Cape Town - With the Johannesburg Stock Exchange (JSE) heading back to its all-time high of 55 188 it reached in April 2015, it would seem that the market correction that followed after the Chinese decided to devalue their currency in August 2015 is nearly eradicated, writes Kirk Swart of Overberg Asset Management.
However, investors should be cautious to start buying across the board.
Although there are pockets of value available, the market in general needs to be approached with some caution.
Here are five points that investors should consider before rushing back into the market:
1. The market is partially driven by rand weakness
With a lot of companies earning a big portion of their revenue from overseas markets, the weak rand will continue to drive earnings (in ZAR terms). Investors must remain cautious and avoid companies whose earnings growth is driven by the weak exchange rate with no earnings growth in real terms.
2. South African GDP growth in 2015/16 is projected at 1.5%
In Finance Minister Nhlanhla Nene's recent Medium Term Budget Policy Statement, he revealed that South Africa's 2015/16 gross domestic product (GDP) growth rate is projected at 1.5%. With the economic growth rate as low as this, companies will feel some pressure on their income statements as revenue margins might shrink.
3. The market is very volatile
This year has seen a lot of volatility, which is a sign that investors are unsure about the direction of the market. The volatility can be measured by the JSE Volatility index, which has increased to just short of 24 points in September 2015.
4. High valuations
With the JSE trading at a trailing price to earnings multiple of 19.2, almost 1.4 times its historical average, one would expect to be in an increasing earnings environment. With growth in 2015/16 projected at 1.5%, a 19.2 price earnings multiple seems stretched.
5. The US FED interest rate hike is around the corner
The market pullback in August has caused the US Federal Reserve to postpone their interest rate increase. With US GDP growth recovering strongly and core inflation at 1.9%, expect the rate hike to be sooner rather than later.
Historically, a rising interest rate environment has caused equity markets to slow down.
* Kirk Swart is an analyst at Overberg Asset Management (OAM), an Authorised Financial Services Provider (No. 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.
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