In the run-up to national elections, South African market and economic conditions continued their 5-year deterioration as at the end of April 2019:
Do not be fooled by the recent rise in the JSE since it is being driven by fewer and fewer large-cap (and mostly rand-hedge) shares whilst the rest of the market is mostly trending down. This is starkly evident from the JSE advance-decline line (AD-Line) which is not posting new highs with the JSE. As long as this line is trending down, more shares are falling than rising on a daily basis and this is a bear market.
Just have a look at the table below taken from our INDICES page where we see that only 12 shares in the TOP-40 managed to eke out a gain over the last 12 months and that most of them are Rand hedges with only CPI, PSG, RMH and FSR having no offshore exposure.
Let’s reverse the table order and see the 10 worst performers over 12 months. It was brutal with traditional quality and safety picks that no investor would normally be ashamed to have in his portfolio, taking a beating:
Foreigners continue to take flight with R35bn is net foreign selling of JSE shares and government bonds since January 2019. Since the peak we reached in foreign inflows in September 2013, nearly R450Bn of SA assets had been dumped by foreigners seeking to flee our investment and government-backed fixed interest landscape.
The percentage of the 400 JSE listed shares that managed to increase dividends or earnings also collapsed, making a brief recovery in the reporting season of April-Nov 2018 but collapsing again after that. So the finances of the companies in our stock market are in poor shape.
Market sentiment and conditions as expressed by the ABSA PMI which has a bigger effect on future JSE returns than most would think, also continues to slide. When confidence is in the toilet, investment stops and the economy takes a toll.
Interest rates are not helping either. The single most powerful contributor to JSE returns is the interest rate cycle. The SA Reserve Bank is in a hiking (tightening) cycle and likely to remain so to keep our carry trade attractive and prop up the weak Rand. Rising interest rates are good for nobody, certainly not the shares on the JSE as the history since 1960 shows below:
One doesn’t have to examine these indicators to see the problems - they manifest on other fronts too. Our unemployment rate keeps increasing, our poverty metrics keep getting worse, South African households saw R449.8bn of the real value of their net wealth wiped out between the fourth quarter of 2017 and the fourth quarter of 2018, our failing SOE’s threaten to bankrupt the state, private sector credit extention is in the toilet, our revenue collection service is a shadow of its former self and we are officially one of the persistently worst, performing economies in the world.
So there is nothing good to say about our current conditions. About the only investors doing well in the market are the Rand hedgers and the astute stock pickers and buy-on-the-dippers. Finding safety in local broad indices (unless they are offshore themed) is not an option for the layman whilst current conditions persist. If you don’t believe this, look at our unique JSE-listed ETF performance page and select 12-months to see how the local ETF performance landscape is totally dominated by offshore themes:
One certainly hopes that the worst is over, and things start to improve after the elections. As the saying goes, things always look the darkest before you see the light at the end of the tunnel. In the meantime, it might be prudent to quiz your own strategy or that of your investment manager to ensure you are hedged against things getting worse (or better!) You are always welcome to consult Sharenet’s investments and dealing desk for ideas using the OPTIONAL section in the form below or contacting us on 021 700 4800.
Dwaine van Vuuren
RecessionAlert, Sharenet Analytics
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and Sharenet Analytics (SA based) into subscription services used by thousands of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.