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The year 2018 has presented a bumpy year for the JSE. The All-Share Index shed 15.18% in the year to end November cementing the worst five-year period for the JSE in 50 years.
This is according to Overberg Asset Management (OAM) in its weekly overview of the economic landscape in South Africa.
It noted that even the stalwart blue-chips of the market, which have traditionally been reliable in preserving capital, have suffered heavy losses.
However, it said that there is hope of an upturn for the JSE. "From these depressed levels it is likely the JSE will bottom-out and turn gradually upwards in the new year, with confidence likely to return after the National Elections."
"The post-election period, characterised by bolder structural economic reforms should usher-in a new market cycle," said OAM.
South Africa economic review
• The current account deficit widened slightly from 3.4% to 3.5% of GDP in the third quarter (Q3), due mainly to a decline in the trade surplus. A narrower deficit on the services and income account was offset by a decline in the trade surplus. The trade surplus declined from R38bn or 0.8% of GDP in Q2 to R14bn or 0.3% of GDP in Q3.
However, trade activity picked-up with both merchandise exports and imports rising. From Q2 to Q3, export growth increased from 6.6% quarter-on-quarter to 10.6%, while import growth increased from 0.8% to 12.7%, indicative of a general recovery in economic momentum. The current account deficit should subside over coming quarters, with the falling oil price and the strengthening rand helping to keep the import bill in check.
• Real GDP grew in the third quarter (Q3) by 2.2% quarter-on-quarter annualised, recovering from the upwardly revised contraction of 0.4% in Q2 and 2.6% contraction in Q1. Among the main contributors, manufacturing, agriculture, domestic trade, transport and communication, and finance, grew in Q3 by 7.5%, 6.5%, 3.2%, 5.7% and 2.3%, respectively. The detractors were mining, construction, and power and water, which shrank by 8.8%, 2.7% and 0.9%. Gross domestic expenditure expanded by 3.2% on the quarter, reversing the 2.9% decline in Q2.
The main contributors were a 12.7% increase in inventories, 2.2% increase in government expenditure and 1.6% rise in household expenditure. However, fixed investment shrank by an alarming 5.1%, capping three straight quarters of contraction after declining 0.7% in Q2 and 3.4% in Q1. The Q3 GDP data, while lifting the country out of recession, is little more than a technical recovery from the low base recorded in the first half of the year. A more sustainable improvement will require bold structural reform, investment spending and meaningful jobs growth.
• South Africa continued to haemorrhage foreign capital from its bond and equity markets in the week ended 7th December, with foreigners selling a net R7.83bn in equities and a net R0.57bn in bonds. In the year-to-date foreign investors have sold a net R49.86bn in equities and a net R64.30bn in bonds, a staggering total net outflow of R114.16bn.
While the investment outflows can be partly blamed on country-specific concerns surrounding land expropriation legislation and depressed domestic economic growth prospects, the bulk of the outflows are attributable to generalised global aversion to emerging market risk.
Bottom line
• It has been an Annus Horribilis for JSE investors. The JSE All Share Index shed 15.18% in the year to end November cementing the worst five-year period for the JSE in 50 years.
• Even the stalwart blue-chips of the market, which have traditionally been so reliable in preserving capital, have suffered heavy losses. The JSE is littered with the carcasses of fallen angels.
Shares in Mediclinic, Tiger Brands, British American Tobacco and Aspen all fell by more than 40% in the year to end November, MTN by 33%, and Naspers, Richemont and Anheuser-Busch InBev by 17%, 19% and 22%. Around 65% of shares on the JSE have dropped by over 20%, meeting the definition of being in a “bear market”.
• The anaemic state of the equity market is not sustainable. Unfortunately, small retail investors are starting to throw in the towel, which is typical of a market bottom. This group of investors tends to buy high and sell low. They buy when the market is euphoric, not realising that investing then presents the highest risk. They sell when markets are despondent, not realising that this point represents the highest potential for capital returns.
• When the supermarkets have sales, people flock to shops. However, when the JSE has a sale, people run scared. Benjamin Graham, widely known as the “father of value investing” wisely said that: “Investors should purchase stocks like they purchase groceries, not like they purchase perfume.” They should buy at cheap prices when markets are weak, not at high prices when markets are expensive.
• The shares that the scared retail investors are selling are being snapped-up by willing buyers, who have been waiting patiently for this opportunity. These are the smart investors. Warren Buffett, one of the most successful investors of all time, describes the stock market as a “device for transferring money from the impatient to the patient.”
• A good indication that we are very close to the bottom in the stock market cycle is the aggressive buying by the highly regarded turnaround specialist, Value Capital Partners. As the name suggests, the company has a value-based approach to investing, buying shares when they are on “sale” not when they are expensive. They obviously see a bargain in PPC Cement and Grand Parade Investments, purchasing shares in both companies to the value of R22m and R115m, respectively, over the past three weeks.
• From these depressed levels it is likely the JSE will bottom-out and turn gradually upwards in the new year, with confidence likely to return after the National Elections. The post-election period, characterised by bolder structural economic reforms should usher-in a new market cycle.
• Depression will make way for hope, then relief, followed by optimism, excitement and eventually euphoria. It is a good time to be investing. 2019 may well be an Annus Mirabilis, a Wonderful Year.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable, but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
