’s no doubt that the cumulative effect of the Zuma years on the economy is being felt in asset prices,” says Denker Capital’s Ricco Friedrich, manager of the SIM Value Fund. “There was a bit of a reprieve in January and February, but in hindsight it’s easy to see that the market ran away from itself and those valuations were not justified at the time.”

Friedrich points out that since February the Alsi has sold off over 30% in US dollar terms, and this persistent poor performance has now become the most dominant theme in investment discussions. As 27four Investment Managers stated in a recent note:

“This ultra-low return environment … coupled with a combination of domestic factors and the increased regulatory allowance for offshore investments, has provided the perfect storm for local investors to become increasingly – and perhaps excessively – exuberant in allocations to offshore asset classes.”

Doom and gloom

Many people seem to have given up on the JSE. This has only been emphasised by the weakness in the South African economy and local uncertainty created by issues like expropriation of land without compensation. Listed companies have been struggling to produce decent results.

“You add all of those factors together and you end up with a market where it is now,” says Delphine Govender, chief investment officer at Perpetua Investment Managers. “Any space I’ve been in lately, investors are incredibly bearish. There is so much doom and gloom that everybody is trying to work out if they should be emigrating, or, if not, how much of their money should be emigrating.”

However, in a scenario where the consensus is that the local market has no prospects, contrarian investors see something entirely different.

“We have this double whammy of a tough economy on the back of the lost decade, coupled with a very aggressive emerging market sell-off, and the result is very cheap shares on the JSE,” says Shaun le Roux, the manager of the PSG Equity Fund. “What we are seeing is a broad swathe of stocks that are trading at bear market valuations on earnings levels that have been struck in very tough economic conditions. We conclude that even if economic conditions stay tough, shareholder returns from a lot of these neglected stocks will be good.”

As Govender points out, given how much prices have come down, there is more value across the market than she has seen for over half a decade.

“The projected return on our portfolio is the highest today it has been at any point in the last six years,” she says. “And this is a fundamentally-driven return, coming from dividends and earnings.”

That doesn’t mean that she’s calling the bottom of the market. On the contrary, she believes it is possible that prices could still go lower. However, there is a huge amount of bad news that is now priced in.

“Market prices now are discounting very low road scenarios for what the economy has to deliver for these companies to do well,” Govender argues. “All you need is for the reality to be less bad than what is being priced in. You don’t have to price in a high road.”

Le Roux agrees: “Essentially we are getting the option that the SA economy grows for free,” he points out. “If it were to grow, we would expect returns to be very good, given that some companies are showing double-digit free cash flow yields, which are fairly rare in the South African context. And those are cash flows that have been made in tough times.”

Time to be greedy

As Govender notes, some of the companies that are now attractively priced would have been considered high quality investment options fairly recently.

“If I had built a portfolio of Woolworths, Tiger Brands, Aspen, and Mediclinic three years ago, you would have said that’s a great quality portfolio,” she says. “Now their share prices have more than halved and those shares have become deep value.”

While Friedrich agrees that there may be opportunities for stock pickers on the JSE, he is more cautious about being too optimistic about the overall market.

“If I look at the forward price-to-earnings multiple, we are at the lowest levels since 2012,” he says. “But when I look at the earnings growth numbers factored in, I would argue that the market is being way too optimistic.”

While it is not his core view that there will be a big market sell-off, it remains possible given numerous risks in the global environment such as high valuations in the US, rising global interest rates and the trade tensions between the US and China.

“One has to bear in mind that valuations could easily fall another 30% and ask the question, what are the circumstances that could contribute to that kind of de-rating,” Friedrich argues. “There is no shortage of things that could contribute to that.”

For Le Roux, however, the time to be greedy is “while confidence is so poor and everyone is so fearful”.

“To me, it does feel quite similar to the early 2000s, where we had been through a rand crisis – people had given up on local equities, and assumed that the economy was going to be in the doldrums forever,” he says. “The climate right now doesn’t feel completely dissimilar.”

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Interestingly there is an other article today on Moneyweb “How the upcoming US midterm elections will impact your investment portfolio” which implies that one can expect a major gain on the US stock market after the midterm election. If so, why would anybody who still has not used up all their foreign allocation invest on the JSE instead of the US markets?

Well some of the reasons include the absurd such as: local is better, Magnus doesn’t know what he is talking about or the Rand will strengthen. However, in my view, one of the biggest reasons is conflict of interest with local asset managers and investment advisors. Well the proof the pudding as they say…

How much worse can it get?

I have never heard so much good news for the economy in one week.

If the JSE drops I will buy some more bargains.

Seems that the article’s timing was 100%, time to get in.

