The year is shaping up to be an annos praeclarus (‘excellent year’) for the JSE, with share prices showing healthy gains this far. Four months into 2019, the JSE All Share Index (Alsi) is currently just below the level at which it started in January 2018, before a barrage of bad news dealt investment sentiment a hard blow that saw the market end the year at a loss of some 14% .
Since the start of 2019, the Alsi has increased from 51 264 points to 59 355, with fewer than 300 points to go to bring us back to the beginning of 2018. It is not a bad run considering that most of the uncertainties that pushed the market down last year are still unresolved. Any improvement can increase investor confidence and give share prices another quick boost.
At the beginning of the year, Citadel Wealth Management predicted that 2019 would be a story of two halves, with investors focusing on finance minister Tito Mboweni’s first budget and the election in the first half of the year and the real economic and financial issues getting more attention in the second half.
At the time, Citadel said the outcome of the election would be less important – subscribing to the general view that the ANC will remain in power with a decisive majority – than the actions government would take to stimulate the economy after the elections.
Policies need time
A strong vote of confidence in President Cyril Ramaphosa’s leadership will give him the mandate needed to implement the policies necessary to boost the economy that will see business and consumer confidence rebound. The Citadel report notes that economic growth won’t be expected to recover immediately as policies take time to deliver results. “We would probably only see the real benefits a few years down the line.”
It seems the market lived up to its role of predicting the future, and investors took advantage of the low share prices when the market dipped to a new low for the year in November. The rebound in some share prices since then is astounding.
Platinum shares performed well with Implats running at 121%, Northam at 58% and AngloPlat at 49%. Even the struggling Lonmin rewarded its courageous followers with an increase of 45%. Among communications and information shares Telkom, Naspers and Datatec performed well.
20 best and 20 worst performers over six months
|Winners||6m gain||Losers||6m loss|
Source: Compiled from JSE price data
The changes in share prices over the last six months since the low of November show that the main drag on the JSE – and, most probably, on most investors’ portfolios – was the large fall in the share and unit prices of real estate companies. No fewer than eight were among the 20 worst performers on the JSE over the period as Edcon’s surprise announcement of financial difficulties focused attention on the prospect of a somewhat overtraded property market in SA.
Good value still on offer
Current price-to-earnings (PE) ratios and earnings forecasts indicate that shares are still offering relatively good value at current prices, despite the good run. A look at the PE ratios of shares usually favoured by investors show they are mostly in line with historic levels, and with some shares – like banks and resource companies – on attractive ratings.
At current prices, the historic PE ratio for bank shares is around 11 times with Investec, Nedbank and Absa below 10 times. Standard Bank is currently on a PE of 11.4 and FirstRand on 13.9, while Capitec’s PE of nearly 30 is still reflecting its status as a growth share.
Among mining and resource stocks, Anglo American’s current share price reflects a low PE of 9.3 times and that of South32 puts it on 8.5 times. BHP Billiton and Sasol are both just above 14 times.
Industrials ‘not expensive’
Industrial shares are also not expensive, despite concerns that the SA economy is growing much more slowly than expected only a few months ago. Remgro, which can serve as a yardstick for substantial industrial companies, is currently on a PE of 13.2 times.
Forecasts published on Bloomberg indicate that analysts are still fairly positive that companies will continue to grow earnings this year, with the result that several major shares are standing on reasonable forward PE ratios. Investors can research at least 15 shares among the largest 100 companies that are currently on a forward PE of around 10 times or less.
Large capitalisation shares on low forward PE ratios
Source: Compiled from Bloomberg earnings estimates
Danie Louw, portfolio manager at Nedbank Private Wealth, cautions that the market has had a good run off a low base. “Performance during the rest of 2019 will depend largely on the reality of economic growth. We need the economy to grow for companies to grow their profit and ensure growth in share prices.
“Current predictions of GDP growth of 1.3% are not that exciting,” he adds, while also referring to the impact of economic policies after the election and to what extent this will stimulate the economy.
“Another big uncertainty that remains is the risk that Moody’s might also downgrade our credit rating,” says Louw. He is however optimistic about the prospects for share prices for the rest of the year.
The wild card remains the exchange rate. As usual, the weakening of the rand had a lot to do with the sharp recovery in share prices from last year’s lows. The fall in the rand to the current levels of between R14.40 and R14.50 per US dollar – compared to R12.25 a year ago – helped the performance of share portfolios, but also makes forecasts difficult.