Publications
Partners
Port Elizabeth - The JSE continued to decline last week with very little good news and fragile sentiment pushing share prices down to levels not seen in recent months. But there is a silver lining to the storm clouds in the form of the European Central Bank (ECB), which announced that it will start a big programme to stimulate the EU economy.
ECB president Mario Draghi is bound to become investors’ and fund managers’ new favourite banker: Not only did he leave European interest rates at its very low levels after the ECB’s latest monetary committee meetings; he also said that the bank will start an aggressive bond buy-back strategy in Europe.
Draghi went as far as to say that the EU will buy bonds issued by most members of the EU. He will even buy back bonds that the not-so-very-good-investment-grade bonds shunned by the rest of the world.
The start of the programme to buy back bonds in Europe – injecting money into the economy by exchanging investors’ bonds for wads of newly printed euro notes – coincides with the tapering off of a similar programme in the US.
Economists in Europe have estimated that the EU will buy back bonds to the value of €1tln.
The aim of the increase in liquidity to buy consumer products and increase economic activity is good news for companies in EU and the rest of the world. It is also positive for share prices overall as a lot of the new liquidity will find its way into the share market.
JSE needs the help
The JSE could do with a bit of help right now. During the last week the gold price, international investors, local economic news and overall sentiment did little to support share prices.
Gold shares tumbled as the gold price fell to below $1 200 (R13 622.40) per ounce and Eskom warned of sharp increases in the price of electricity next year. It takes a lot of electricity to take gold miners 2km underground and hoist tons of pieces of rock 2km up. AngloGold Ashanti [JSE:ANG] fell more than 9% and Durban Deep [JSE:DRD] slumped 14% since Monday.
Mining houses felt pressure from a decline in most commodity prices and the diversification across several commodities did not seem to help much lately. Anglo American [JSE:AGL] dropped another nearly 8% and African Rainbow Minerals [JSE:ARI] shed nearly 10%.
Platinum shares were under pressure as well. AngloPlats [JSE:AMS] fell 6.3% and Northam [JSE:NHM] and Lonmin [JSE:LON] by 8%.
Industrial shares fared slightly better, meaning they declined less than the rest of the market.
Richemont [JSE:RCH] fell another 4%, despite the weak rand and the decline of the euro against the dollar. In fact, Richemont is well set to benefit from the expansionary stimulus in Europe as the euro will stay weak against the dollar – Richemomt’s production are based in Europe with sales driven by wealth in other countries.
Only a few shares ended the week higher, mostly of com panies supplying basic consumer products. Woolworths [JSE:WHL]. Pick n Pay Stores [JSE:PIK] and Spar [JSE:SPP] each added a few percent.
Massmart [JSE:MSM] gained 3.1% as investors hope that it wider offering of necessities to the middle income group will benefit earnings in lean economic times.
Food producers and hospital groups also took the change in investment sentiment better than most sectors, while property companies and property trusts are also still looking strong.
Bad economic news will limit recovery in most share prices. This week the SA Reserve Bank said that credit extension to the private sector declined in August, to 8.8% compared to 9.8% in July. This shows that consumers are less confident to borrow and spend money.
A big increase in the trade deficit points towards a weaker rand and continued pressure on the inflation rate, which will harm economic growth even further.
The week ahead
Investors could do well to wish for the best, but prepare for the worst. The bank of England holds its monetary committee meeting this week and will announce any change in interest rates towards the end of the week.
Stats SA will announce production figures by SA mines and manufacturing companies. It will hopefully show some improvement, especially the output of platinum mines. The better than expected new car sales figure last week point to improved manufacturing data too.
* After chasing money on the JSE for 15 years, Adriaan Kruger is now living a relaxed lifestyle in Wilderness and lectures economics part-time at NMMU.
* Exchange rate calculated at R14.21/€.
- Fin24.
