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Johannesburg - Local shares have rallied too hard too quickly and the market is overvalued, analysts said.
The JSE's All-share index has rebounded from 18 000 points in March 2009 to about 27 200 points at present.
The massive rally was driven by international investors who piled into emerging markets.
"The thing that's driving markets right now is extreme global liquidity," said Imara Asset Management CEO Dave Eliot.
But analysts don't think the good times will last much longer, particularly as companies' profits start to disappoint.
"We're concerned that earnings growth may not materialise," said Khaya Gobodo, head of equities at Afena Capital.
Abdul Davids, head of research at Kagiso Asset Management, thinks the catalyst for a retracement will be the earnings season starting in February 2010.
Weak earnings will push already expensive-looking price earnings ratios to unsustainable levels, which will result in selling.
The JSE price earnings (p/e) multiple moved from about eight times in March to 16 currently. The p/e is a popular metric used by investors to measure share price against a company's earnings. The higher the p/e number, the more expensive a share is considered.
Seeing that the average price earnings ratio for the past 49 years has been about 11.5 times, the market is clearly expensive, said Davids.
"We foresee that a lot of companies will report negative earnings growth, implying companies will cut their dividends," said Davids. This will cause the dividend yield to come down to probably just below 2%. The current dividend yield is 2.4%.
Resource companies - including Harmony, Anglo Gold and Goldfields - are expected to report negative earnings growth as the strong rand negates the effect of record high commodity prices.
While some investors are hoping that companies can counter weaker revenue numbers by cutting costs and reducing employees, this is highly unlikely, said Davids.
He does, however, still see buying opportunities in the market.
"We are finding significant value in financial stocks and the defensive industrial stocks which have not participated in this massive market rally," said Davids.
- Fin24.com