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Keep faith in the JSE: Absa

Johannesburg - Absa Asset Management (Abam) Private Clients said value can still be found in local equities on the JSE, despite its strong performance in 2010.

The local bourse was recognised as one of the world's best-performing equity markets in US dollar terms in 2010 and faces a barrage of earnings reports in February and March, which have the potential to affect investor sentiment for months to come, Abam warned.

Craig Pheiffer, general manager for investments at Abam Private Clients, said: "With an appreciating rand last year, offshore investments performed poorly. However, the weakening of the currency over January showed just why offshore investments or offshore currency exposure shouldn't be ignored."

He said local equities retained a central role in a well-balanced portfolio, and that value can still be found for those looking for long-term capital growth.

Abam noted that despite the market decline of 2% in January, the historical price to earnings (PE) ratio of the FTSE/JSE All-share index stubbornly remained at about 17 - which was historically close to the top end of JSE share valuations.

"The crunch comes later in February when major JSE players like Anglo American and BHP Billiton [JSE:BIL] report their earnings," said Pheiffer.

"At the moment, analysts are working with earnings estimates. In a few weeks, their calculations will be based on actuals. Higher earnings will have a material impact on historical PEs in a number of recovering stocks and sectors. One year forward, PEs will also decline and investors may have a better picture of value," he said.

An increase on the earnings side of the PE ratio has the effect of bringing down PE multiples.

"If multiples for the likes of Anglo and Billiton stay at 17 or 18, some may continue to view those shares as expensive. But a fall closer to 12 or 13 would tend to encourage investors to stay in or recommit to those counters.

"Our view is that value is still to be found in the JSE, given proper sector and stock selection. However, we acknowledge that, with the strong market gains in 2009 and 2010, value identification has become more of a challenge," he said.

The JSE has proved a good investment over the past two years. In 2009, the All-share index achieved a total return of 32%, followed by 19% in 2010 for a compound annual market return of 25%, Abam said.

Last year, it outperformed emerging markets such as China and Brazil in dollar terms as the strong rand bolstered the JSE's performance.

However, since the start of the new year the unit has weakened against the dollar, euro and sterling.

"Currency factors and international influence on a highly liquid emerging market like the JSE are obviously important," Pheiffer said.

"Our overall message to clients is to stay balanced and don't turn your back on the JSE just yet," he said.


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