“Our market is overvalued. Our economic situation is bad, yet the market was painting a pretty picture,” says Abri du Plessis. “We are not expecting blood on the streets, but there is no doubt that this can develop further.”
Terence Craig, Element Investment Managers CIO, believes the market’s retreat could be disorderly. “We are expecting a 10% to 15% correction. We think we will see 40 000 on the Alsi before we see any sign of improvement.”
The reasons for this slide are the same well articulated cocktail of loose monetary policy and slow economic growth: Excessive money supply from the Federal Reserve in the US, the European Central Bank and more recently the Bank of Japan coupled with low or negative real interest rates forced investors out of bonds – junk or otherwise – and into equities regardless of fundamentals.
Now the Fed is tapering, cheap money supply will ease and investors are realising that perhaps fundamentals do count.
Two weeks ago, things were different. “The Alsi was strong when compared with other emerging markets,” says Du Plessis.
“Foreigners have been selling our equities – which is consistent with what is happening globally – but local investors were buying.
“Now local investors have stopped buying and our market is now showing a similar pullback to others.” By the end of January foreign capital outflows wiped out any gains made in 2013 as the emerging market rout continues.
But US and Japanese markets are also trading lower.
Yesterday, according to Imara, the Dow traded below its 200 day moving average for the first time in more than six weeks as the blue-chip index fell 2.1%. The S&P 500 was in the red after losing 2.3%. And the NASDAQ traded below 4 000 point area as the index fell by 2.6%.
Investors are looking for safer places to invest and the money being pulled out of emerging markets is finding its way into US 10 year Treasury bonds.
“This could make us vulnerable to a currency blow off in the next five months or so,” says Craig. “But we believe this will be a short term trend and the Rand will strengthen again – within the next two years. This is negative for local consumer stocks. You have already seen the reaction of retailers and banks,” says Du Plessis.
“Unfortunately these are also the shares that foreigners like and this is our biggest threat. If foreigners see rising interest rates as a negative and sell in bigger volumes our market will pull back further and the rand will weaken more. Even after the pullback the JSE remains expensive relative to the state of the economy,” says Du Plessis.
A leading indicator should be the recent vehicle sales numbers, says Craig. Vehicle sales were down 6.8% year on year. “We would have expected to see more pre-emptive buying,” he says. “One month does not make a trend, but a decline of this magnitude is a negative sign.”
The pullback in local and global markets does not yet represent a buying opportunity in these analysts’ minds. Consider this: In March 2009 the Alsi stood at 17 500. It has almost trebled since then.