finweek

Sprouts of recovery

Schalk Louw is a portfolio manager at PSG Wealth.
Schalk Louw is a portfolio manager at PSG Wealth.

Company analysts expect the FTSE/JSE All Share Index to gain substantially over the next year at current valuations. It’s time to start looking for the blossoms, albeit cautiously.


Spring has finally arrived, and we’re getting closer to the time of the year when most people’s minds start leaning towards sun, sea and sand. The less pleasant side of a seaside vacation, however, is rip currents.

Anyone who has had the unfortunate experience of crossing paths with one of these monsters will know that it must be one of the most terrifying and frustrating experiences to go through. Your every instinct will prompt you to swim back to shore, only to find yourself being drawn further back into the ocean.

The key to your survival when caught in these currents, strangely enough, lies in either conserving energy and floating on your back along with the current; or swimming sideways – parallel with the shoreline – until you can feel the current weakening, giving you the opportunity to swim to shore safely.

Rip currents provide the perfect example to explain the current situation in our local stock market, especially over these past few months. In the same way that your instincts will prompt you to try to swim against a rip current to shore, human instinct will always prompt us to try and determine either the peak or the bottom of a market, and more specifically, individual shares. However, this is exactly where many investors earn themselves a few extra self-inflicted grey hairs.

History offers some apt examples. After the FTSE/JSE All Share Index (JSE) declined by more than 29% for the 12 months ending 30 April 2003, the “swim against the current”-mentality was clearly visible when the index gained nearly 43% in the following 12 months (up to 30 April 2004). It feels like yesterday that the press was filled with news on how the market had “rallied too much” and cash had suddenly “become king”.

What happened after that, was that the JSE managed to grow by a further 25% in the 12 months that followed and three years later (30 April 2007), had delivered almost 200% growth in total.

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That said, the last thing I want to do is to suggest that our current local market environment is anywhere close to what it was in 2004. But I do want to point out that investors should be careful of swimming against the market rip current.

As at the end of August 2020, JSE levels of 55 476 not only meant that we were in a full-blown recession in addition to the Covid-19 pandemic, but also that the JSE found itself in a space where it hasn’t been able to outperform the local money market since 2013. The fact is that since the market declined by more than 33% from the beginning of 2020 until 19 March 2020, no one thought that six months later we would again be trading at levels higher than those seen at the end of 2019. Is this the peak then? What are the experts saying?

Before I answer this question, I would like to explain an investment term called the bottom-up approach. When investors follow a bottom-up approach, they focus on the analysis of individual shares and not so much on the market as a whole. When looking at analysts’ consensus forecasts on individual shares, for example, we will be able to get an indication of how positive or negative their outlook is on each individual share. When placing their findings relative to something like the FTSE/JSE All Share Index, we can get an idea of the expected growth for the market.

After following a bottom-up approach on each individual listed share on the stock exchange and calculating the one-year expected future price on each of these shares, it was quite interesting to see that analysts remain moderately optimistic about local shares, despite the fact that the index’s earnings suffered quite a bit over the past two months.

In fact, for the first time in years, analysts have adjusted more companies’ earnings forecasts upwards than downwards in the past 30 days. 

At current price levels, they still expect 27% growth in the index over the next 12 months.

It is important to remember that although they may be experts in their fields, these analysts still cannot provide any guarantees in terms of future growth, profits or pricing.

Remain calm when approaching the noise and “currents” surrounding shares now. It remains a higher-risk investment than other asset classes, such as the money market and bonds, but those who can demonstrate patience over the long term can definitely reap the rewards.

Read more
This article originally appeared in the 24 September edition of finweek. You can buy and download the magazine here.

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