Time to take money off the market?

Time to take money off the market?

28 August 2013

The JSE had quite a spectacular run over the last two months. The Allshare Index gained 14% since 24 June to 26 August and slipped 2% over the last two days. The major engine this time was the Resources sector. The Resi Index shot up 22% from 5 July to 26 August. This all happened in the face of looming strikes in the mining industry, not easy to explain. I think the risk in the short term, two to three months, is to the downside. My reasons:

High PE ratios.

As you can see in the graph, the JSE PE at 18 is more than one standard deviation above the Mean. This means that the market is rather expensive. The JSE is even more expensive than in 2007. Excess liquidity contributed to this. Even the 12 month forward PE ratio is a hefty 13 times. (See the Blog explaining PE Ratios on this Blog site)

 JSE PE 28 Aug

Labour unrest.

 Strike season is looking worse every day. How do you avoid a strike if a union demands 100% increase and the employer offers 6%? Strikes will have far reaching effects on production, GDP, profits, wages, spending, etc. GDP growth will probably disappoint on the downside going forward.

Economy.

As I explained in the previous Blog, the next Balance of Payments release can shock the market because of some once-off items in the previous quarter. Because the deficit as a % of GDP is so high (6%), this can put even more pressure on the Rand exchange rate. Emerging Markets are already experiencing a sell-off caused by the fears of tapering QE. Whilst Rand weakness is usually good for exporters and other Rand-hedges, it is not the case if the cause of Rand weakness is foreigners selling SA equities and Bonds. Although I do not expect an increase in interest rates by the SARB, company earnings may disappoint in the second half of the year.

Conclusion.

I think the JSE has run too far ahead of earnings in the short term. I expect a correction of between 5% and 10% in the next few months. High global liquidity will probably push the market higher again after the correction.

Gerhard Lampen.

Head Sanlam iTrade.

4 Comments
  • Denis
    Posted at 12:45h, 29 August

    I have several individual stocks as well as a Satrix Indi.
    Currently only 3 of those individual shares are showing a profit (CFR, CML, CCO).
    Should these be pulled and the profit stashed till after the correction?
    And should I leave the other shares?

    My aim is long term growth.

    • isayitrade
      Posted at 15:46h, 04 September

      That depends on a lot of factors Denis. Firstly, the price you paid for a share should not influence your decision to sell except if you are trading on a stop-loss and profit-take percentage. As I said in the blog, I expect a smallish correction, so it is more for traders than investors. Hope it helps.

  • Nick van Dyk
    Posted at 12:32h, 11 October

    Good day,

    I have R 30 000.00 that I am looking to invest and I am looking at investing this as follows :
    – R 15 000.00 in Satrix Divi
    – R 15 000.00 in either Satrix 40 or RAFI

    do you think this is a good idea currently?
    Thanks for the feed back it will be much appreciated.

    Regards

    Nick

    • isayitrade
      Posted at 12:40h, 11 October

      Hi Nick. Not a bad choice at all. I am als starting to like Satrix 40 again because commodities are a much smaller percentage than over the last decade which put me off. I think it is also one of the best performers in the Satrix stable.

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