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Rating downgrades pose serious risk to JSE

Port Elizabeth - Anyone can be forgiven for thinking that the JSE made a mistake last week when they calculated their indices. But it is true - shares reached another record high last week, despite the fear of a recession and a pile of other bad news.

Economists seem divided on the possibility of an economic recession, according to the formal definition of two consecutive quarters in which the gross domestic product shows a decline.

The fact remains that the economy is in bad shape, whether economic growth for the three months to June comes in at a positive 0.5% or a negative 0.5%.

Every single economic indicator that was announced last week was worrisome. The SA Chamber of Commerce said that their business confidence index declined to the lowest level in 14 years, the purchasing managers’ index as calculated by Kagiso dropped to the lowest level since 2009 [just after the international economic crisis] and during the previous week we saw very high inflationary pressures in the producers price index.

In addition, Naamsa announced that new car sales declined by nearly 10% in May compared to a year ago as not even a flood of new vehicle releases could lure buyers into showrooms and tempt them to sign five-year credit agreements.

Neither does company management tout a lot of good news. Sasol [JSE:SOL] just got slammed with a R534m fine by the competition authorities which found that its local pricing structure for certain plastic chemicals is unfair to local buyers.

A change in the pricing structure throughout Sasol - and perhaps at other big companies – will affect profitability and dividend flow.

The strike at platinum mines is still continuing with little indication of a solution. Latest estimates show that platinum producers lost more than R20bn in revenue and SA lost R20bn worth of foreign exchange, and the multiplier effect of R9bn in lost wages and a couple of billion in lost taxes circulating through the economy.

The week ahead

In the week ahead, StatisticsSA will announce mining output and manufacturing output for April, numbers which are bound to let economists revisit their views on the state of the economy. Rand Merchant Bank and the Bureau for Economic Research will announce the latest business confidence index, which will probably show the same trend as similar indices announced last week.

Rating agencies Finch and Standard & Poor are scheduled to release new credit ratings for SA. They are bound to mention their take on the economy and the effect of the platinum strike in line with that of Moody’s a few weeks ago.

A hefty downgrade will pose risks for the bond and stock market as SA can scarcely afford any significant capital outflow at the moment.

Given the current economic reality, it is becoming increasingly difficult to explain the repeated new record highs on the JSE and the current high valuations of shares. It is striking that only small increases in the shares prices of a few big companies are driving the market higher.

Last week, BHP Billiton [JSE:BIL] increased by less than 1% and Anglo American [JSE:AGL] ended the week flat. SAB Miller [JSE:SAB] declined 2.5% and Bidvest fell 2.8%. Angloplats [JSE:AMS] rose 4.2 % and Steinhoff International [JSE:SHF] increased 3.3%. Richemont [JSE:RCH] dropped 2% compared to a week ago and British American Tobacco SA [JSE: BTI] fell 2%.

Large index contributor Naspers [JSE: NPN] and Tiger Brands [JSE:TBS] increased by less than a percent each. Banking shares helped the index along with increases of nearly 4% in the share prices of most of the larger banks.

African Bank [JSE:ABL] still saw only one-way traffic on the market screens as the share dropped another 13% last week to only R7.30 after its recent bad results. Sanlam [JSE:SLM] announced that earnings increased by 23% as a strong share market boosted portfolio values and their relevant management fees on the bigger portfolios.

The week ahead, it seems, is going to be very interesting.

 - Fin24

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