13/05/2013
Market Overview May 2013
A dramatic sell-off in resource stocks and more specifically the price of gold in April, led to a decline in the JSE All Share Index.
In the twelve months to April, the price of gold declined by almost 11% in dollar terms with a combination of factors leading to panic selling in April. Firstly, there was concern that the Central Bank of Cyprus would sell their gold reserves and secondly increased growth prospects for the American economy and possibly less monetary support from the Federal Reserve which can lead to lower inflation expectations. This in itself reduces gold’s attractiveness to serve as a hedge against inflation. Thirdly, there are increasing signs of an economic slow-down in China, the biggest buyer of resources.
China’s purchasing manager’s index fell to 50.6 in April. Although still above the key 50-point level, which indicates an expanding economy, the rate of growth is still declining.
However, markets have shaken off most of this negativity since mid-April and started to rise again. And so we can begin to ask, like many clients are doing, whether the negativity is behind us and whether stock markets is now not too high? As it is and widely reported, the S&P500 in the USA rose to an all-time high in early May.
In terms of the macroeconomic environment, the trend is still mostly negative. Central banks around the world are still dropping their lending rates with Europe and Australia being the latest two jurisdictions to do so. Production figures have also slowed down in the USA, while bond yields are decreasing and low inflation is still a concern. This in turn creates a bigger risk for deflation.
Yet there are also signs of recovery. House prices are steadily rising in the USA and construction activities have increased. The lower oil price and the USA extracting more of their own energy resources are encouraging. European stock exchanges are stronger and this shows that, to a certain extent, stimulation is taking place.
On the other end of the spectrum is seems that dividend yield on stocks are better than what interest-bearing investments are providing. This makes stock markets more attractive.
The economy is bearing down heavily on South Africa and this is particularly evident in the high unemployment figures, as well as consumers facing headwinds with higher administered prices. The chance of interest rates declining in South Africa has increased, against all expectations, and that explains to an extent the recent strength in our stock market. Is our stock market now too high?
Yes or no, whichever, stock selection is now the issue that must receive full consideration on the South African market. We might have to be careful of just buying shares in general. However, active selection of good quality companies that pays good dividends, have rand hedging qualities and where management have proven its worth, will be a good buy.
