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Analysts predict more upside for the JSE

We’re getting closer to that time of the year when most people’s minds are filled with sun, sea and sand.
 
The less pleasant side of a sea vacation, however, is rip currents.

Anyone who has had the unfortunate experience of crossing paths with one of these monsters will know that it has to be one of the most terrifying and frustrating experiences known to man. 

Your every instinct will prompt you to swim back to shore, only to find yourself being drawn back into sea even further. 

The key to your survival when caught in these currents, strangely enough, lies in the fact that you need to either conserve energy and float on your back with the current, or swim sideways parallel with the shoreline until you can feel the current weakening, giving you the opportunity to swim to shore safely. 

These currents provide the perfect example to explain the current situation in our local stock market. 

In the same way that your instincts will prompt you to swim against a rip current to shore, human instinct will always prompt us to try and determine either the peak or the bottom of any market, and more specifically, individual shares. 

In reality, this is exactly where many investors get a few extra self-inflicted grey hairs.
 
After the FTSE/JSE All Share Index (JSE) declined by more than 29% for the 12 months ending 30 April 2003, the “swim against the current”-mentality clearly showed when the JSE managed to grow by nearly 43% in the following 12 months (up to 30 April 2004).

It feels like only yesterday when the press was filled with news on how the market “rallied too much” and how cash has suddenly “become king.” 

What happened after that, was that the JSE managed to grow by a further 25% in the 12 following months. Three years later (30 April 2007), the market was up nearly 200%.
 
That said, the last thing I want to do is to insinuate that our current local market environment is anywhere close to what it was in 2004. 

But I do want to point out that investors should be careful when swim against the market rip current. 

At resent levels of around 57 600 (as at 10 October 2017), the JSE is already up by 17% for 2017 and uneasiness is starting to set in. 

Is this the peak? What are the experts saying?

Before I answer this question, I would like to explain an investment term called the bottom-up approach. When investors follow a bottom-up approach, they focus on the analysis of individual shares and not so much on the market as a whole. 

When looking at analysts’ consensus forecasts on individual shares, for example, we will be able to get an indication of how positive or negative their outlook is on each individual share. 

When placing their findings relative to something like the FTSE/JSE All Share Index, we can get an idea of the expected growth for the market. 

After following a bottom-up approach on each individual listed share on the JSE and calculating the one-year expected future price on each of these shares, it was quite interesting to see that analysts remain moderately optimistic about local shares, despite the fact that the index is already up by 17% in the year to date. 

At current price levels, they still expect 10% growth in the index over the next 12 months. On a sectoral basis, they feel that the IT sector will contribute the most, with an expected 40% growth, while the Consumer Discretionary sector is expected to take second place with 19% expected growth over the next 12 months. 

They are least excited about the resources sector. 

It is important to remember that although they may be experts in their fields, these analysts still cannot provide any guarantees in terms of future growth, profits or pricing. 

Remain calm when approaching the noise and “currents” surrounding shares at the moment. It remains a higher-risk investment than other asset classes such as bonds and the money market, but those who are able to demonstrate patience over the long term can definitely reap the rewards.  

Schalk Louw is a portfolio manager at PSG Wealth.

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