Too much good news to ignore and more coming.

Value plays.

The biggest gains come when you buy when, and where, there is blood in the water and a lot of negative sentiment.
Like SA.
Of course it is a gamble, because as japan showed us a stock market can dive and take decades to recover, it it ever does.

But objectively SA is a value play right now. Value investing is contrarian and uneasy by nature.
Not for everyone to be sure.

Let’s not, and say we did.

The cadres can have the JSE, for all I care.

The analysis here is lacking..

Small data sets on specific to bull market: “forward price-to-earnings multiple, we are at the lowest levels since 2012,” Denker. Show us where we are on a 10-30 year basis.

Subjective feelings: “There is so much doom and gloom” Govender. Show us the doom in the numbers instead..

Commentators should mention their net equity exposure instead of opinions.

During most bear markets in South African, the JSE can fall up to or > 50% in USD as the currency weakens rapidly and stocks fall with risk off.

If you looking to invest, dip toes in the water now. If you waiting for real bargains, there are still more to come when next bear market reaches it’s peak.

In my opinion, the only other investment opportunities apart from a share portfolio and cash( depending on interest rates) are Property,Gold, Bitcoin, artwork,-none of which currently appear to be safer alternatives. So maybe do what Warren Buffett has always suggested and that is to buy when the markets run scared!

You lost me at Bitcoin

No, investors have given up on ZA. Who cares about <1% of the global economy and getting smaller?

There is a difference between the economy and a stock market.

One is real, the other is a collection of collective perception about that economy.

Interestingly the jse stock exchange is far less connected to th local economy than many people acknowledge.
A large number of companies are moving past 50 percent of their total earnings coming from a very global presence.

We may be a bit harsh on the JSE – The performance of the MSCI Europe Index hasn’t been any better over the last 4 years. It is basically only the USA markets that offered growth. This growth is/was driven by QE. The rout on the JSE is delayed effect of the financial crisis a decade ago. We need inflation and growth to pull us out of this rout, and there is nothing we can do the create this growth. The growth will have to come from the USA, Europe and China. Chinese growth is in decline, Europe is stagnant and the USA markets are in correction mode.

If investors give up on the JSE, where in the world do they go?

“If investors give up on the JSE, where in the world do they go?”

The bottle?

hehehe – yes maybe…but AB InBev is also in free fall. Maybe the market for the newly legalized green stuff benefits from the rout on the JSE.

@beachcomber. “The bottle?”

Okay, so DISTELL Shares sounds like…hic…a sure buy then?…hic….


Not the most opportune time to consider to invest in the USA – prices past all time high’s, entering market correction mode and government is struggling with irresponsible high deficits. Rand not very strong against the dollar currently. China and Asia already in correction mode and slowing on growth prospects for the bear future. Europe and Germany especially entering unsupported market conditions with quantitative easing (huge subsidization) coming to an abrupt end whilst sitting with child support hindrance to Italy, etc. UK is struggling with Brexit and with huge government deficits. Emerging and BRICK countries has it own political and self-destructive limitations with India as the only dim light shining.

So what is there left to consider to invest in? Value propositions buying at bargain prices in the hope that these investment assets will recover and grow again such as a few SA counters? Fixed deposits with banks? Property Reits with decent yields? Gold? Japan? Australia?

Or maybe I will just buy lots of cases of good quality whisky, store it with the distillers at a small fee and on-sell it to retailers 3 to 5 years from now. At least the price growth of good whisky is note worthy. Nothing exiting presently.

Does anyone have any money left to buy now?

Currently, I have roughly 67% on the JSE and 33% in the US. But will look to diversify more overseas. The JSE is doing poorly in recent years. I’ll still buy “penny stocks” locally if I see a good deal, but otherwise, no.

In short, JSE is dead to me; looking abroad.

the JSE is like a “dead horse”, disinvest A.S.A.P.

Until such time RSA is managed on economical principles and NOT politics, the economy will keep shrinking and the JSE will weaken. Good-bye JSE

Hmm see i dont agree with this statement.

The jse companies themselves are looking offshore and have been shifting their attention and capital abroad.
Its actually one of the easiest ways to get offshore exposure for any south african — our companies have to look offshore for their own survival.
But not everyone gets it right so it will require selective stockpocking.

Anybody with a hypothesis about the Chinese connection in the global equity problems of the last few months. Wouldn’t they be putting a spanner in the works before the American mid-term elections to undermine President Trump. Hopefully one could see a rebound after the American mid-terms then, in the likes of Naspers and companies linked to China. (Perhaps those regulatory rulings will cease to impede the Tencent gaming division).

End of comments.





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