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The extent to which the JSE has weakened internally is apparent from the fact that in last month’s edition of this column, most of the shares lay above their long-term averages. Of the 100 biggest shares on the JSE, as measured by market capitalisation, 55% of them stood above their 200-day exponential averages (EMAs). Now it’s only 36%. At the beginning of the year, the market still stood firm as 71% of them lay above their 200-day EMAs.
A question that’s bothering analysts is whether there’s a chance of the bull market recurring. Technical analysts point out that the All Share Index’s graph has shown descending highs since January, which is negative. It’s also significant that the past two upturns in the market both met with resistance at more or less the same level – 58 740 – and pulled back. Double tops are regarded as a warning sign. Analysts with a fundamental approach also see little light: the SA economy is struggling as was once again proven by the GDP contraction in the first quarter. This leads to pressure on profits; earnings growth is required for a market to strengthen.
It’s largely thanks to the US’s prosperity that good global growth is being experienced, so commodity groups such as BHP, Anglo, Sasol and South32 are leading the way as the strongest shares. As is evident from the accompanying table, Kumba is once again one of the top ten, with Glencore slightly behind it.
Where great pain is experienced is at Sibanye-Stillwater and Lonmin. The latter’s great hope is the planned takeover by Sibanye, which is also saddled with a mountain of debt and which will have to act drastically if Lonmin does join its stable. It could lead to serious shaft closures and job losses. As one cynical commentator stated when asked about platinum companies: “Be silent. They are praying.” He also believes that the solution is simple: Stop over-producing so that the supply can drop. Then the platinum price will start rising.
SA mines 70% of the world’s production of new platinum, and in a recent report by Johnson Matthey, the surplus platinum for 2018 is put at 316?000 ounces. The vulnerability of SA’s platinum industry is evident from a report by JPMorgan Cazenove, which says that about 60% (2.6m ounces) are produced at a loss, or, as the report states, cash negatively.
The experienced Neal Froneman, CEO of Sibanye-Stillwater, will head the difficult task to integrate Lonmin into his group. If we look at the pressure experienced by Sibanye’s share price, then the market is quite sceptical. Since its high in August, the share price has decreased by about 87%.
A reasonable increase in the platinum price could of course make a major difference in the industry’s profitability, and this is probably what Froneman and his team are hoping for, especially if the supply diminishes, as the demand is still strong. In this regard, it’s interesting that a GFM Platinum Group Metals Survey by Thomson Reuters expects a price increase this year because its researchers are predicting a slight shortage of 300?000 ounces. It contradicts Johnson Matthey’s prediction.
An interesting characteristic in the table of shares that have broken through, is that most of them are experiencing support in the region of their 200-day EMAs. In other words, there are buyers at this level, which can be regarded as a positive. Otherwise Capitec seems to be the most interesting in this table.
Lucas de Lange is a former editor of finweek and the author of two books on investment.
This article originally appeared in the 21 June edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
