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Johannesburg - The outlook for equity markets, both local and foreign is as clouded as it has been for a long time, Christopher Gilmour, investment analyst at Absa Asset Management Private Clients said on Wednesday.
“Markets are at or near all-time highs while the fundamental earnings outlook in virtually all of them is tepid at best.”
“A philosophically corrupt relationship currently exists between the level of equity markets and their fundamental drivers,” said Gilmour.
He said only the sheer volume of relatively cheap money is keeping markets at these elevated levels and while that persists, markets are likely to remain high, even if economic fundamentals remain as poor as they are now.
While US corporate earnings growth, which had been in secular decline for at least the last two years, looks as though it has turned around there is little scope left for US corporate to slash costs, said Gilmour.
“A rapid turnaround in corporate earnings growth appears unlikely”, he added.
Locally, our market continues to be underpinned by growth in earnings and dividend growth as has traditionally been the case, but a disturbing new phenomenon is apparent, said Gilmour.
“Dividend growth has overtaken earnings growth for the first time since our time series began.
“This is shown even more clearly in the graph of dividend cover, with cover falling to levels not seen since the early 1980s.
“The logical interpretation of this is that companies have declining faith in their ability to reinvest cash in their own businesses and are, instead, returning that cash to shareholders – a vote of no confidence.”
Having said all of this, the equity market still remains the best place to be for long term returns and easily out-performs cash and bonds on a prolonged basis.
The equity market is also extremely resilient to both economic and political shocks. The All Share Index is up 10% year to date and 13% including reinvestment of dividends.
In USD terms, however, the Alsi is down 8% nominally and 6% including reinvestment of dividends.
“Our market still looks attractive to foreign investors and speculators,” said Gilmour, “with large real return still apparent in constant currency terms. But make no mistake, our equity market is expensive in historical terms (at around an 18x PE) and the earnings growth underpin that was so evident until a few months ago is not nearly as robust anymore.”
Nevertheless there is little indication that investors or speculators are losing their appetite for pushing local stocks higher.
“This situation will likely persist for as long as global interest rates remain at historically low levels”, said Gilmour.
- Fin24
“Markets are at or near all-time highs while the fundamental earnings outlook in virtually all of them is tepid at best.”
“A philosophically corrupt relationship currently exists between the level of equity markets and their fundamental drivers,” said Gilmour.
He said only the sheer volume of relatively cheap money is keeping markets at these elevated levels and while that persists, markets are likely to remain high, even if economic fundamentals remain as poor as they are now.
While US corporate earnings growth, which had been in secular decline for at least the last two years, looks as though it has turned around there is little scope left for US corporate to slash costs, said Gilmour.
“A rapid turnaround in corporate earnings growth appears unlikely”, he added.
Locally, our market continues to be underpinned by growth in earnings and dividend growth as has traditionally been the case, but a disturbing new phenomenon is apparent, said Gilmour.
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“Dividend growth has overtaken earnings growth for the first time since our time series began.
“This is shown even more clearly in the graph of dividend cover, with cover falling to levels not seen since the early 1980s.
“The logical interpretation of this is that companies have declining faith in their ability to reinvest cash in their own businesses and are, instead, returning that cash to shareholders – a vote of no confidence.”
Having said all of this, the equity market still remains the best place to be for long term returns and easily out-performs cash and bonds on a prolonged basis.
The equity market is also extremely resilient to both economic and political shocks. The All Share Index is up 10% year to date and 13% including reinvestment of dividends.
In USD terms, however, the Alsi is down 8% nominally and 6% including reinvestment of dividends.
“Our market still looks attractive to foreign investors and speculators,” said Gilmour, “with large real return still apparent in constant currency terms. But make no mistake, our equity market is expensive in historical terms (at around an 18x PE) and the earnings growth underpin that was so evident until a few months ago is not nearly as robust anymore.”
Nevertheless there is little indication that investors or speculators are losing their appetite for pushing local stocks higher.
“This situation will likely persist for as long as global interest rates remain at historically low levels”, said Gilmour.
- Fin24
