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Port Elizabeth - The announcement that retail sales were higher than expected during May has pushed the JSE to yet another new record high on Wednesday when retail and consumer shares increased sharply.
The retail sector was also supported by the announcement that Australian authorities have approved the acquisition of the David Jones retail chain by Woolworths [JSE:WHL].
But shares took a bit of beating on Thursday and Friday. The most important fundamental reason was the increase in interest rates which impact on valuations directly.
Even the small increase of 0.25 basis points in the repo rate and resultant increases in banks’ lending rates reduces consumers’ ability to spend and by implications companies’ revenue and profit.
The higher interest rate also increases costs as most companies have debt and, most importantly, a higher interest rate means lower share values when analysts run their financial models to work out the present value of future (lower) earnings and cash flows.
SA Reserve Bank (Sarb) governor Gill Marcus’ comments at announcement of the interest rate decision are bound to weigh on the market even more in coming weeks.
Not only did she caution once again that SA has entered a cycle of increasing interest rates, but she also announced that her team of economists lowered their growth outlook for 2014.
The Sarb now expects that the economy will only expand by some 1.7% this year, compared to the forecasts of 2.1% at the beginning of the year.
Even the 1.7% prediction came with a disclaimer: The bank made the assumption that the strike by workers in the metal and manufacturing industry will be over shortly.
Marcus warned that the strike can harm the economy worse than the long strike in the platinum mining industry.
The other big reason for more caution when looking at buying rather expensive shares is that foreign investors might start looking at safer investments than shares in emerging companies as a result of higher political tensions between Russia and the rest of the world.
World leaders all condemned the escalating fighting in the Ukriane and that a passenger plane was shot down with a sophisticated Russian ground-to-air missile.
The week ahead
Other news that weighed on the market included the profit warning by Anglo American Platinum [JSE:AMS] that earnings for the 6 months to June will be some 96% lower than last year.
The results are due on Monday and will probably include further warnings about the second half year. Holding company Anglo American [JSE:AGL] will announce its results on Friday, with the possibility of the re-valuation of a few assets.
Another large platinum mine which suffered from the long strike, Lonmin [JSE:LON], will publish a trading update for the period to end June this week.
It will make for dreadful reading as Lonmin has high debt and interests costs while the company earned very little income.
Kumba Iron Ore [JSE:KIO] will also announce its results this week, for which management had already issued a profit warning last week.
BHP Billiton [JSE:BIL], Vodacom [JSE:VDM] and SAB Miller [JSE:SAB] will also issue trading updates during the week. Expect good news from Billiton and Vodacom and average from SAB.
StatsSA will announce consumer inflation for June on Wednesday, which is bound to be far above the Sarb’s inflation target once again.
A difficult time is ahead for the market, especially if international markets continue their weaker trend after the rally since the beginning of the year.
*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.
The retail sector was also supported by the announcement that Australian authorities have approved the acquisition of the David Jones retail chain by Woolworths [JSE:WHL].
But shares took a bit of beating on Thursday and Friday. The most important fundamental reason was the increase in interest rates which impact on valuations directly.
Even the small increase of 0.25 basis points in the repo rate and resultant increases in banks’ lending rates reduces consumers’ ability to spend and by implications companies’ revenue and profit.
The higher interest rate also increases costs as most companies have debt and, most importantly, a higher interest rate means lower share values when analysts run their financial models to work out the present value of future (lower) earnings and cash flows.
SA Reserve Bank (Sarb) governor Gill Marcus’ comments at announcement of the interest rate decision are bound to weigh on the market even more in coming weeks.
Not only did she caution once again that SA has entered a cycle of increasing interest rates, but she also announced that her team of economists lowered their growth outlook for 2014.
The Sarb now expects that the economy will only expand by some 1.7% this year, compared to the forecasts of 2.1% at the beginning of the year.
Even the 1.7% prediction came with a disclaimer: The bank made the assumption that the strike by workers in the metal and manufacturing industry will be over shortly.
Marcus warned that the strike can harm the economy worse than the long strike in the platinum mining industry.
The other big reason for more caution when looking at buying rather expensive shares is that foreign investors might start looking at safer investments than shares in emerging companies as a result of higher political tensions between Russia and the rest of the world.
World leaders all condemned the escalating fighting in the Ukriane and that a passenger plane was shot down with a sophisticated Russian ground-to-air missile.
The week ahead
Other news that weighed on the market included the profit warning by Anglo American Platinum [JSE:AMS] that earnings for the 6 months to June will be some 96% lower than last year.
The results are due on Monday and will probably include further warnings about the second half year. Holding company Anglo American [JSE:AGL] will announce its results on Friday, with the possibility of the re-valuation of a few assets.
Another large platinum mine which suffered from the long strike, Lonmin [JSE:LON], will publish a trading update for the period to end June this week.
It will make for dreadful reading as Lonmin has high debt and interests costs while the company earned very little income.
Kumba Iron Ore [JSE:KIO] will also announce its results this week, for which management had already issued a profit warning last week.
BHP Billiton [JSE:BIL], Vodacom [JSE:VDM] and SAB Miller [JSE:SAB] will also issue trading updates during the week. Expect good news from Billiton and Vodacom and average from SAB.
StatsSA will announce consumer inflation for June on Wednesday, which is bound to be far above the Sarb’s inflation target once again.
A difficult time is ahead for the market, especially if international markets continue their weaker trend after the rally since the beginning of the year.
*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.
