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Off to a credible start to the year

Mar 14 2019 09:20
Maarten Mittner

As the JSE All Share heads toward the end of the first quarter of 2019, all things considered the local equity market had a reasonable start to the year, firming about 5% since the first trading day in January.

That is somewhat weaker than the performances of other global equity markets, but probably the best that could reasonably be expected under the circumstances, as a myriad of challenges remain after last year’s reversals.

The Dow Jones and S&P 500 have climbed 9% respectively. 

The FTSE 100 and the Nikkei have both added 5%.

But the star performer has been the Shanghai Composite, jumping 20% year-to-date and clearly pricing in a positive outcome to the present trade talks between China and the US, as well as further stimulatory measures from the Chinese authorities.

The star performers on the JSE have been mining stocks, with the Resi 10 index gaining 9%. Market giant Naspers* recovered 9% following the unbundling of MultiChoice. 

The Resi 10 was boosted by shares such as Anglo American and BHP rising 15% and 11% respectively. 

Stocks that were hammered last year generally continued their recovery mode, with British American Tobacco up 23% and Richemont 10% for the year so far.

The market also had to discount sharp reversals, including previous blue-chip Aspen, plummeting 25%, and sugar producer Tongaat Hulett falling to a 25-year low. 

Retailers continue to have a torrid time, with Mr Price retreating 14%, Woolworths 13%, and Shoprite 6%. 

Consumer stocks remain on the back foot. 

Vodacom has lost 13%, but bombed-out MTN at last seems to be in recovery mode. 

At the same time there have been some promising rebounds at MMI Holdings, and at Nedbank, where Ecobank reversed last year’s losses. 

However, despite Capitec jumping another 10% for the year, the Fin 15 index is largely unchanged.

With risks remaining elevated, the All Share put in a credible performance, navigating between populist rhetoric from the ANC, continued troubles at Eskom and indications that global growth could experience some form of reversal going forward. 

Global bourses have generally fared better, but the tide lifted the JSE over the period.

How long the Goldilocks moment – not too hot and not too cold – will continue, is uncertain as many factors come into play. 

Lower global growth is throwing a shadow over further gains. 

At the same time central banks have reacted sensibly, adopting a more dovish tone to further rate hikes. 

Much will depend on real company earnings reported for the rest of the year, which could indicate if markets are overpriced at present levels.

The US Federal Reserve has ‘paused’ with further hikes. Present lending rates at a maximum of 2.5% are at, or close to, the neutral rate, estimated to be at 2.8%. 

Fed chair Jerome Powell’s assertion that President Donald Trump cannot fire him – “the law is clear on that” – left markets confused momentarily, as they mulled if it is a good or bad thing, finally deciding to adopt a non-committal attitude. 

Powell is still attempting to recover some credibility after suffering a setback at the end of 2018 when the Fed indicated it was set to hike rates further, despite an expected slowdown in economic growth. 

For now, markets have priced in no further interest rate increases in the US this year.

Against the backdrop of subdued growth in Germany, the European Central Bank (ECB) has also seemingly put a lid on interest rate hikes for the year, sending the euro to an annual low against the dollar. 

Locally, the rand lost 50c against the dollar after President Cyril Ramaphosa reaffirmed ANC policy to do away with the Reserve Bank’s (Sarb) private shareholding. 

Although the Sarb is only one of six global central banks with private shareholders, the timing of the policy change is questionable against the backdrop of persistent calls by populist political parties, and from Cosatu, to “nationalise” the central bank.

Although Ramaphosa’s stance is clearly not “nationalisation”, it does open the door for greater government pressure on the Sarb. 

It also reduces the theoretical independence of the bank, which has adopted a marked hawkish stance on interest rates. 

Governor Lesetja Kganyago has made it clear that rates are set to remain at present elevated levels for now, and will only be reduced if inflation subsides further. 

That’s not what politicians want to hear in an election year.

Whatever the case, global factors are still expected to remain the main driver on the JSE.

The bond market continues to adopt a wait-and-see attitude amid general scepticism that central banks will be successful in preventing some form of “overkill” in the rates normalisation process. 

The US ten-year remains stuck at a yield of between 2.6% and 2.7%. 

The greatest movement since January was in German Bund yields, with the benchmark ten-year yield dropping to 0.10%, and even lower at times, as investors rushed into the German market in safe-haven trade on the ECB’s dovish stance.

Yields on the local benchmark R186 rose in tandem with the weaker rand, but soon rebounded from the 9%-level to around 8.6% at present. 

Foreign buyers have entered the local market again, but trade will remain volatile.

Prospects for global markets remain inexorably linked to central bank policies. 

Which becomes even more important as lower global GDP growth becomes increasingly likely.   

Maarten Mittner is a freelance financial journalist and a markets expert.

*finweek is a publication of Media24, a subsidiary of Naspers. 

This article originally appeared in the 21 March edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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