29 Aug 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)
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.
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.
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.
Head Sanlam iTrade.