JSE downturn is widespread

The downturn on the JSE is quite widespread, as shown by 55% of the top 100 shares, by market cap, now below their 200-day exponential moving averages (EMAs), compared with 42% last month.

There is speculation over how far the JSE could fall. 

The important market analysts don’t believe we are facing a bear market, but it’s clear that the current volatility is typical of an advanced bull market that is experiencing its last (third) phase. 

Most analysts believe there are now buy opportunities, in property shares among others, where there have been some big price drops. 

Important here is the quality of the underlying property portfolios and their expected returns.

A survey among fund managers by Bank of America Merrill Lynch gives a useful indication of how they see things. 

No one is predicting an international bear market in the foreseeable future, although the possibility of a trade war triggered by President Donald Trump with America’s major trading partners could create serious problems. 

As far as local fund managers are concerned, there is general agreement that the Ramaphosa rally is over. 

While 73% believed in February that the JSE would improve in the following six months, only 30% thought so in March. 

An interesting fact is that most fund managers feel the earnings forecasts for resources companies are too low. 

Many mining companies are earning good money at present. Another result of the South African survey is that most of the fund managers – about 60% – are overweight in cash, which could of course provide good support for the JSE when the next market upturn occurs. 

That there is potential for such an upturn is shown by the fact that 50% of fund managers are positive about the market, compared with only 27% in February, confirming that price decreases tend to encourage certain buyers. 

About 80% predict that the economy will improve slightly, and 40% are overweight in shares, while only 10% are overweight in bonds.

As is shown by the list of the strongest shares, half of the top 10 are retailers, that is TFG, Mr Price, Truworths, Lewis and Massmart. 

The shares have become expensive and some fund managers predict that the retail sector could in future become a laggard. 

Apparently price-earnings multiples of up to about 30 are worrying in the midst of consumers under pressure. Sectorwise, fund managers’ top choices are chemicals, tobacco, food and drug retailers. 

The importance of the views of fund managers is shown by the fact that institutions account for 80%-90% of all transactions.

Only one bank, Standard Bank, appears among the top 10 strongest shares, although about 80% of managers are overweight in the sector. 

Naspers**, which has sold about 2% of its interest in Tencent for $9.8bn, has fallen by 29% since its peak in November last year and is now also under its 200-day EMA, the second time within a year that this has happened. 

On the previous occasion, it recovered strongly, backed by Tencent’s continued excellent performance.

Among the weakest shares, Steinhoff remains at the top. It is 91% below its EMA. There is much discussion about criminal charges against Markus Jooste and some of the other chief executives. 

Unfortunately, the National Prosecuting Authority has a poor record when it comes to complicated financial cases. 

Usually the accused are financially strong and can therefore hire the best legal brains. For example, in the case of Brett Kebble and his associates at mining groups such as JCI, Western Areas and Randgold, there was fraud involving about R26bn more than a decade ago, and to date there has still not been a successful prosecution. 

Given the market conditions, it is not surprising that only one share, Grindrod, shows promise in the “Breaking Through” column. KAP is also interesting, because it is sitting on its 200 EMA, which can be seen as a support level.

**finweek is owned by Media24, a subsidiary of Naspers.

Lucas de Lange is a former editor of finweek and an author of two books on investment.

This article originally appeared in the 12 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.